Sat in the plush Chelsea offices of its sister company Finchatton, Uma Rajah, the CEO of CapitalRise is talking about Brexit. And specifically, Rajah is speaking of the impact the UK's exit from the European Union has had on the slice of the real estate market she is most interested in: the luxury kind.
Speaking to Techworld in January, long before the coronavirus pandemic shut down the capital and impacted everyone and everything, Rajah explained how prime central London property has long been "the most resilient part of the property market".
"Brexit has had an impact on the property market overall, but in terms of our part of the property market, the key issue for us has been the uncertainty that it's caused," she said. "Uncertainty causes people to sit on their hands and not transact."
Then the general election happened, and the Conservatives romped to a majority. "We've already seen the benefit of [the general election] in terms of just the volume of transactions."
There have been some positive benefits as well. "The impact [Brexit] had on the pound meant, in our part of the market specifically, where there's a lot of international investment into prime central London, that for a lot of potential investors, London was on sale," she said.
Building the foundations
Rajah is a self-identified product geek, stemming from her time designing new chocolate products for Mars, to her time launching fintech applications for the payday lender Wonga.
"I'm a big devotee of The Lean Startup [by Eric Ries], if I had any business book as my bible, that would be it," she said.
At Wonga she learned to streamline and automate complex payment workflows, including building peer-to-peer lending platforms.
"We were very much the early days of the fintech sector," she said. "So none of the infrastructure that now exists existed then, nobody even knew what an API was. We had only one credit reference agency who we could integrate with."
This stood her in good stead when Alex Michelin and Andrew Dunn, the cofounders of luxury property developers Finchatton, reached out to her in 2015 about launching a digital platform for investing in prime property developments.
"They could see there was a massive gap in the market for finance for developers," she explained. "On the other side, they could also see that the types of investors that got access to the part of the market that we play in, which is very high end residential, was cut off from anyone other than ultra high net worth individuals and institutions, because of the really high minimum entry size to get involved in these sorts of investments."
How it works
The resulting platform, CapitalRise, was launched in July 2016 and has leant more than £56 million in that time. The way it works is CapitalRise front loads all loans to developers, taking on all the risk that it will be able to fulfil the value of the loan through crowdfunding and sizeable top-ups from institutional investors, thanks to Michelin and Dunn's connections in the space.
The investment process is fully digitised and automated, from onboarding to investigating and committing to an investment, even the signing of documents. The average length of a CapitalRise investment is 17 months and £27 million has been redeemed to investors at an average of 9.6 percent per annum over that time, with no defaults so far. CapitalRise then charges developers a fee to raise funds through the platform, with investors paying no fees.
Of course all of this capital is at risk, and CapitalRise prides itself on being transparent about the risks involved for investors on its platform.
"[Transparency] is something we take incredibly seriously," Rajah said. "If you look at our website, we've always had, I would argue, more prominently displayed risk warnings than a lot of competitive platforms out there. We also, within each specific deal, try to make that explanation as clear as possible and use very simple language to make it clear as to what the key risks are related to each individual project."
This includes funding structure charts, which breaks down how a project is being funded, a bit like a cap table for property investors, with the developer often in the first loss position if something was to go downhill.
The original idea for CapitalRise was to build as a crowdfunding platform to enable more everyday investors to get access to this asset class – luxury developments in neighbourhoods like Mayfair, Chelsea, Knightsbridge and the home counties – for as little as £1,000.
That all changed on 1 January, however, when the government introduced regulations to stem the marketing of "high risk speculative mini-bonds to most retail consumers", limiting the platform to individuals who know their way around an investment.
"We are not allowed to target what you would call everyday investors," Rajah said.
Now, CapitalRise is only available to UK-based high net worth individuals who have an income of more than £100,000 a year or assets in excess of £250,000; or self-certified sophisticated investors, who must have invested in an unlisted company in the last year or has worked as a professional investor in the past two years, as defined by the Financial Conduct Authority.
This has meant a slight change of mission for the startup. "One of the reasons for doing this was because we did want to democratise access to an asset class that historically was cut off to the majority of investors. I guess this does limit the number of people we can enable access to that for," she admits.
Commercially this shift does help the firm, however. "It makes more economic sense to try and target larger investors, because you can use more marketing budget to acquire an individual if they're going to put hundreds of thousands of pounds into each loan, versus somebody who's putting in a thousand pounds into each loan," she said.
The competitive landscape
That doesn't mean the company isn't hard at work trying to find new ways to build product structures that could allow for smaller-fry investors to get access to the platform.
"We'd probably have to look at more conventional listed bonds and other structures in order to be able to access that kind of mass market. I think that's probably something further down the line," she explained.
Take rival investment platform Bricklane, which allows investors to invest in portfolios of buy-to-let properties across London, Manchester, Leeds and Birmingham via a Real Estate Investment Trust (REIT) linked to an ISA or pension.
Similarly, The House Crowd is a crowdfunding platform which allows for investments of as little as £1,000 in portfolios that range from cautious to bold.
What sets all of these platforms apart in the growing digital alternative investment space is the tangible nature of its investments. Property, especially big luxury London developments, can seem a safer investment than a bundle of code and complicated financial instruments in an exchange traded fund (ETF), for example.
"Property is a very popular investment asset class for lots of reasons, but I think the fact that you've got security is incredibly powerful. It's not as esoteric as other potential instruments that you might invest in," as Rajah puts it.
Rajah sees a huge opportunity for her company to drag property-borrowing into the 21st century.
"On the borrower side, that's the bit that I'm really excited about, because when it comes to property lending, it is literally the most archaic industry I've ever come across," she said. "It is just amazing how complacent the industry is."
For example, most property lenders do all of their know your customer (KYC) and anti-money laundering (AML) processes manually today, with documents being signed, scanned and couriered around the country with wet signatures.
"Every month we'll have things in our pipeline that help solve those problems and use automation to make that process quicker," she said, "because I do think that speed is really important for borrowers wanting to acquire a site. "If you can be that lender that can do it much faster than anybody else, they're going to come back to you next time, even if your pricing might be more expensive."