SPECIAL REPORT: The gathering crowds

To collect capital for investment in real estate most private equity managers are typically required to clock up a significant amount of air miles and shake a lot of hands. But, elsewhere in the real estate industry some players are attempting to make fundraising a digital process, via a route known as crowdfunding.

The concept of crowdfunding is a simple one. An online marketplace for real estate investing is created and investors can invest in real estate investment opportunities through a simple and secure website by creating an account, selecting an investment, signing legal documents and funding the investment. 

One of the most significant beneficiaries of crowdfunding is Shanghai-based property developer Greenland Group, China’s largest real estate developer by sales. Greenland last month teamed up with e-commerce behemoth Alibaba to raise RMB200 million ($32 million; €28.7 million) for its first online debt offering, which reportedly sold out within 30 minutes. Greenland has also indicated that internet finance will be one of the company’s primary areas of growth in the next five years.

Elsewhere in Asia there are signs of a growing trend. China currently leads the pack, fuelled by constraints on traditional bank financing and the absence of Real Estate Investment Trusts (REITs). Indeed, crowdfunding investments in China are estimated to reach $50 billion by 2025, according to a 2013 report by infoDev, a global program of the World Bank. Elsewhere in Asia, the Singapore-based real estate crowdfunding site CoAssets has already crowdfunded more than $20 million worth of real estate projects since its launch in 2013.

Such web-based fundraising has been gaining traction in the US and European markets too. Close to $1 billion was invested in the e-commerce US real estate market via crowdfunding last year, a report by the research firm Massolution estimated. New York-based real estate developer Thor Equities is also working on a crowdfunding platform to launch later this year. In a recent example from Europe, the London-based BrickVest raised $1 million in seed capital from twenty investors to build the first ever pan-European online real estate investment platform.

Varying models

While crowdfunding is becoming a global trend, different models are being adopted across regions, resulting in varying degrees of regulatory oversight. 

For BrickVest, online capital raising means much more than merely providing a website for real estate developers and owners to place an advert of their property so investors can scour potential deals. The platform is only available to qualified investors who can invest as little as €1,000 in pre-vetted, and underwritten, real estate deals.

“We do our own sourcing, diligence, and underwriting of the deals,” says Emmanuel Lumineau, co-founder and chief executive of BrickVest. “We have a compliance and investment committee, so everything you would expect from an investment manager. But, unlike private equity we do not have discretion because we offer deal-by-deal. Investors look at the opportunity without committing fees, so it’s changing the dynamic which is usually pay first and then a discretionary mandate.”

European-wide capital raising regulations have played a large part in the way BrickVest has been set-up, adds Lumineau. Under the Alternative Investment Fund Managers Directive (AIFMD), BrickVest must structure each investment as a dedicated Alternative Investment Fund (AIF). Investors will have an interest in that AIF with an independent fund administrator, independent depository and independent quarterly valuation.

Also tapping into the demand for investor access to European real estate is London-based Cogress. 

However, Cogress’ platform only lists development projects. For each development the structure is similar, but not identical. Generally, 60 percent to 80 percent of the total cost is senior debt (a loan from a bank). The remaining 40 percent to 20 percent is the equity. This is split between the developers and the investors. In most cases, the developer will fund 10 percent of the equity and investors will put in the remaining 90 percent.

Like BrickVest, investors using the Cogress’ platform must be accredited investors with minimum ticket writing set at €20,000, although the average investment is around €40,000, according to Cogress’ chief executive Tal Orly. 

Yet Orly says that he expects the model of raising capital for real estate online to gradually scale up and says it won’t be too long before institutions are making online commitments of upwards of €100 million.

“We are currently learning their needs so we can design a product which they can really invest in. With family offices it won’t take long for us to get their support, as they are talking about much bigger tickets,” says Orly. “They need more time and want to make sure we can source enough good quality projects to put that amount of money to work so they are testing us for longer to make sure our model works for them.”

However, not everyone is convinced that crowdfunding will be able to compete with more traditional fundraising models when it comes to bagging institutional capital as regulatory concerns are top of mind for many potential investors.

Calling crowdfunding an “unnecessary risk”, Solon Brown, vice president of the Singapore-based family office, Vulpes Investment Management, says that investors risk committing their money illegally by investing in such a platform.          

“Crowdfunding seems a lot like a REIT, except without the advantages of supervision and corporate governance,” he says. “If you are an investor in a REIT, you know that the company is overseen by a regulatory authority and has to abide by listing rules.”         

The biggest dampener is the lack of an adequate safety net for investors in case an investment goes bad, compounded by the fact that there is no specified way to track a project’s development progress.

“What the individuals can get is some sort of an electronic agreement, with some terms and conditions,” says David Ye, an associate at the Hong Kong-based law firm Paul Weiss. “There will be some information made public in the relevant website for the investor to see. But the protection is not like the usual protection in a REIT or other IPO listing arrangements.”

Institutional backing

Yet, in the US institutional investors have taken notice, and some are still taking the plunge and committing  capital through crowdfunding.

Established in 2010, crowdfunding platform Fundrise has taken commitments from established names including New York-listed Chinese social networking site Renren, global investment and advisory financial services firm Guggenheim Partners and Silverstein Properties, the New York-based real estate development, investment and management firm.

The platform allows lenders to invest in specific properties for as little as $100 per share, and as much as $10 million. To date, more than 1.24 billion square feet of property has been developed by 373 real estate companies on Fundrise. Perhaps even more tellingly, $200 million plus has been raised on the platform and about a third of that has been committed by institutions or family offices. 

Dan Miller, co-founder and president of Fundrise, said: “The amounts of money being raised is pretty small and large institutions look at it and don’t think it’s relevant but it’s growing exponentially and it will threaten the centralized fund management banking model over the next ten and fifteen years.”

Miller expects to see greater involvement from institutions in real estate crowdfunding in the future and that “every type of capital will be raised via digital platforms at least in part.” 

Additional reporting by Arshiya Khullar