EUROZONE: Crowdfunding 2.0

Since first appearing online in 2003, crowdfunding platforms have grown into a multi-billion-dollar industry, with some estimates suggesting that more than $34 billion was raised worldwide last year.

Of this, 10 percent, or some $3.4 billion, trickled down into the real estate world in 2016, according to industry researcher Massolution. While this figure pales in comparison with overall global real estate fundraising, the subsector is becoming increasingly relevant, largely to due to its rapid rate of growth: just $19.1 million was invested in real estate crowdfunding worldwide in 2012, ballooning to $1 billion two years later.

Through crowdfunding, parties can invest in real estate opportunities online by creating an account, selecting an investment, signing legal documents and funding the deal. But, despite its apparent simplicity, in our sphere it has developed a negative image and drawn a number of criticisms.

However, one crowdfunding company, London-based BrickVest, believes it is part of a new generation of real estate crowdfunding platforms trying to tackle some of the subsector’s perception issues. One of the negatives levelled at early platforms was based around a lack of trust in amateurish set-ups with little or no genuine real estate experience. Another was a lack of speed, due to the small size of the platforms and subsequently the small number of investors. There has also been criticism that quality assets are not available.

What separates firms like BrickVest from the crowdfunding 1.0 generation, aside from a more professional set-up and being fully licensed to market assets in Europe, is the offer of investment in institutional quality assets, with the chance to partner with some well-known names in the industry. The firm’s investment pipeline currently has an opportunity with London-based real estate asset manager M7 Real Estate to invest in a pan-European portfolio of high-yielding assets in Northern Europe. The firm also partnered with Corestate Capital this year on a German high street retail portfolio.

The business, which was set up two years ago, has strong ties to the private equity real estate industry. For example, the firm’s co-founder and chief investment officer, Thomas Schneider, started his own private equity real estate firm, while senior investment director Agate Freimane most recently worked on real estate investments at Morgan Stanley Alternative Investment Partners. BrickVest’s online status, with reduced overheads, means it can charge investors considerably less fees, somewhere around 2 percent, compared with fees from larger firms which can reach 20 percent or more.

The big question is whether institutional capital would find investing with these platforms attractive. One London-based investment manager said his firm would not invest with such a platform because it already had a traditional and established investment model. However, he did acknowledge the appeal of such a practice because it gives firms the option of diversifying capital sources and providing access to a different investor base.

The investment manager also suggested that if a number of the crowdfunding platforms achieved the kind of scale they were aspiring to in years to come, it would be “horrendous” for established, institutionally-capitalized private real estate firms because of the relatively low fees they are able to offer. Interestingly, according to BrickVest’s Schneider, the firm attracted its first potential institutional client, a European pension fund, this summer. Although the deal is not signed, talks are at an advanced stage.

With Uber challenging the taxi industry, Airbnb doing the same with hotels and numerous other examples of online platforms challenging the status quo, real estate crowdfunding, in its newly revamped form, could be on the cusp of making serious inroads into the private real estate world.