Is crowd funding the answer for developers left without financing from the banks?
The concept of syndicate investment and indirect investment in commercial property through vehicles such as investment funds and REITs is firmly established.
Investors, who may not otherwise have the expertise or financial wherewithal to purchase commercial real estate in their own right, essentially pool their resources and purchase property as part of a larger group. Considering the extent to which technology is advancing and new concepts are emerging, it is conceivable that a new phenomenon may reach us before long - that is the concept of "crowdfunding", which is becoming increasingly popular in real estate in the US and gaining traction in Europe and Asia.
Crowdfunding or peer-to-peer lending is described as "the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet".
There are now several well-established crowdfunding platforms including Kickstarter, Indiegogo, Rockethub, and Crowdcube, among others. Most of these are US platforms that have been expanding overseas into Europe and elsewhere. These platforms enable start-up businesses and entrepreneurs to launch and promote their business ideas online and give investors an opportunity to invest in this idea, often for a relatively small outlay.
It goes without saying that investing in start-ups and early stage businesses, whether through crowdfunding or otherwise, involves considerable risks, including illiquidity, lack of dividends, loss of investment and dilution. Crowdfunding should therefore only be undertaken as part of a diversified investment portfolio.
Property crowdfunding is the fastest growing segment of the market today. Following some regulation changes in the US in 2012, commercial real estate sponsors obtained the ability to broadly solicit and advertise to the public. This opened the door for real estate developers and owners to capitalise on modern digital marketing tools and leverage the reach of the Internet to reach a wider potential investor base. A study from Massolution reported that $2.5bn of crowdfunding occurred in the real estate sector in 2014 and this continues to rise.
A number of specialist real estate platforms are now in operation in the US including RealCrowd, Crowdstreet, Fundrise and Prodigy Network. In fact, the largest crowdfunding campaign ever was a real estate crowdfunding project organised by Prodigy Network. Its founder Rodrigo Nino has predicted that "Crowdfunding will disrupt the status quo of traditional equity investment in real estate."
In 2009, Niño helped build the first skyscraper in Bogota, Colombia, in 40 years. He financed much of the project by attracting small investors who invested $20,000 at a time. By 2013, he had raised over $190m for the BD Bacata project - a world record in crowdfunding. Many of the investors in this project, which has recently been completed, made returns of more than 40pc since purchasing shares. Prodigy Network has since moved on to other successful projects in New York including AKA Wall Street, 17 John and AKA United Nations. Another real estate crowdfunding vehicle Fundrise is currently offering approved investors an opportunity to invest in 3 World Trade Centre in New York.
These specialist real estate crowdfunding entities are targeting up to 10 million accredited investors in the United States who are looking for solid returns on tangible assets that can generate private equity type returns. Accredited individual investors can research the best private real estate operating companies, view current offerings, submit offers, fund investments and manage their commercial real estate portfolios from their personal crowdfunding accounts. The portfolio valuation of the largest real estate crowdfunding platform Prodigy Network's now stands at over $600m. They claim to have over 5,200 accredited investors on their books. Interestingly, they are now reportedly looking for institutional quality investment opportunities in Europe.
However, crowdfunding isn't yet an option for all interested in investing in commercial property. Although the core principle of crowdfunding is affording small investors the opportunity to invest in particular projects for relatively little outlay, many of the well-established real estate crowdfunding platforms in the US have high thresholds for accredited investors. To become an accredited investor and to be able to browse open investments on certain real estate crowdfunding platforms, in some cases you are required to have a net worth of at least $1m and to prove that you have a minimum annual income of $200,000 over a number of years in order to be accredited.
If you meet these criteria, you undoubtedly already have access to direct real estate investment opportunities and may prefer to invest in real estate in this way as opposed to pooling resources with many other investors on a crowdfunding platform in order to achieve a similar rate of return. However, as time goes on, these thresholds are likely to reduce giving a greater pool of potential investor's opportunities to invest in commercial property through crowd funding.
In a European context, Spain, Germany and the UK are expected to follow the lead of Italy, which recently became the first country to implement a law on equity crowdfunding.
The property industry is now fully au fait with syndication and REITs and the concept of collectively investing in large and diversified portfolios of commercial real estate across different geographies and jurisdictions. However, the likelihood is that technology will alter current models and streamline investment processes over the next few years with accredited investors increasingly evaluating the merits of investing in particular funds or schemes via highly supportive data rooms and websites in the first instance and making their actual investment via transparent crowdfunding type platforms. Over the last few years, technology has eliminated middle men and increased efficiencies in a plethora of different industries and it has the potential to do likewise in the real estate industry. Real estate crowdfunding has seen exponential growth over the last few years and is likely to continue to grow over the course of the next few years, particularly as the regulatory framework becomes more developed in many jurisdictions.
Marie Hunt is Head of Research with CBRE Ireland
Sunday Indo Business