Crowdfunding platforms are still too under-developed to be a viable source of capital for the private equity real estate world, said panelists at Thursday’s Real Estate Women’s Forum in New York.
Through crowdfunding, investors can invest in real estate investment opportunities online by creating an account, selecting an investment, signing legal documents and funding the investment. Despite its simplicity, panelists who work in private equity real estate said one of crowdfunding’s biggest drawbacks is how the process hampers speed, critical for investors who work in fast-paced primary markets. Unlike traditional funding models, from fund structures to entity-level investments, a manager may need to wait six months or more until small, individual investments add up to enough capital to purchase a building, said one panelist who founded a New York City-focused private equity real estate shop that draws largely from family office capital.
“I’ve looked into crowdfunding and I think it’s really not a bad idea for smaller players,” she said. “The problem for what I do is that you have to move from loan to contract really quickly to secure your building.”
Speakers also noted crowdfunded buildings are often far from the prime locations many private equity shops seek to own. The panelist said she has seen myriad deals on crowdfunding sites for what she termed C markets, including Tallahassee, Florida, but few options for Manhattan deals, which she attributes to the issues of limited supply, speed and low cap rates.
Another panelist who has spent decades at an international real estate investment firm said lack of control is the biggest drawback to crowdfunding. She said if a manager needs more time or funds to turn a property around, crowdfunding’s model does not allow for the same flexibility to call a joint venture partner, for example, and ask for more capital or changed terms of agreement.
Despite these hesitations, by the numbers, crowdfunding is becoming a more popular investment strategy. The amount of US real estate capital from crowdfunding sites jumped from $570 million in 2014 to an estimated $1.4 billion in 2015, according to industry researcher Massolution. A New York developer on the panel said crowd-sourced capital will become even more mainstream in the next five to 10 years. However, growing popularity does not necessarily make it a viable capital pool for her business.
“If I have other equity sources that don’t distract me from my business, I’m not going to take the risk because I want to see a down-cycle and an upcycle for a bunch of these crowdfunding platforms,” the developer said. “I want to see what happens with regulations before I jump in. I just don’t want to be pioneering.”