Real estate crowdfunding: Invest a little, diversify a lot

The confluence of changing consumer behaviour, rapid advancement of the Internet and mobile technology has caused major disruptions in the consumption of goods and services. Innovative disruptions such as Uber for taxi bookings and car sharing and Airbnb for accommodation have torn down many barriers for entering the hospitality industry. Both Uber and Airbnb own no assets but have created billion-dollar companies through solving consumers’ pain points.

We believe the real estate industry is also on the verge of major disruptions through the rapid evolution of real estate crowdfunding platforms.

Is crowdfunding a passing fad?

The crowdfunded real estate deals are, in some ways, a type of “club deal” that has been in the purview of the private banking space and their high net-worth clients. The difference that crowdfunding platforms make to the industry is that they can increase the level of transparency, lower the investment quantum for each investor, reduce subscription costs and build a community of investors who can promote good-quality, responsible fundraisers as well as jointly police against bad fundraisers.

A very early success is Prodigy Network. In Colombia and the United States, Prodigy Network successfully raised US$170 million (S$243 million) from more than 3,800 investors to develop BD Bacata. When completed, BD Bacata will be the tallest skyscraper in Colombia. It will be 67 storeys high with 1.2 million sqf of floor area, which will include office and retail space, apartments and a 364-room hotel. In a move that has been termed as democratising real estate design and financing, Prodigy Network crowdfunded the entire development.

Detractors might say that such fundraising is only done by lower-quality developers having difficulty with conventional financing. But we are seeing more and more well-recognised developers and institutions adopting the method for major and iconic projects.

In a startling demonstration of the attractiveness of crowdfunding, one of the largest developers in China has raised funds for five large projects through crowdfunding. Last June, The New York Times reported that Chinese conglomerate Dalian Wanda Group raised a total of 5 billion yuan (S$1.1 billion) from its crowdfunding app and from an online payments site. This fund was for the construction of five Wanda Plaza commercial property projects.

Dalian Wanda jointly launched the product, called Stable Earner No 1, with online payment-service provider 99Bill on June 12, 2015, and individual investors could invest as little as 1,000 yuan to become a shareholder and property developer. Stable Earner No 1 offered a yield of 6 per cent each year. Individual investors put in 500 million yuan and institutional investors accounted for 4.5 billion yuan. The time Wanda took to raise the 5 billion yuan? Three days!

Key components for a sustainable, successful crowdfunding platform

In the report Crowdfunding’s Potential for the Developing World, published by the World Bank, it is suggested that essential ingredients for the success of a crowdfunding platform involve the following components:

Regulations: A regulatory framework that leverages the transparency, speed and scale that advances in technology and the Internet can deliver to early-stage funding marketplaces. Regulators have the opportunity to use equity and debt-based crowdfunding to provide better protection to investors than they could have ever done in an offline world. Driving capital formation online creates the opportunity to monitor and report on what both entrepreneurs and investors are doing on these online platforms in ways never before possible.

Rules on participation: Crowdfunding platforms need rules on who may participate. In a number of countries, participation is limited to accredited investors and investors’ pledges will be limited by their net worth and income.

Community: Strong social media market penetration and Internet usage necessary to harness demographic and technology trends to drive collaboration and cultural shifts.

Crowdfunding platforms allow investors to diversify their portfolios by investing smaller amounts across several countries, and into a wider variety of property types, such as retail, office, farmland, hotels, serviced apartments, warehouses, and even real estate debt.

For example, investors who are knowledgeable about the retail sector of a particular neighbourhood in Melbourne may find a crowdfunding deal that will allow them to invest directly in the project under development or in the debt of that specific project, without having to invest in the shares of the listed property developers building it and taking on the associated corporate risks.

For investors just starting to get their feet wet in real estate, crowdfunding allows them to learn about entire property development projects with a small sum of cash. Through engaging with a community of educated investors with shared knowledge and objectives, investors can weed out dubious fundraisers and enjoy healthier risk-adjusted returns.

Also, by reducing the investment amounts, crowdfunding enables investors to diversify their investment capital across more deals. A key benefit of this is that a single investment mistake does not necessarily have an irrecoverable and irreversible impact on the investor’s overall financial health. Forecasting is difficult these days, as it involves a future that is changing much faster than before. Thus it is a far better option to adopt a sensible diversification strategy: Invest a little, diversify a lot.

ABOUT THE AUTHORS: Mr Brian Wee is co-founder of real estate crowdfunding platform Fundplaces, while Mr Ku Swee Yong is a licenced real estate agent and chief executive of property firm Century 21 Singapore