Real estate crowdfunding: how has the investment market changed in 20 years?

Crowdfunding History

One of the most important aspects of the modern world is crowdfunding, which, strangely enough, has only become popular in recent years, although it was first talked about back in 1997. Back then, the British rock band Marillion managed to raise an impressive amount of $60,000 through an online platform, which allowed them to organize a tour of the United States with the help of their fans.

Modern forms of crowdfunding

Modern crowdfunding models represent something more complex and beneficial for all participants. The real estate collective investment market is quite simple: online platforms bring together people willing to invest to finance various projects, including renting, renovating or building new properties. Investors can either buy stakes in companies or provide loans, and in return receive a percentage of the profits.

The popularity of crowdfunding

But why is crowdfunding attracting more and more investors? First of all, it is due to the fact that, unlike many other financial instruments, such platforms make investment opportunities accessible even to people with limited means. Investors do not need to manage assets directly, which makes this type of investment even more attractive.

• On average, the returns on crowdfunding projects are higher than those of traditional financial instruments such as stocks, deposits and commodities.
• The availability of internet technology makes it much easier to make collective investments.
• According to Preqin research, funds raised in global closed-end real estate funds have increased an average of 11% annually over the past three years.

Crowdfunding platforms around the world

In this article, we will take a detailed look at the most important real estate crowdfunding platforms operating in countries such as the UK, Germany, Spain and the US.

Features of UK crowdfunding

Within the UK, several characteristics of crowdfunding platforms can be identified:

• These are high commissions.
• Attention to rental properties.
• Low threshold for entry into investments.

One prominent platform is Property Moose, based in Liverpool, which allows users to invest anytime and from anywhere. While the platform is primarily aimed at British investors, it is also open to foreigners other than United States citizens. The minimum amount to enter starts at just £10 and can go up to hundreds of thousands.

Statistics and Property Moose's work

Today there are more than 26 thousand users registered on the Property Moose platform. The main properties in which members invest belong to a special company created exclusively for this purpose (SPV). Investors have the right to participate in meaningful decisions regarding leases and tenant evictions.

In return for their investment, they receive a share in the givenSPVwhich can be sold through the platform itself in the future. Most projects have a payback period of 12 to 18 months. It should be noted that at each stage of the investment process, participants face commissions: when buying a share in the platform.SPV5% of the investment amount goes to cover the costs associated with fundraising, deed-dealing and deal structuring.

Monthly rental income from real estate entails the payment of 10.5% for the services of a management company. If an investor decides to sell his property, 15% tax will be withheld from his profit. Similar tax obligations also apply to the sale of a share in an SPV, where the tax will amount to 15% of the assessed value. In cases where the investor does not act as the owner of the share but provides financing in the form of a loan, he will not have to pay platform fees.

Crowdfunding with Property Partner

The crowdfunding platform known as Property Partner, which is based in London, was able to make significant progress in its very early days. In October 2015, right after the launch of its website, it raised an impressive amount of 843 thousand pounds in a short period of time - in just 10 minutes. Investors from all over the world can participate in projects on this platform, except for citizens of the United States. At the moment, the number of registered users on the site exceeds 10 thousand.

Investing in student housing

Property Partner focuses on investing in student housing, including studio apartments and apartment complexes with shared kitchen and lounge areas. The terms and conditions for working with investors are quite similar to those offered by other platforms:

• There is a 2.5% commission and stamp duty to acquire a stake in an SPV.
• Rental income is 3.4% of invested funds.
• Of this amount, 10.5% is allocated to the Property Partner management company, which manages and leases the properties.

As a result of the increased capital injection, project yields could potentially increase to 4.3%.

Unique features of the platform

One of the interesting features of this platform is the absence of additional commissions when selling a stake in an SPV. The founders of the platform claim that the process of selling a stake takes about 4.7 days on average. Investors can exit the project every five years, when the platform is ready to buy the stake at the market price estimated by an independent expert.

Another attractive opportunity offered by Property Partner is the chance to invest in projects that have not yet been acquired by the platform. In such cases, funds are debited from the investor's account on the platform, not from his bank account, until full funding is collected. By investing in such projects, investors can receive a return of 5% for two years.

Protection of investors' interests

Investors' rights and interests are protected by the UK's compensation scheme (FSCS), and the platform's fast and safe operation is monitored by the UK's Financial Conduct Authority (FCA).

The House Crowd

Another outstanding crowdfunding platform is The House Crowd, established in 2011 in Altring. It positions itself as the first platform of its kind and by the end of November 2017 had successfully completed about 340 projects, raising over 60 million pounds. Participants in projects on this platform can be both individuals and a variety of organizations including:

• Partnerships
• Closed joint stock companies
• Trusts
• Public institutions

The platform is also open to international investors, excluding US citizens, and the minimum amount to enter an investment is £1,000.

Ways to profit on The House Crowd platform

Users of The House Crowd platform have two methods to generate income. The first is to buy a stake in a real estate company that rents out real estate. The second method is through loans with interest rates ranging from8% to 10%for individuals and from10% to 13%for development projects. Typically, the terms of such investments range from six months to one and a half years.

It is important to note that when investing funds through an SPV, payment is required5% registration feeHowever, borrowers are not required to pay additional fees to the platform.

Investment due diligence and risks

The House Crowd's team of moderators carry out thorough checks on each property and all projects are assessed by RICS. However, they also warn users that there are risks associated with potential capital loss and liquidity. Platform members do not receive FSCS protection, which is worth considering when making investment decisions.

Crowdfunding services in Germany

Crowdfunding services in Germany have several characteristic features, including:

• Absence of any fees;
• Emphasis on mezzanine loans;
• Focus on value-added projects that offer returns in the range of5-7%.

For example, Exporo, based in Hamburg, has realized about 80 different projects since its founding, gathering over100 million eurosfrom which16.5 million euroswas returned to investors. The minimum amount to invest here is500 eurosand the period over which the project is implemented varies fromtwo to three years.

Availability for foreign citizens

It should be emphasized that participation in Exporo projects is open to foreign citizens, who can use the English version of the website. Unlike British companies, Exporo receives funding not from direct investors, but from project owners, which allows the platform participants to avoid additional costs.

Investment format

The investment format is in the form of a mezzanine loan. In this case, the investor provides borrowed funds to the developer in exchange for a fixed interest for the use of these funds and the right to share in the project's profits. The mezzanine loan is a unique instrument that is on thesecond tier subordinated loansand secured by a pledge of shares or interests in the project.

Funds raised through the Exporo platform are used to implement projects related to the renovation and construction of both commercial and residential real estate in Germany. The average yield of projects on the platform is about5-6%annual.

Zinsbaustein Company

Berlin-based Zinsbaustein is a relatively new crowdfunding platform that has launched in eleven and a half months13 projectsattracting more15 million euros. For individuals wishing to invest, investments start at .500 to 10 thousand euros. This is possible provided that there are assets in the amount of100 thousand eurosor if the deposit amount does not exceed double the average monthly income.

There are no such restrictions for organizations, which opens up additional opportunities for legal entities.

Participation of foreign investors

The participation of investors from different countries in some platforms does not require special conditions and the resources are available exclusively in German. Investments placed on the Zinsbaustein platform are formalized as mezzanine loans, which is associated with certain characteristics and conditions. The developers of this platform warn about possible risks: the loans provided by investors have no collateral assets and are repayable only after all other debt obligations have been fulfilled.

Investment opportunities

Members of the platform have the opportunity to invest in shares of companies or provide loans for the construction and modernization of housing. Investors can receive income both from the sale of real estate and from its transfer for rent. The level of profitability can vary significantly depending on the specific project.

Typically, the investment period is about one year. Most of the platform participants have a limit on investment in one project of3000 eurosWhile the total investment limit for the year is10,000 euros. Those investors whose annual income exceeds the50,000 eurosFor legal entities, the minimum assets must be more than the minimum amount. For legal entities, the minimum assets must be more than1 million euros.

The Housers platform holds10%from the profits made by investors.

New Inveslar platform

Inin 2016A new crowdfunding platform, Inveslar, was founded in Barcelona, which has already realized a9 projectswith a collection of about2 million euros. Anyone of legal age, both Spanish citizens and foreigners, can participate in Inveslar, provided they have a foreigner identification number (NIE). However, the platform restricts cooperation with certain countries in Asia, the Middle East and Oceania.

Inveslar members are offered two main types of investments:

• buying a property, renovating it, and selling it a year later;
• rental property with an option to sell after three years.

The minimum investment ranges from100 to 3000 eurosdepending on the specific project.

In addition, the platform finances its activities through contributions from investors. Participants pay:

• 4%of your investment for access to projects;
• 10%of rental income in the case of a lease;
• 2%from the final price when the asset is sold.

Privalore platform

Privalore from Barcelona is proud to be the first crowdfunding platform in Spain. The Bricktal project, launched inin 2014by fall.2017 yearhas brought together more than1,000 investorsand managed to attract about3 billion eurosfor his projects.

Unlike many other platforms, Privalore is an investor in its own projects, investing no less than the65%of the amount of capital required. “If your friend offers you to invest in an interesting project, wouldn't you be interested to know how much he himself is willing to invest?” - emphasizes Privalore, addressing its potential users.

Any citizen or legal entity that has a current account in banking institutions in countries that are members of the Organization for Economic Cooperation and Development (OECD) can participate in Privalore projects; foreign investors must also obtain an NIE identification number. The minimum amount with which to start investing is as follows1000 euros.

Privalore and its projects

Privalore focuses on residential renovations in significant cities such as Barcelona and Madrid. The investment process usually takes approximately eight months.

Of this timeframe, two months are allocated for site rehabilitation while the remaining six months are used for implementation. The average profitability of the projects is about17.6%. The Company retains a commission of approximately4%from transactions, which is due to a reduction in the number of intermediaries. This, in turn, improves conditions for investors and increases their profitability.

Features of crowdfunding platforms in the USA

As for crowdfunding platforms in the US, they have their own peculiarities:

• Low Commissions;
• Variety of investment strategies;
• High minimum thresholds for participation in projects.

These platforms are mainly aimed at U.S. investors.

RealCrowd and its features

RealCrowd, based in Palo Alto, California, claims that its services are exclusively for experienced investors. The platform's founders emphasize that only companies with more than one year of experience in the market will be acceptedten yearsand the volume of transactions from50 million euros.

RealCrowd's focus is on commercial real estate, including office space, retail space, apartment buildings and industrial properties, as they are considered more attractive from an investment standpoint.

RealCrowd investment opportunities

Investors on the RealCrowd platform are offered several options for investing their money:

• Lending;
• Acquisition of shares in a company;
• Invest in funds with different strategies such as core, core plus, value added and opportunistic.

Platform users do not pay commissions and participation is only available to accredited investors - individuals whose annual income for the last two years is greater than200 thousand dollarsor who have capital from1 million dollars.

The decision on the possibility of foreign investors participating is made by the sponsors of specific projects. Investment terms vary from one year. Investors do not have the option to exit the project before its completion, which sets RealCrowd apart from other platforms.

Realty Mogul and its specialized projects

Another significant platform is Realty Mogul, founded in Los Angeles inin 2013that has managed to attract about300 million dollarsand finance more350 real estate properties.

Participants of this platform can choose between two main investment schemes:

• Providing a loan secured by real estate, which guarantees a fixed profit over several months or years;
• Acquisition of shares in apartment buildings, offices, warehouses, and shopping centers.

In the last case, the investor earns income from rent and from the subsequent resale of the property after a certain period of time. In most cases, participants cannot resell their investments.

Who can participate in Realty Mogul?

Realty Mogul works with both accredited and non-accredited investors, including banks and family offices, starting with a minimum investment amount of1,000 dollars..

Questions regarding the platform's readiness to work with foreign investors remain unclear, which may raise certain doubts among potential clients.

The significance of companies in the modern market

Thus, companies like Privalore and Realty Mogul are becoming increasingly in demand in the market, offering a variety of options for real estate investment in the context of a constantly changing economic environment.

Conclusion

In conclusion, it was important for me to emphasize that crowdfunding is not just a trendy fad; it is an effective tool that has long proven its worth. The idea of raising funds to implement projects, whether it's a music tour or real estate investments, has a long history and continues to evolve in the context of globalization and digitalization.

Today, crowdfunding platforms offer unique opportunities for investors with varying levels of capital, allowing everyone to participate in projects that were previously only accessible to large investors and financial institutions.

Key features of modern platforms

• Availability and transparency:Thanks to online platforms, investors can easily find and choose projects that match their interests and financial capabilities.
• Diversity of approaches:Platforms like Property Moose, Property Partner, and The House Crowd showcase a variety of investment options.

The observed popularity of collective investments in real estate also highlights the growing interest in alternative finance. More and more people are realizing that traditional instruments, such as bank deposits or stocks, may not always deliver the expected returns. Crowdfunding, with its potential for high profits combined with relative simplicity and a low entry threshold, is increasingly attracting young and less experienced investors.

Challenges and security

It is worth noting that this form of investing also brings new challenges, including the need for careful risk assessment and the wise selection of platforms. However, thanks to increased regulation and the implementation of investor protection programs, such asFSCSIn the UK, the level of safety and trust in this method is increasing.

I am convinced that crowdfunding will continue to evolve, offering new opportunities for both investors and project creators. It will be interesting to see how this will impact the real estate market in the future and what new projects we will witness in the coming years.The future is in crowdfunding.and perhaps you will become a part of this exciting journey.