Crowdfunding in real estate: a new evolution of investment opportunities in Finland?

Crowdfunding in Real Estate: Overview

This article deals with the topic of real estate crowdfunding, the expert in which is Olga Bogdanova, a professional with an MBA and an active participant in the real estate market, as well as the regional manager of Privanet Capital Markets Oy.

The investment market in Finnish real estate

In recent years, there has been a steady increase in investments in the Finnish real estate market, starting from 2011. A record level of such investments was recorded in 2017, when the volume of transactions amounted to10.2 billion euros. At that time, the main transactions were still portfolio investments.

Demand for residential real estate

Increased demand for residential real estate in Finland's capital and other developing cities has triggered an increase in activity in the rental housing market. Since 2016, there has also been a strong increase in construction work, which is due to both positive changes in the country's economy and various urbanization processes.

Changes in lending

In accordance with the new directives of the European Union, credit institutions have started to provide financing of no more than60-70%from the total amount of required funds. This created conditions for the emergence of an alternative financing market that filled the resulting niche.

Alternative financing in Finland

At the moment, the alternative finance mechanism in Finland is already very developed: it is subject to legislative regulation and control by the Ministry of Finance, and operates on the basis of licenses similar to bank licenses.

It is worth noting that previously participation in such investment schemes was not accessible to small investors; however, modern technologies and changes in legislation have made it possible again in recent years.

Crowdfunding as a new opportunity

In recent years, we have observed a significant volume of investment deals in Finland, indicating that crowdfunding is becoming a great opportunity for many investors. Crowdfunding represents a new direction in the investment sphere, with opinions ranging from full approval to skepticism. This disagreement has arisen from the ambiguity of the term.

The evolution of crowdfunding

• Crowdfunding was originally used to raise funds from the public for various charitable projects.
• It later evolved into a mechanism for attracting investment for new product development and launches.
• Crowdfunding in real estate has become the final stage of this evolution.

State-level support for crowdfunding

Finland actively supports crowdfunding as a part of public policy, because it is about acting for the benefit of private business in various spheres - from educational institutions to government structures.

In 2016, a law was passed that, on one hand, legalized crowdfunding, and on the other, made it easier for platforms to operate by ensuring the protection of investors' rights. Thus, real estate crowdfunding became feasible only after the adoption of this legislative act.

Active construction and demand for housing

The growing interest in residential real estate has led to an active pace of new housing construction, while lending restrictions from banks create additional demand for financing and open up new opportunities for investors.

The role of crowdfunding in the future

In this context, crowdfunding serves as an indispensable tool that not only addresses the issue of insufficient funds for project implementation but also provides small investors with the opportunity to participate in the real estate sector, which was previously impossible. This creates new prospects for the development of the sector and suggests that in the future, crowdfunding could play a key role in investment strategies in real estate in Finland.

Crowdfunding platforms in Finland

Finland currently has a number of specialized crowdfunding platforms, including Realinvest, Groundfunding, Icon and Varaa. The most successful of them were created on the basis of consulting or investment organizations that have the necessary resources and experience in this field.

It should be noted that in countries like Germany and France, real estate crowdfunding initiatives developed several years earlier, which contributed to the evolution of similar platforms in Finland.

The principle of crowdfunding

The principle of crowdfunding is as follows: construction companies often face the need to obtain funds to launch their projects at an early stage. As a rule, banks agree to provide only50-60%the necessary resources, which is why alternative funding options are becoming particularly relevant.

Each developer's proposal is carefully selected and evaluated, after which information about the project is published on specialized online platforms. Thanks to such mechanisms, small investors have the opportunity to participate in real estate investments, which was previously available only to large corporations.

The dynamics of the crowdfunding market

Statistical data show that in the period from2013 to 2017The volume of transactions in the crowdfunding market has significantly increased. According to the research by Bogdanova O. (2018) in the work "Crowdfunding in Real Estate in Finland: Success Factors of Campaigns and Industry Development," clear growth trends are noted.

Alternative ways of investing

Speaking of alternatives in the field of investments, it is worth noting that previously private investors could choose from:

• mutual investment funds (MIFs)
• real estate funds (REITs)
• the most straightforward acquisition of real estate for rental

Features of mutual investment funds

Mutual funds are most often established by banking institutions and involve long-term investments with a minimum amount offrom 20,000 eurosThe exit from such funds will cost the investor1-3%from the down payment.

In addition, the management company may withhold1-2%amounts as their commission, as well as20%when a set level of return is exceeded. Usually the yield of such funds is about5-7%per year, based on rental income, which can be increased through the use of borrowed funds.

Historical performance of funds

Regarding the historical returns of funds, detailed information can be found in the study conducted by Bogdanova O. (2018).

Real estate investment trusts (REITs) in Finland

Real estate trusts (REITs) are not common in Finland. To date, there are onlyone such trustThis can be explained by its similarity to mutual investment funds.

The main differences lie in the legal aspects of the ownership structure and mandatory allocation rules as a minimum90%dividends, as well as the need for an initial public offering on the stock market within the established timeframe.

The rates of return, investment strategies and fees in such trusts are almost identical to mutual funds.

The securities market in the real estate sector

If we consider the securities market of companies operating in the real estate sector, we can identify two main approaches:

• Riskyrelated to the purchase of shares
• Saferwhich involves the purchase of bonds of organizations engaged in the development and management of commercial properties

Such a choice allows investors to adapt their strategy based on their risk tolerance and desired level of return.

The yield of bonds and stocks

In general, the return from bonds does not exceed the level of 4% per annum. Stocks listed on the stock market have much higher volatility, which can lead to losses of even up to 20%. Nevertheless, for long-term investments, the average return on equities can be in the range of 10 to 13% per annum. This figure includes both dividends and changes in exchange rate value.

The study presented by O. Bogdanova in 2018 addresses the performance of stocks of companies operating in the real estate sector and is dedicated to crowdfunding in Finland, shedding light on the factors that contribute to the success of such initiatives and the development of this field.

Crowdfunding in real estate

Real estate crowdfunding is a quick process where funds are raised and transferred to borrowers within 30 days. Investors are not required to pay any fees.

Financial resources are directly allocated for the implementation of construction projects, most often for residential purposes in Finland. Loans are provided on short-term and medium-term conditions, yielding returns of 8 to 12% per year. The construction projects themselves serve as the basis for these loans.

Investment conditions

The interest accrual process is set by the borrower and is set out in the loan agreement. Most often interest is paid on a monthly or quarterly basis.

• The duration of the investment period is usually around one year.
• Compound terms from 8 to 24 months are also available.

If early withdrawal is required, some crowdfunding platforms have a secondary market where securities can be exchanged. However, a fee of 1% of the original investment is charged when transferring rights to others. Such opportunities may be limited on different platforms and therefore investors should treat their investments as medium-term investments.

Comparison with other financial instruments

If we compare crowdfunding with other financial instruments, we can note that in terms of liquidity, it falls between mutual funds and stocks. It is important to emphasize that the legislation in Finland, supported by modern technologies, allows for small investments in projects that were previously only accessible to professional participants.

The small entry threshold, which ranges from €500 to €1,500, allows investors to diversify their portfolios and spread risk across multiple projects.

Licensing and security

All platforms operating in this area are licensed by the Finnish Financial Supervisory Authority (Finanssivalvonta) and operate within the framework of the law. This ensures the safety and transparency of all financial transactions.

In our Telegram channel, you will find exclusive information regarding the real estate market, immigration opportunities, and the investment sector. It is important to understand that real estate investments, known as crowdfunding, come with certain risks. Real estate crowdfunding differs from traditional investments by offering the chance to pool funds to participate in projects that were previously only available to large institutional investors.

Expected risks of crowdfunding

It should be noted that this type of investment carries an expected level of risk that can be compared to investments in the stocks of companies operating in the real estate sector. Different investment formats have their own characteristics in terms of investor involvement and independence.

Credit ratings on crowdfunding platforms

Credit ratings found on crowdfunding platforms represent two key aspects. The first part of the assessment covers both the business aspects and the qualitative characteristics of individual projects. The second part of the analysis focuses on the collateral assets that serve as a guarantee for the repayment of the issued loans.

Each project receives a unique rating scale from zero to one thousand, which illustrates its level of reliability and potential risk. In the event that a borrower faces bankruptcy, the crowdfunding platform seeks assistance from collection agencies to recover debts.

To minimize such risks, projects with lower credit ratings are excluded at the preliminary analysis stages. This is due to the fact that the legislative norms regarding crowdfunding impose serious responsibilities on the platform, including criminal liability, for listing projects with a high risk of bankruptcy.

The RS insurance system in Finland

It is also worth noting that Finland has implemented an RS insurance system, which is designed to reduce risks for buyers and investors. What does RS insurance entail? This system protects participants who purchase housing at the construction stage from potential financial and construction risks posed by the development companies.

This initiative began its work in the 1970s and was officially formalized in legislation starting in 1995. Under this system, the developer is required to place an insurance deposit as a guarantee for the successful completion of the construction project, even if financial problems or deviations from the original plans arise.

Conditions for developers

In addition, development companies are required to meet certain conditions:

• Sales transactions for properties under construction must be executed exclusively in writing.
• All necessary project documentation, including the charter, pledge certificates, financial estimates, construction licenses, and technical drawings, is submitted to the bank or the local government administrative office.
• Buyers can also be represented by the interests of the organization that oversees the construction process, or by an independent auditor.

Conditions for investors

Next, let's consider the most important conditions that apply to investors within this system. The first condition is high profitability, which amounts to8.0%to12.5%annual returns on investments. The interest rate varies depending on the project's rating: the higher the risk, the higher the potential income.

During the negotiation process between the investor and the borrower, specific interest rates are established. Some platforms may not cooperate at all with high-risk projects (where the rating is below...3points or lower700), however, other resources may show greater flexibility on this issue. In any case, the investor always has the opportunity to review the project's rating and make an informed decision about the viability of their investments.

No management fee

The second significant aspect is the absence of management fees. In contrast to traditional funds and management companies, crowdfunding platforms in Finland do not charge private investors fees for conducting transactions and managing assets. This positively impacts the overall return on investments and allows for more efficient management of personal finances.

Thus, crowdfunding is becoming an attractive alternative for those who want to earn a stable income from investments. The growing popularity of crowdfunding is linked to its accessibility and transparency, which allows both investors and borrowers to find mutually beneficial solutions and terms for collaboration.

Conclusion

In conclusion, real estate crowdfunding in Finland represents a unique opportunity for private investors who previously did not have access to large investment projects. Since the adoption of the crowdfunding law in 2016, this tool has not only become legitimate but also quite successful in the further evolution of the real estate market. It creates new financing avenues for developers who face restrictions from banks when obtaining loans.

I observe that interest in this model is growing, and it's not surprising given that in today's conditions, private investors are eager to diversify their portfolios as much as possible. Crowdfunding allows them to be part of significant projects by participating in large-scale residential real estate development in capital cities and emerging regions, which is very relevant in light of the changes in housing demand.

The future of crowdfunding

The future of crowdfunding looks promising. We already have several successful platforms, such as Realinvest and Groundfunding, that provide transparent and secure conditions for investments. This creates an atmosphere of trust and support from both consumers and government entities.

Advantages of crowdfunding

An important aspect is that crowdfunding offers more flexible conditions than traditional investment tools, such as mutual funds or real estate trusts. It allows for significant amounts to be invested in smaller portions, making investments more accessible even for small investors.

Conclusions

Thus, we stand on the brink of a new era in real estate investing, where crowdfunding plays a central role. Given its potential, alongside the growing demand for housing and positive shifts in legislation, we can expect that this area of development is just beginning. I am confident that real estate crowdfunding will continue to expand the horizons of investment and provide us with new opportunities to participate in interesting and profitable projects for anyone who wants to be part of Finland's thriving economy.