EXCLUSIVE: Alex Michelin and Andrew Dunn, founders of super-prime property development firm Finchatton, have teamed up with fin-tech star Uma Rajah – formerly Head of Product at Wonga Group – to launch a major new real estate crowdfunding platform, called CapitalRise.
The aim is to offer ‘institutional grade’ investment opportunities – prime residential and commercial development deals promising 10-18% returns that are normally only available to big funds and seriously high net worth individuals – to ‘everyday’ investors, with as little as £1,000 to put in. Alex Michelin and Uma Rajah spoke exclusively to PrimeResi about the new venture.
£1,000 won’t get you much in prime central London, but it is enough to get involved in a Finchatton renovation scheme on Eaton Square, helping to finance a project by one of the most successful and celebrated luxury property developers in the business.
The first deal to go live on the CapitalRise crowdfunding platform, which has been launched by Finchatton founders Alex Michelin and Andrew Dunn with Wonga’s former Head of Product Uma Rajah as CEO, is a home-grown Finchatton project in one of the world’s top super-prime addresses. The developer is looking to raise an extra £1m in debt to renovate and extend a ground and lower-ground floor flat on Eaton Square, which should be worth around £8.15m once completed, and is offering a decent 10% annual interest rate to anyone that contributes to the 18-month project via capitalrise.com.
UPDATE 29th July 2016:
This first project’s full crowdfunding target of £1m was reached in just eight days.
Finchatton’s Michelin and Dunn came up with the idea for a high-level real estate crowdfunding platform back in early 2015, and brought in Rajah – who they met through a mutual contact on LinkedIn – as Chief Executive in December. Cambridge graduate and INSEAD MBA Rajah has been at the forefront of emerging financial technologies for much of her career, most recently spending six years at Wonga Group. Rajah saw the payday lender grow from a team of just 20 to a staff roster of over 900, steering the Group’s suite of products including its consumer loans business, its business lending division Everline, and the launch of a peer-to-peer lending platform.
The combination of Michelin and Dunn’s on-the-ground experience of raising money and delivering highly successful property developments – Finchatton launched back in 2001 and has completed around 120 projects in London and abroad so far; the firm currently has around £1.3bn-worth of very high-end developments in the pipeline, including the landmark resi conversion of the former US Navy building, 20 Grosvenor Square, in the heart of Mayfair – and of Rajah’s deep knowledge of next-generation financial technologies makes for a compelling proposition.
“CapitalRise aims to disrupt the old way of investing in property,” says Michelin. “With our experience and knowledge of property development and property investment, we can provide your everyday investor with incredible opportunities in direct real estate investments that provide very high returns. Previously these have only been available to the very wealthy because the minimum input would be over, say, £1m. But now, with the advent of the internet, you can get much lower minimums – £1,000 – but you can get a 1,000 people and suddenly you have that £1m… And for property developers, CapitalRise offers a new source of finance for their projects, at a lower cost and with more efficiency than has traditionally been available to them.”
Disrupting the old ways is now as much a necessity as it is an opportunity. Traditional bank lending has struggled since the crash of 2008, with more strict criteria and less appetite for risk making it a difficult landscape for developers. “Banks are retreating from the market,” says Michelin. “They simply don’t have the firepower they once had, in the good old days. That starving of the market for finance has created huge opportunities for alternative finance providers.”
Alternative property finance ventures, such as peer-to-peer lending, have taken off dramatically as traditional lenders have backed off. LendInvest, one of the emerging sector’s brightest success stories, claimed at the end of last year that it is financing 1% of all privately built homes in the UK, and recently won a £17m investment from the founder of Skype, Niklas Zennström. But investment-grade crowdfunding is still in its infancy.
The UK is the clear crowdfunding leader of Europe, accounting for around US$2bn of Europe’s $2.5bn in crowdfunded capital raised in 2014, according to specialist research and advisory firm Massolution. But it’s dwarfed by the more mature US market, which was valued at $7.5bn over the same 12-month period, indicating just how much potential for growth there is. Massolution expects the total amount of crowdfunded capital worldwide to more than double this year.
“Real estate should be the biggest part of the UK’s crowdfunding sector”
Of course the vast majority of that crowdfunded capital is not in bricks and mortar; the top established platforms such as Crowdcube and Kickstarter tend to focus on creative and artisan ventures, rather than on high-grade investment prospects. “Real estate should be the biggest part of the UK’s crowdfunding sector,” says Michelin. “It plays so well into the sector’s hand, but it is currently one of the smaller parts of the market… I think the real estate crowdfunding market is going to be huge. I can see these direct investments eventually appearing on Goldman Sachs portfolios and in family offices alongside equities and bonds.”
Historically low interest rates are an added bonus for CapitalRise’s business model. “With a reported 21% of UK adults earning 0.5% or less interest on their savings due to low interest rates and limited product choices, many savers are looking for other or additional options,” says Uma Rajah. “Real estate has historically been one of the best performing asset classes to invest in but the higher grades of investment were previously only on offer to institutions or high net worth investors. At CapitalRise, we are determined to change this and give everyday investors access to a new profile of investment which could generate returns of 10-18%.”
A large part of attracting these everyday savers to the real estate investment arena will be down to how easy it is to understand the opportunity – and to actually invest in it. Which is why CapitalRise has put in a huge amount of work over the last year into creating a clear, ergonomic online platform that manages to deliver a lot of information on each development project without resorting to jargon or obfuscating sales spiele.
“Investors want to take control of their money,” says Michelin, “which is why we’re trying to be so transparent on everything. When you invest in a pension fund or some kind of product with your bank, you have no idea what stocks they are buying, what they’re doing, or how they’re managing your money. We’re taking the opposite approach.” Unlike other property crowdfunding platforms such as PropertyPartner and FundingCircle, CapitalRise does not charge any fees to investors; it does, however, charge developers a 1-1.5% arrangement fee on funds raised, plus a quarterly management fee.
Broadly speaking, the platform offers two categories of investment opportunity – debt and equity – allowing investors to mix-and-match and build a real portfolio with money allocated between different deals. These have different risk profiles, and promise corresponding potential returns ranging from around 10% (for relatively low-risk senior debt with a first legal charge on the property) to around 18% for a higher-risk joint venture equity arrangement, where the investors come in on an equal footing with the developer. Each project’s risk profile is given the infographic treatment on the website to illustrate how far up/down the pecking order investors’ money is if the deal were to go south – and an indication of just how far south the deal would have to go before that money is dipped into. The post-development value of the Eaton Square project, for example, would – according to the developer’s workings using valuations from Strutt & Parker and Knight Frank – have to be more than 35% less than the anticipated sale value for the CapitalRise invested capital to be at risk. That kind of drop is, in Eaton Square at least, unprecedented.
Each CapitalRise investment property – which could be a prime retail site on Bond Street, a luxury residential development in Chelsea, or a student accommodation scheme in Manchester – has a thorough dossier of information available for investors to browse online, complete with budgets, timelines and biographies of the developer. Information ranges from quick summaries of risks (and how they are being mitigated) and comparables to full reports from valuers and planning committees.
The emphasis is on the quality of the deals, rather than on the quantity. Rajah expects only three opportunities to be live on the platform by the end of the year, with that number doubling every 12 months over the next three years. “It’s not the sort of site where people have to wade through loads and loads of listings,” she says. “It will be quite exclusive.”
“We really are targeting the institutional-grade deals; the best-in-class real estate”
Developers looking to list a project will need to clear a series of fairly onerous hurdles – designed to wheedle out all but the very best investment prospects – before being deemed worthy of the platform. Developers need to have a solid track record of delivering similar schemes, for example, and must have at least a 10% equity play in the project themselves. “Our selection process is the most rigorous of any property crowdfunding site that we’ve seen out there,” says Michelin, proudly. “We really are targeting the institutional-grade deals; the best-in-class real estate in that sector. It’s what we do at Finchatton; it’s what we understand… People are going to come onto CapitalRise because the deals are best quality out there.”
And the team is literally putting their money where their mouths are: founders Michelin, Dunn and Rajah will be investing their own money in each and every project listed on capitalrise.com. “We are in the trenches with you,” says Michelin. “We are making sure that we are managing risk at every step of the process because we are putting our own money up as well, alongside other investors.”