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Known to go through its peaks and troughs, the real estate market is always evolving and new ways of investing emerge alongside traditional methods. Crowdfunding is one of the new forms of alternative finance that is making more international real estate markets accessible to investors. In fact, a recent study from Massolution, a research and advisory firm specialising in crowdsourcing and crowdfunding solutions, shows that crowdfunding investors injected $1 billion (Dh 3.67 billion) into the US real estate market last year.
Crowdfunding grew 156 per cent last year, just breaking the $1-billion mark, with campaigns ranging from less than $100,000 to over $25 million, the report states.
Last year North America stood as the largest region by funding volume at 56 per cent market share, compared with Europe at 42 per cent. Massolution forecasts that North America will retain its lead this year, reaching $1.4 billion in funding volume, but Europe will have just broken the $1 billion threshold. Overall, real estate crowdfunding is expected to increase by 150 per cent, reaching $2.57 billion this year, making it one of the fastest-growing segments of crowd capitalism.
Nuts and bolts
“Crowdfunding is raising money from a large number of people to fund a project or business venture through an online platform,” Sidharth Mehta, Partner and Head of Real Estate and Construction at advisory firm KPMG Lower Gulf. “Crowdfunding platforms have varying fees and rules and usually have a finite fundraising window of about three months. Crowdfunding has been more successful in some markets, such as gaming, technology and design, than others — heavy engineering springs to mind.
“There are different models of crowdfunding: equity, donation, reward, debt/peerto-peer lending and royalty, which takes a percentage of future revenue in return for investment.”
Crowdfunding has become a handy tool for a growing number of investors who want to enter the real estate market but do not have the necessary capital, says Aakarshan Kathuria, Founder of EstateUp, a real estate crowd investing platform. “We provide them with the opportunity to get involved by obtaining participation rights in various projects of their choice and breaking down the [required] investment,” says Kathuria. “This model removes the middlemen and connects developer directly to investors, which results in a better flow of communication and as such more people are inclined towards crowd investing as opposed to the more conventional means of property investment.”
EstateUp allows developers to raise funds from common investors by providing them participation rights in their projects. Once a project has reached a certain level and the market is doing well, they can look into sales as a means of generating profits for them and their investors. “The main advantage with our model is the all-ornothing structure,” says Kathuria. “This provides investors with the confidence that their funds are only being put into projects that are reaching their funding target.”
Crowdfunding investors invest in real property and not a concept that has a high chance of failure. This is the reason real estate crowdfunding has been successful worldwide, explains Waleed Esbaitah, Founder and CEO of Durise, a crowdfunding platform. “At the same time, it gives investors access to these real estate investments, conveniently through the online platform. Real estate is an expensive investment, therefore, [crowdfunding] also allows people to enter the market at a much lower price point.”
The meeting of real estate and crowdfunding is facilitating a huge leap within the industry away from the old property syndication model to new intermediate marketplaces. With crowdfunding platforms having turned their focus internationally, investors from around the world have a chance to capitalise on opportunities in nearly every continent.
“We are witnessing a few UAE-based crowdfunding projects and there are now a number of platforms that are emerging as alternate sources of funding and investment,” says Mehta. “The concept is gradually gaining momentum, perhaps in response to comparatively underdeveloped capital markets across the Middle East and North Africa.”
When used correctly, crowdfunding can be a pivotal tool for entrepreneurs to find capital. “We all know that the internet is often geography-neutral — it is therefore difficult to define exactly what the UAE model is,” says Mehta. “However, for some entrepreneurs in the region, obtaining traditional funding has been difficult so it is likely that the UAE will begin to develop its own market niche.”
In the UK, it has become quite common for groups of small-scale investors to band together on crowdfunding websites to provide loans and mortgages using a number of specialist sites. Crowdfunded buy-to-let property — where a property is bought with the intention of renting it out — has ignited interest among investors who want to invest in property but don’t have sufficient capital to create their own portfolio.
There are clear differences between the UK and the UAE property markets, not least are the historically low interest rates in the UK. “What is significant — and seems to be driving some interest here in the UAE—is that crowdfunding allows investors to get involved in the property market with very low stakes, as low as Dh5,000 in some cases,” | explains Mehta.
“Obviously, returns are commensurate with your investment, and the smaller your stake, the less you stand to gain or lose.”
During the financial crisis, some projects in the UAE stalled due to lack of funds as construction progress was dependent on funding or offplan sales. With crowdfunding, developers don’t have to rely solely on off-plan sales as the network of sourcing funds increases significantly.
In addition, with the government’s growing focus on affordable housing, crowdfunding provides an opportunity for even small investors with moderate income levels to invest in the real estate market and reap the benefits.
“The Dubai market has seen a shift into real estate aimed at low- to mediumincome households, which is one of our focuses as well,” says Esbaitah. “We make real estate investments more inclusive rather than exclusive, by breaking down the barriers and limitations.”
How it works
Crowdfunding allows investors to invest in very small stakes that fit their budget, and to diversify across asset types and geographic areas, spreading risk and potentially increasing returns.
“We also noticed that banks were not supporting the developers. As a result, [many] projects did not have any financing mechanism,” says Kathuria. “For relatively new developers, off-plan sales isn’t a feasible option as it involves large marketing costs. The only option left for the developer is to target institutional investors. Our idea helps the developer target a large pool of investors through the use of technology and keeps the investor updated on the progress of the fundraising, giving them a safety cushion of receiving their investment back in case the funding goal has not been reached.”
The win-win approach allows developers the option of kick-starting their projects even during a downward cycle, which would be difficult, if not impossible, through traditional methods of funding. The investors can also reap the benefits of investing into a sector when the price is attractive and the ticket size is kept relatively small.
“In addition to this, another important aspect that is eliminated through crowdfunding is the concept of flipping, which has haunted the UAE real estate market prior to the crash,” says Kathuria.
“By allotting shares to the crowd, all aspects of flipping are eliminated as these shares have a certain holding period. Our longterm goal is to implement this model on large-scale projects wherein we can attract investors globally.”
For every project to be considered, EstateUp appoints a third-party legal firm to vet the entire project and a third-party audit firm to look into the financials. If a project is approved by these entities, it is then placed on EstateUp’s portal along with complete details.
Each project has a funding timeline of around 90 days and also has a minimum ticket size, which varies from $3,500-$10,000. Once the project has been uploaded, investors are required to register online to view the documentation and financials.
If a funding target is reached in 90 days, the funds are released to the developer and investors obtain participation right in the project. If the funding target is not met in 90 days, the funds are returned to the investors, and the project in cancelled.
Source: Sanaya Pavri, Special to PW