Real Estate Crowdfunding

2 / 16

Real Estate Crowdfunding, ,Alternative Finance Sector Report - October 2014 2
REAL ESTATE CROWDFUNDING
ALTERNATIVE FINANCE SECTOR REPORT
PUBLISHED
October 14
AUTHOR
Samantha Goins
Introduction to Alternative
Finance and Crowdfunding
Alternative Finance is an umbrella term
for various new on-line platforms that act
as intermediaries between retail investors
and borrowers/fundraisers. Alternative
Finance activities include peer-to-peer
lending, peer-to-business lending, invoice
financing and equity crowdfunding. In
the UK, the alternative finance market is
predicted to raise £1.6bn2 in 2014.
Equity crowdfunding consists of raising
funds by collecting small contributions
from a large pool of investors in exchange
for a share of the ownership of the
business or a share of the profits of the
proposed project.
The platforms fulfil the role of an
intermediary by matching borrowers and
investors. This work would traditionally
have been done by a long chain of
intermediaries – investors would be
recommended to purchase shares in a
venture capital fund which would invest in
these kinds of opportunities. By reducing
the number of intermediaries involved
and utilising online technology the
platforms can provide the same service
at a much lower cost to both parties –
borrowers and investors. In addition, the
lower costs mean that entry levels can be
set much lower – some are as low as £5.
Interestingly, although modern day
crowdfunding is very much hi-tech, the
concept of crowdfunding has a long
history. A number of medieval cathedrals
were built using many small donations
collected from local populations; and the
plinth that the Statue of Liberty stands on
was built using funds raised by Joseph
Pulitzer following a successful newspaper
campaign. The first successful online
crowdfunding project launched in 1997
when British rock group, Marillion, funded
a tour by raising US$60,000 in donations
from fans3. The concept is not new, but
the global reach and social nature of
the online community has brought it to
prominence.
Since the early days, the crowdfunding
market has changed drastically. The
2008 financial crisis coupled with the
growth of the internet really kick-started
demand for crowdfunding. On the one
hand, businesses and entrepreneurs were
suddenly unable to access traditional
sources of funding as banks stopped
lending. On the other hand savers
and investors disappointed with stock
market volatility and low interest rates
were looking for new, additional and
diverse sources of return. Both groups
were brought together by crowdfunding
platforms. This led to exponential growth
- in 2011 $1.5bn was raised globally on
crowdfunding platforms, $2.7 billion in
2012 and an estimated $5.1bn in 2013 4.
2 - The UK Alternative Finance Benchmarking Report
3 -
4 -