There has been considerable hype recently in connection with what is being marketed as a revolutionary new source of funding for real estate projects — crowdfunding. Who are the companies that have entered the market, what’s in it for investors and developers, and how does crowd investment compare with more traditional forms of real estate investment?
You’ve got to be in it to win it
One major hurdle for people wanting to get involved with real estate investments is the amount of money a potential investor needs to have at their disposal just to gain a seat at the table, let alone play the game. Even though promised returns in excess of 5% aren’t always delivered, there is no shortage of interest in real estate as an asset class. On the other side of the table, developers are in a similar but different position (they’re the dealers in my card game metaphor)—if the stakes are too high or there are not enough players, the game grinds to a premature halt. And what is it that keeps the players interested, attracts others to join them and entices them to keep their chips in the game?
The house needs it (the developers) and the players (investors) hope to take their share home with them at the end of the game.
Plugging the funding gaps
On the one hand, crowdfunding is a way of democratising real estate investments. It opens to the door to smaller investments and (in theory at least) offers smaller-scale investors a convenient route to higher returns and a more highly diversified investment portfolio. Only got a few thousand euros to invest but don’t want to bet everything on a single colour or number? No problem! Spread your investment across three, four or even five real estate investments and you will have a more diverse investment portfolio and lower levels of risk. Fine in theory, but lets wait and see what actually happens.
Developers are attracted to crowdfunding for a number of reasons:
- They retain control—they set the conditions, fees, yields, etc.
- They get better conditions—more equity means lower interest rates on loans from real banks, and no need for hungry mezzanine financing. After all, the crowdfunding plugs the gap normally filled by mezzanine capital. And at much, much better terms.
- Their projects attract free publicity.
- They have access to a broader investor base—lots of small-scale investors can be easier to deal with than two or three large-scale investors. Plus, communication can be streamlined via the project’s crowdfunding website. Also, investors may not be quite so picky when the sums involved are so much smaller—no need for expensive feasibility studies, due diligence, market reports, etc. Simply post a few appealing pictures, make some attractive promises and watch the money stream in. Again, fine in theory and a potential win-win situation for all parties involved.
Investors need to go in with open eyes as well as open wallets.
The individual crowdfunding platforms, sites such as Mezzany, Kapitalfreunde or Zinsland, need to be treated as marketing channels. Shiny, glossy artists’ impressions, 3D visualisations and virtual tours of projects that haven’t even broken ground yet can be very impressive, but can also easily be taken out of context by inexperienced investors. It is always advisable to speak with an experienced financial advisor and to do as much research as possible into the people behind an individual project—how many projects have they completed? Do they have a track-record of more traditional investment models? Do the sums really add up? Is it possible to accurately the risks involved with the project? Where will the rest of the financing come from? What happens if things don’t pan out as expected?
It will be interesting to see how many of the projects currently looking for investors actually come to fruition and not only deliver the buildings that have been promised, but also the returns on investment.
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