“The biggest pain in property development is funding – we know because we’ve been there - so we founded CrowdProperty to change it. We are property people doing property finance, so able to understand the fundamental needs, challenges and risks faced by property professionals undertking property projects and are building the very best lender in the market to being the best property projects to our investors.”
CEO at CrowdProperty
CrowdProperty is a specialist property peer-to-peer lending platform focused on high-quality residential property projects in the UK.
Today we talk with Michael Bristow, co-founder and CEO of CrowdProperty, about his vision and expertise of the real estate asset class and CrowdProperty’s approach to high quality peer-to-peer lending:
Michael, you hold an MBA from London Business School, a First Class Masters in Mechanical Engineering from the University of Birmingham and you are also a Chartered Accountant. You have worked as a strategic consultant for many leading international companies and private equity funds. Your Curriculum Vitae is really impressive. Could you please tell us a little bit more about yourself and your previous professional experience before founding CrowdProperty?
After attaining a first-class Masters degree in a very quantitative subject (Mechanical Engineering), I went into management consultancy. When I was in management consultancy I worked with many major corporates and also a large array of private equity funds, both on commercial due diligence in M&A situations and also corporate strategy for their portfolio businesses to build them into market leaders.
I saw a lot of sectors and a lot of different companies in both the B2C and B2B spaces within business ranging in sizes between 100 million pounds to 10 billion, which has been an incredibly valuable experience bringing the best insights on each sector and each company into Crowdproperty.
It’s really important to highlight that alongside this, I’ve been investing in and developing property since 2002 - a good 17 years of investing and undertaking major refurbs and developments across pretty much every end-user type. That has always given me a huge of passion for property, knowing the power of property, what it can do, and how important it is for everyone and what can it deliver individually as an investor.
In 2012 you co-founded of The Cooperative Property Company. What led you to found that company and how did you get from the financial world to the real estate world?
It comes from building on my then 10 years of property investing, build a more sophisticated and scalable proposition. I had already grown a significant property portfolio and what I saw more and more was an opportunity to differentiate in more ways than just superior investment decision making: to think about things differently, to think about things more smartly and build a portfolio with better insights than a lot of people in the market. So, I went by doing that and I raised the capital to support the portfolio growth. So, I have always been challenging myself to apply my business strategy fundamentals into the real estate world.
And then, also in my consulting career, I have advised firms in major real estate and infrastructure projects, working with Foster and Partners Architects on the economic case for the Thames Estuary Airport to replace Heathrow with an airport in Thames estuary. I have always been fascinated with major real estate projects as well.
You are a very active investor in early-stage proptech startups and you are also a mentor at Pi Labs Property Innovation, Europe’s first venture capital platform exclusively investing in the proptech sector. Tell us a little more about your role as a mentor and investor.
About 6 or 7 years ago, I started thinking a bit more strategically about property, especially in terms of the huge potential that technology has in the world’s largest assets class, which at that time was so far behind other sectors in terms of technology adoption, so the potential was huge and I started investing in a lot of different proptech businesses. I have invested in 20-25 different proptech startups, some of which are fundraising at huge valuations now. So, I got into that both the underlying trends and the proptech sector quite early, in fact before the term ‘proptech’ was coined.
I am a mentor and an investor in Europe’s first Proptech focused Venture Capital platform, which is called Pi Labs Property Innovation. Pi Labs has already had 45 businesses going through their incubation program and I mentor many of them and off the back of their success date are raising a substantial third fund which I will be more involved with.
Then, would you define yourself as an entrepreneur? Or do you think your profile is more like a manager or an investor?
I have been very entrepreneurial since I was really young. I founded, grew and sold a business when I was at university, so I started from many years ago and have subsequently founded several companies, like The Cooperative Property Company, that is a business where to invest in residential real estate, or Growth Strategy, that is my own strategy consulting firm.
When I left university, at that time everyone wanted either to be in consulting or banking, now there are other cooler options; but I went into consulting because I knew I would be founding and running my own businesses and I felt consulting gave me the opportunity to get a hugely varied experience across lots of businesses and sectors and therefore the toolkit to build great businesses.
Let's go to CrowdProperty. At the end of 2013 you founded CrowdProperty together with Simon Zutshi and Andrew Hall. Can you tell us a little more about how the idea came about and how the process went?
We all met because we had been investing and developing for many years. In fact, I was the least experience person, with only 11 years as a property investor at the time.
Andrew Hall is now 35 years RICS Qualified, RICS being the Royal Institution of Chartered Surveyors, the professional body in real estate in the UK. He has personally built millions and millions of square foot of residential and commercial property and has his own personal portfolio as well. What Andrew Hall doesn’t know about property development is just not worth knowing. That was a natural fit as our property director and now he is full time property director in the business now. Just on the aside, he is quite grumpy and doesn’t like approving projects - that is one of the human mechanisms that help us maintain our perfect track record, alongside the incredible systems for efficiency and expertise for effectiveness that we are building.
Simon Zutshi has been investing in and developing property since 1995. I have known Simon for many years, actually since University, and Simon Zutshi owns the largest property investor network in the UK, which gives us a very large network of people who are actively investing and developing in the UK. He runs 50 meetings around the country each month where between 50 and 150 people gather to learn more about property, hear presentations, share knowledge and network. On top of that, he has a big property education business and just to give you an idea of that, the top course in that business is a 12 month long course called the Property Mastermind program, for which people pay over 20,000 pounds to attend. 1,500 people have gone through that program with huge success (because otherwise people would not follow in the footsteps of those who have already taken it) and is exceptionally well regarded as a property education leader in the UK.
And the reason I say that, is because if you put those 3 things together it is extremely powerful. You have someone that has built millions and millions of square feet, and already seen all the pains and made all the mistakes; you have the largest property investor network run by a very experience investor developer and then you have a guy who has an equivalent passion for property bring private equity buyout and corporate strategy expertise from many sectors to build the strategy, systems, processes, team and expertise to deliver on the huge opportunity. We came together and based on our own experiences and detailed discussions with the many we knew working hard in the sector, we agreed that the biggest pain in property development is funding, so we set about solving that and that is the genesis of CrowdProperty.
What is the business approach of CrowdProperty and what sector are you targeting?
We focus on residential property end product. It might be a commercial building now, but someone wants to convert it into residential, the end product might be part “resi” and part commercial; but fundamentally it always has residential at the core; so that is the property class we focus on.
We fund projects for short-term finance in property. Anything from bridging, and quite vanilla bridging, right through to new build development and everything in between. So, we are the guys that help someone to buy and add value to a property before they either sell it or refinance to keep it or whatever they want to do with it.
We focus on SME (small and medium enterprises) property professionals, and the reason for that is because in the UK is an island and we do not build enough houses. The government targets are 300,000 home per year and we are currently building just 165,000. We haven’t met the target build for decades. That creates the fundamental issue of housing under-supply in the market. The two biggest obstacles, outlined in the Government Housing White Paper in 2017 are planning and funding for SME property professionals, with funding being the major one that we can tackle better than anyone else. But also, if you think about it (and it’s typically the same with any market), large plots of land are built out more quickly, meaning that unlocking smaller plots of land and enabling smaller property businesses to build them out is critically important to just stand still on current housing delivery levels, let alone fulfilling the number of homes we need as a nation.
Additionally, SME developers are treated very badly by banks. They are generally smaller size loans and the banks don’t have the efficiency to deal with this segment, resulting in terrible service and a total lack of expertise. Both are fundamental - and there are lots of very particular challenges with small plots of land and small propositions versus a large greenfield site to build 100+ homes. Smaller plots are complex, and proportionally more time is needed to understand them. Therefore, we are building the best expertise-led, technology-driven, service-oriented lending business that serves the needs of the market we know best, therefore ensuring that we see, assess, select and fund the very best projects. We know that we can win on this basis as the benefits are huge to borrowers and lenders alike.
Does CrowdProperty charge a fee to the developers? And to the lenders?
There are no charges to the lenders at all. And that includes if they are investing normally, or through our AutoInvest product. Also, there are no charges in our tax-free ISA product, and there is no charge if invest through pension. CrowdProperty is completely charge-free for lenders, and that is really important to us.
Our borrowers pay an arrangement fee and a small spread on the interest payments - we get a payment from the borrowers in two ways but most importantly for lenders, the spread is kept to an absolute minimum, made very transparent and is only taken on successful completion of the loan contract. That gives the business cashflow security and should anything happen to the platform, costs associated with a wind-down of the loan book are covered.
How is the investment process at CrowdProperty? How do you structure the investment?
This is really important to understand right now after the collapse of Lendy a few weeks ago.
Firstly we are a lender of first resort; and what that means is we compete directly with the banks; we want to do the same deals that the banks might want to do if they were open to lending or if they treated people well – we focus on the highest quality SME projects. So therefore, we are competitive in our rates to get applications in. And then we are exceptionally strong in speed and service, which is a real failure in traditional lending, so we close that business. Therefore, we are seeing, assessing and winning the best projects in the market. The difference is that many alternative finance players position themselves as lenders of last resort, so when everyone else rejects a project because it was not very good, they will fund it, and they will fund it with high interest rates. If you imagine a really bad project economically which is then funded at high interest rates, it’s no wonder things go wrong with such players. So we are in a very different position in the market, first of all because we are lenders of first resort funding the very best quality projects.
Secondly, we only fund projects where we take ‘first charge security’, so we take the senior security position. That gives us ultimate control in how to recover those funds, should that action actually be necessary down the line and that is core to our business. Other positions in the property capital stack are hugely volatile and we don’t think rates that are offered for those positions are fair and we also believe that investors underestimate those risks.
Thirdly, and very importantly, we have built a team of deep and passionate property experts. The 3 founders have decades and decades of experience and we really understand property. We do not have typical box bank administration approach. We look beyond the superficial to deeply understand the property project, the property vision, the exit market segment, the market data, the architectural integrity and most importantly the qualitative capability and motivations of the team to deliver on that project. We have unique levels of interaction and relationship to be able to diagnose these, all from a deep property perspective, and as property experts we have made and are making great lending decisions.
If you put those three things together, that’s why we’ve got a 100% track record of paying capital and interest back. You’re not a lender unless you get it back – without that you’re just a charity without a cause.
CrowdProperty is authorised and regulated by the FCA (Financial Conduct Authority) and we know you implement the highest quality standards. So, tell us how your processes are to evaluate borrowers and what additional measures you implement to protect investors.
Operating best practice is fundamentally important for the sector and really important to us at CrowdProperty. In the UK there is the association called Peer2Peer Finance Association. There are only 8 members and we are the only property project platform member. In order to get onto the membership you have to be elected into the membership by the other members, and the other members are platforms like Funding Circle or Zopa , i.e. some of the greatest and biggest peer-to-peer lenders in the world. We went into a lot of due diligence to do that, and we signed up to their operating best practices, and it’s probably the strongest operating best practices in the world. That is a critically important thing in building a brilliant, brilliant business in this market as the spectrum of operating practices is unacceptably broad.
The second thing I want to highlight is that we are independently verified by Brismo and again, the only property project platform to do so. Brismo is the leading independent verifier of marketplace lending platform performance, on the basis of analysing every single loan cashflow in a loan book and verifying lending performance and returns. This shows our commitment to disclosure best-practice and independent accountability for the performance of every loan that we originate both historically and going forward, especially as there are not many platforms in the world that have opened up in such a way, but those who have are the likes of Zopa, Prosper, Lending Club, Market Invoice, etc. We believe transparency and openness is absolute critical in this market and we are operating at the very best world class level as a foundation to growing the CrowdProperty trusted brand and our business, because we are building a long-long-term business.
And, of course, the last point is that the key to CrowdProperty's success is a very professional due diligence on every project, a due diligence process that has only got more stringent over time, made efficient by technology and effective via expertise, for the benefit of both borrowers and lenders.
Recently the FCA has published that it will set stricter conditions to allow investment in p2p lending platforms, introducing new rules designed to help better protect investors. First, what do you think of this set of measures? And second, how do these new measures affect CrowdProperty? Do you already have a procedure or work plan in place to adapt?
We very much welcome the proposals from the FCA and we’ve been active in the consultation process. We knew that they were going to conclude with what they concluded. The crucial reason why we are very supportive of it is because we operate under the very best practices. There is a huge spectrum of operating practices in this market, and ultimately the FCA and every regulative body around the world needs to protect retail lenders, and make sure retail lenders who are participating understand what they are participating in and the economic good that is delivered to both sides of the marketplaces who do a great job is not marred by those who do not. So, it is great that the FCA is putting a lot of focus on this sector.
Secondly, we knew what the conclusions were likely to be well ahead of the final consultation publication. Actually, it has very little impact in our business, because we already operate at those best practices. We have been already developing one of the factors around marketing that quite correctly ensures knowledge of the asset class and risks (the “appropriateness test”). I think the developments are an excellent move and important that the UK ensures that this powerful and strategic sector remains on track - overall peer-to-peer lending in the UK is 2-3 times the size of the rest of Europe combined and therefore has a responsibility to define best practice to ensure that the benefits continue to be realised by many. The USA, Europe, South America, Asia, and in fact everywhere is looking to the UK to define such best practice and required regulatory rigour in the sector as it matures everywhere.
CrowdProperty has recently raised a ￡1.1 million investment round via Seedrs, with a pre-money valuation of almost ￡16 million. Can you tell us about the process of raising the round and your growth plans?
The process is really good. Seedrs is a good equity crowdfunding platform. The reason we did it this time through Seedrs is partly because we did it before - in November 2017 we raised 900,000 pounds through Seedrs and they supported us very well through that – in fact they really like our business and the success we have shown during raises themselves and in terms of growing the business successfully and ready for further funding rounds off the back of that proven success. I know many of the VCs and private equity funds that are interested in the space and we felt, as a board, we didn’t yet need strategic investors at this point, so we opened it up to general public also in the knowledge that our customers love their experience with the platform and wanted to be a part of the business as well. A huge take up of the round was our existing customers, because they see us doing a brilliant job and getting materially better every day that passes.
You started as a Non-Executive Director and last year you were appointed by the board as Chief Executive Officer at CrowdProperty. Can you explain this change to us?
When we started this business, I was still doing a lot of private equity advisory. So, I sat on the board helping scale the business as we generated the proof of concept. And Simon Zutshi was running the business alongside his other businesses as well. After we did a fundraising on November 2017 we agreed as a board we needed dedicated leadership, but Simon has a number of other successful businesses to focus on. So, Simon Zutshi moved to chairman and the board decided to invite me to run the business, which is perfect given my track record of growing very strong private equity backed, scalable businesses, and really understanding the key factors and metrics that are pivotal in growing a very strong long-term sustainable business. And on February 2018 I became the CEO and we haven’t looked back – growing spectacularly since then.
CrowdProperty is an HMRC (Her Majesty's Revenue and Customs) approved ISA / IFISA manager. Can you explain us what an ISA (IFISA) is?
The ISA is a UK tax break for savings. Even though peer-to-peer lending is an investment product, a few years ago the government expanded the ISA tax break to people who saved a certain amount - everyone in the UK has an allowance of 20,000 pounds a year where they can earn interest tax-free if held within an ISA. This happened about 4 years ago when the government acknowledged that peer-to-peer lending was a really strong strategic sector for the UK and created a type of ISA and enabled lending platforms to offer an ISA product to people (called the Innovative Finance ISA). So, in one of our customers account they will have a regular lending account and they often have also opened an additional ISA lending account. ISA accounts are operated in exactly the same way but is free from tax. This is so powerful because that tax would be charged at the rate or for a higher rate tax and can be up to 45% and when you are earning 8% returns, tax-free that is first-charge secured, that is a really strong proposition which people love.
What prospects do you see for the English property market?
There is little doubt that right at the moment there is a great deal of uncertainty. We undertake a huge amount of analysis internally to ensure that we are still in an environment where senior lending is a correct undertaking, assessing the risk and rewards very thoroughly. There are a many macro factors that are good for the property at the moment such as low interest rates, very low unemployment in the UK and as already mentioned, the UK is not building enough houses so there continues to be supply and demand imbalance and this is getting worst year by year. There a lot of factors that despite the uncertainty points to underlying resilience that exists in the UK, especially when projects are selected well on many levels and most importantly secured very well. We expect a relatively benign environment on average over the next few years. We would be surprised if there is significant downside and we will be surprised if it goes up significantly as well but economically there are still strong projects to be done and we continue to support those to satisfy fundamental domestic (ie non-prime London) demand.
Saying all of that we are a lender, it is our job to be prudent and what we do is a lot of resilience/stress testing on asset values, in particular looking at the two most recent drops in the housing markets on the UK, obviously 2008-2009 and also in 1991. We analyze every single loan and also the resilience of our entire book, so we know what would happen if the market were to crash like that again, also running far more bearish scenarios. And that analysis is also part of our decision making on our due diligence on every new loan, looking to the past about pricing effects and how that effects our judgement on loans and their specific locations, specific values, specific unit sizes etc.
One factor we do see in the last 3-4 years that is somewhat different to previous falls is that the growth coming into this softening has been far less pronounced than in the past. The last few years have actually been relatively flat and if there were to be a market correction, it may be less severe than in the past, so modelling on historical falls and more bearish scenarios is a good reference point to understand resilience, even if all cycles are different.
To conclude, what would you say is the greatest value of CrowdProperty and what makes you different?
We have an incredible technology platform and we have built entirely in-house. Everything we do right across the business is developed and delivered in-house because we want our capabilities to be developed, controlled and learned from in-house. And all is part of building a scalable and sustainably competitively advantaged business.
We also have an incredible team. We are a team of 33 now, which is really important because we are very much building the business ahead of demand that we know we can create. This is also part of building a long-term sustainable business, ensuring we are proactively mitigating growing pains which can be caused by underestimating the learning curve needed to form a fully-performing team - recruiting ahead of demand, bringing those people into the team and then skilling up, training, educating, etc. So, when demand comes, that we know we can create because we are solving the fundamental pains, the business can handle that demand and it can scale rapidly. We probably have a larger team than any for our size but that is a strategic priority which will play out to huge advantage.
We believe in focus as well, and doing exactly what we do time after time and getting better and better and this is exactly what we are doing.
On the borrowers side the big thing is we are property people doing property finance, solving the fundamental pains that existed in the past and still exist today – we are building the most relevant lending business for those SME target borrowers, developing not only the speed, ease, certainty and expertise they crave but also the long-term funding partner they’ve never had to help them grow their businesses quicker.
On the lender side, we’re not only deep asset experts but we are also strategically positioned to attract the best projects. We are lender of first resort and close the business we want to close having assessed those projects with real, hands-on expertise. We started with this background of being asset experts and then applied the capital sourcing model that is peer-to-peer lending. There are many platforms in the market who simply set up a peer-to-peer lending platform and then decide where to point it – that’s just no understanding that asset expertise is at the heart of success – they are the businesses that will fail unfortunately - it’s just the wrong way round. We secure really well, we assess it really well and we work with borrowers hand in hand to make sure everyone has the desire outcome – everyone wants to exit a successful project and we are taking the proactive partnership approach for the benefit of everyone involved. We have proven the system we are building is working, and are working harder and harder every day to make sure continues to grow and gets better and better, building on our 100% capital and interest payback track record through over 5 years of operation.