Real Estate Crowdfunding

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Real Estate Crowdfunding, ,Alternative Finance Sector Report - October 2014 10
REAL ESTATE CROWDFUNDING
ALTERNATIVE FINANCE SECTOR REPORT
PUBLISHED
October 14
AUTHOR
Samantha Goins
Platform Models
Real estate crowdfunding platforms
can follow several different models.
Many include both equity and debt
opportunities, while some use a co-
investment model. Lead-generation
is also becoming a popular way for
platforms to drive large numbers
of investors towards investment
opportunities, without transacting deals
through the platform. These all fall under
the real estate crowdfunding umbrella.
Equity
Equity is the fastest growing platform
model. Investments usually include
unlisted shares or membership interest in
a limited liability company which is set up
as a special purpose vehicle (SPV) for the
specific project.
This is common practice in property
development as it allows established
businesses to operate individual
construction projects within each SPV,
keeping profits, costs and administration
as simple as possible. Returns come from
any profits on rental income or capital
growth in the underlying development.
Investors may be locked in for a defined
term and find it hard to exit early, unless
they can sell their equity interest privately
to another investor. The secondary
market for equity based crowdfunding is
still in its infancy but is likely to develop
as the crowdfunding market grows
and matures. Platforms are likely to
aid this development by incorporating
marketplaces into their offering, allowing
investors to list their investments for sale
to other users.
Debt
Debt based platforms are centred on
traditional lending methods and are
one of the most well-established and
fastest growing forms of crowdfunding,
particularly in the UK. Companies,
often profitable small or medium -sized
enterprises (SMEs), will issue a certain
amount of debt to fund expansion plans,
new ideas or research and development.
Real estate debt crowdfunding lends
money to developers to take on a specific
project or a series of projects. As with
any loan, the developer would then pay
a fixed rate of interest to service the
loan over a fixed term, with the return of
principal at the end of the term. Loans can
be interest-only or capital and interest
and range from 6 months to 25 years.
Innovations in the Debt Market
Bridging loans may be more attractive to
investors as they are usually short term,
less than one year, pay a higher rate of
interest and are secured against the
property. Developers use bridging loans
as a quick and short term of finance until
longer term financing can be arranged.
For example, a developer may want to
ensure that they have the capital ready to
purchase a property at an auction.
Bridging loans are risky as there is no
guarantee that the proposed exit plan will
be carried out to repay the loan.
Angels Den is one platform that
is enabling its investor to expose
themselves to bridging loans while
mitigating the risk. They offer bridging
deals that are already in place, with the
valuation and due diligence process
already completed. The original bridging
company will keep a proportion of the
loan so that its investors are only exposed
to 60% of the loan-to-value.
Co-Investment
Co-investment involves a group of
investors collectively investing in a
property, by forming a syndicate. Each
investor will own a portion of the physical
property and the rental income and
capital growth attributed to their share.
Investments tend to be longer term
providing regular income and capital
growth over several years.
Co-investment strategies are the same
as syndicate properties which are very
popular in the UK. They can require
a large amount of legal structuring
to put together and need ongoing
administration, but they can allow
investors access to established properties
at a fraction of the overall cost.
Lead Generation
As there is no global standard for
crowdfunding regulation many countries
restrict investors from investing through
platforms. For example in South East
Asia, regulation on how real estate can
be funded is quite strict , and therefore
lead generation has become a popular
alternative. Platforms allow developers
to list investment opportunities online
and gauge investors’ interest. Platforms
do not collect any investors’ funds but
instead put interested investors in touch
with the developers seeking finance.
These platforms may conduct some
due diligence but offer no recourse if
investments go wrong. They purely allow
developers to access a large pool of
willing investors. These platforms charge
developers to list on the platform and
may also charge investors to access the
listings.
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