PERSPECTIVES ON ASIAN REAL ESTATE CROWDFUNDING

“Everyone can invest now” but is it a good thing? Asian Property Review analyses the impact of this new trend in real estate investing.

danielAmid the hype of this so-called ‘next big thing’ in real estate in Asia, there are cautionary views by some investment advisers. Dan Vovil, an experienced investor with a global investment portfolio who also advises Australasian high net worth individuals says: “Crowdfunding has traditionally been a funding mechanism for funding much smaller projects and small businesses. Increasingly, some investors are now using this as a way to get access to investment property for a fraction of the purchase price (some platforms allow as little as USD100 per investor), and can provide diversification whilst removing much of the administrative issues associated with property investing.

“However there are risks, with the obvious issue being one of control. By pooling your investment with so many others, you don’t actually have any control over the asset. The investor doesn’t have any say in the tenants, rent charged, how the property is managed or optimized. A bigger risk is liquidity, in that often the investor in these crowdfunded properties have restrictions on when they are able to sell their holdings. And it is arguable whether there is sufficiently active liquid secondary market should you wish to sell your shares.”

Another issue to consider, adds Vovil, is the crowdfunding platform itself. “Is it run by a reputable organization? What is their track record? What happens if the property rental income doesn’t pay for the expenses and borrowings? Will the platform cover it or are there any other liability issues?”

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“I have looked at a number of crowdfunding platforms and I have noticed the high level of fees involved. Many will charge you 5% upfront and a profit share for their management of the rent of around 15% of the rent roll. Many also take a performance fee of 15-25% of the capital gain.”

Vovil concludes that it’s still early days for crowdfunding in the property sector. “The platforms are increasing in number and sophistication at a rapid rate. But I would caution investors if they believed that crowdfunding provides them with a simpler and a lower risk way of investing in property.”

That should perhaps give some perspective to the buzz currently surrounding real estate crowdfunding.

Pros and cons

PrintThere are obviously pros and cons of crowdfunding to developers. According to Julian Kwan, Founder and CEO of InvestaCrowd, the pros may include:

Diversification of capital

New sources of capital

Faster funding

Funding on favourable terms

Marketing and PR value for project

Ability to do more projects

There are not many disadvantages, these mostly relate to having to completely open up their books to prospective investors as complete transparency of the project including financials, contracts and materials are needed to convince the crowdfunders. Today’s investors are more savvy and are very likely to do research on the Internet before parting with their money. Both sides of the deal will also have to grapple with understanding new rules – crowdfunding is a new ballgame after all. And to play a new game successfully, you need to understand the rules.

Funders, according to Kwan, can look forward to:

Strong returns

Asset backed investment

Access to deals globally

Co-invest alongside reputable large scale developers with proven track records

Diversification of investment portfolio

Ability to invest globally

Ability to invest from anywhere through their smartphone/ laptop

No ongoing property management work

Monitor progress of project through investor dashboard on the website

As for all investments, crowdfunding comes with risk for the funders. These include:

Returns may not meet targets

Timelines may not meet targets

Market fluctuations

Experience and understanding of development financials

Legal and tax obligations

Crowdfund, what?

Having said that, a brief about what real estate crowdfunding is. As the name suggests, it is harnessing the resources of the crowd for the purpose of funding or investing in a project. Each crowdfunder will need only contribute a small amount. Therein lies its attractiveness for the retail investor who doesn’t have enough cash. “Everyone can invest now” perhaps best sums up its effect. It democratises the funding process when previously this is the sole domain of institutional investors and High Net Worth Individuals (HNWIs).

Among the many types of crowdfunding models, the most common are equity crowdfunding and the reward-based model. The equity-based model is a financing model that allows businesses to sell company shares through an online platform in return for the capital they require to achieve their business goals. “They are basically online venture capital portals where the venture capital companies have been replaced by millions of smaller investors. It should be noted that the “crowd” is truly a crowd comprising people from all walks of life and backgrounds, with wildly different investment appetites and investment capabilities,” says Kwan.

Any type of property can be crowdfunded including residential, commercial (most common) and infrastructure. The door is wide open for more property-related funding projects and innovative crowdfunding models.

What if the project fails?

There is a very valid concern of what happens should projects fail to materialise. As there are land and property titles involved, it is expected that the investors will somehow get back a bit of their investment via a sale of the asset. Says Getty Goh, Co-founder and CEO of CoAssets, it tries to ensure a degree of trustworthiness and credibility by vetting the opportunity providers. “We only allow registered developers, registered agents and project owners to list their projects, along with proof in the form of title or option document showing ownership. This allows funders to perform checks and cross-references.”

Some developers have gone further by introducing measures to increase assurance, such as maintaining escrow accounts and allowing people to have charges over an asset. In CoAssets’ case, it has developed research tools for emerging markets such as Malaysia and Vietnam to allow funders to evaluate property deals, due to limited information available in such markets.

Risk of bubble?

If real estate crowdfunding takes off in a big way, will it fuel a property bubble due to the easy and cheap availability of funds?

Both Goh and Kwan disagree with that possibility. “Many Asian investors are open to crowdfunding short term debt to property developers but are less prepared to use the crowdfunding mechanism for property syndication. From this perspective, crowdfunding only provides an alternative source of fund for developers and not to retail investors. Since cheap funds are not available to property investors and punters (via crowdfunding), I do not foresee a property bubble forming as a result of crowdfunding taking off. ”

Kwan says: “There is no real down side that I can see for the investors. There are already very large real estate markets and capital is flowing across borders like never before. In markets that continue to see demand outweighing supply, we think this is a good thing.”

Globally, crowdfunding in real estate is projected to hit USD2.5 billion in 2015, a 250% increase in just one year. Real estate crowdfunding worldwide grew 156% in 2014, just breaking the USD1 billion mark, with campaigns ranging in size from less than USD100,000 to over USD25 million, according to Massolution’s Crowdfunding for Real Estate Report 2015.

And experts predict Asia will be the new epicentre of the global crowdfunding trend. In June 2015, the Malaysian Securities Commission (SC) issued six equity crowdfunding licenses paving the way for this investment mechanism to gain traction in the country in the following months. With the Malaysian economy currently at risk of contraction, funds from traditional sources may dry up, hence crowdsourcing offers an alternative way for developers to fund their projects whilst allowing retail investors to jump in with small amounts, thus spreading the risk for all.

According to reports, the Thai government is now looking into bringing the model to Thailand and the Chinese are going to regulate the space soon. In short, equity crowdfunding is settling down roots in Asia, and given its maturing entrepreneurial ecosystems, is likely to explode in growth in the coming years.

But as the caveat in our opening paragraph above states, do consider its flipside even as the hype grows louder in the coming months.

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