COMMENT Crowdfunding has the potential to revolutionise the real estate market, but like any venture which engages the general public, many of whom may have limited experience of investing, it carries a certain amount of risk.
Crowdfunding is essentially a simple business: funding is raised for a project or venture from a large number of people who each contribute a relatively small amount, typically via a digital platform. The global crowdfunding market was worth $84bn (£62.5bn) in 2018 and is set to grow to $114bn by 2021, according to a report by EY.
The US has led the way in crowdfunding in the real estate sector, with companies such as Fundrise, Crowdstreet and RealCrowd active in the market. Fundrise, one of the largest, has transacted more than $4.9bn in total and has in excess of 130,000 registered investors.
In Asia Pacific, a number of Chinese property developers, including Dalian Wanda and Country Garden, have raised funding through independent crowdfunding platforms. Singapore-based CoAssets has raised S$100m (£54.8m) of funding since its launch in 2013 and is listed on the Australian Stock Exchange (although it is seeking to delist).
The sector offers the ability to democratise funding and gives retail investors access to real estate transactions at both a debt and equity level.
This could become more interesting in a post-pandemic future where banks are focused on their existing loan books and may be cautious about new lending. This environment creates more room for alternative lenders, including crowdfunding, and the possibility of access to higher returns, albeit with more risk.
Mainstream real estate players have so far largely ignored crowdfunding. However, ARA Asset Management took a step into the world of fintech in May when it acquired a majority stake in Minterest, a Singapore-based crowdfunding platform established in 2016.
Minterest has so far focused on crowdfunding loans for SMEs, but is now turning its attention to real estate, backed by ARA’s expertise in the sector.
While the larger US-based real estate crowdfunding platforms have focused on their domestic real estate market, Minterest is also set to be more internationally diversified, and may well seek to leverage ARA’s platform as it has a presence in 28 countries.
The crowdfunding sector is not without risk. Investors need to fully understand where they are in the capital stack – ie, who gets paid first if things go wrong – and the covenant risk they are taking on, as well as whether there is a tenant or developer underwriting the loan.
It is also not just a question of loan-to-value and the interest rate – there is also platform risk. Nonetheless, I expect real estate crowdfunding to grow in Asia Pacific and further afield as a source of finance which is an alternative and complementary to bank lending.
In a slightly ironic turn of events, while Covid-19 may have led to us avoiding physical crowds, when it comes to property investment the pandemic may have provided the impetus for crowdfunding to really take off.
Chris Marriott is chief executive, South East Asia, at Savills