Advice and Opinion

Crowdfunding in the real estate space: disruptive technology or revolution?

By Gemma-Louise Perrins

The real estate crowdfunding space is a fast developing industry. It is currently amongst some of the leading sectors in the world’s crowd funding community. The question is will this form of technology prove to be troublesome, or will it contribute a prosperous return to real estate on a global level?

“In ten years or more, I truly see crowdfunding (or the concept of crowdfunding) revolutionizing real estate, investments, finance, medical aid and every other thing where there is a middle man being removed,” says Scott Picken, founder and CEO of Wealth Migrate.

With an estimated eighty-five real estate crowdfunding portals worldwide, the published figures from previous years have shown that real estate crowdfunding has increased dramatically.

According to Massolution’s 2015 report, $1.014 billion was raised through real estate crowdfunding in 2014, compared to $396.4 million in 2013 and $19.1 million in 2012. The report has forecast that 2015 will raise $2.57 billion with further estimated amount of $250 billion for the year 2020.

“Growth, to-date, has focused on first world markets, but emerging markets are where the real growth is expected in the future,” says Picken.

The pros and cons of crowdfunding

“There is a reason that there is the saying, “He who owns land is king,” says Picken. “…For centuries, real estate has been the best asset to create and to preserve wealth”

REITs (real estate investment trusts) have a high correlation with the stock market. Crowdfunding, on the other hand, is a direct property investment and individuals can decide on which properties they would like to include or exclude from their portfolios.

Additionally, real estate crowdfunding investments are not publicly traded which means that they are not subjected to a mark-to-market valuation on a recurrent basis. The stock price of a REIT could fluctuate on any given trading day. “Real estate crowdfunding is one of the best vehicles to protect against inflation” says Picken.

Lastly, real estate crowdfunding campaigns do not require a large minimum amount to invest. Individuals could potentially own a sizeable portion of real estate or a development project without having to put down large quantities of money. This allows individuals to invest small amounts of money into various property opportunities which expands their ownership and it will lead to a larger portfolio with a minimized risk exposure.

But, for every pro there is a con – one of the major disadvantages of real estate crowdfunding is that the investments are illiquid and they are not traded; individuals will not have easy access to their investments in the event of an emergency and it could be near impossible to cash out quickly before their property is disposed.

Another down side is that not all crowdfunding spaces are created equally. The general public needs to be aware that just because technology has entered into this space, it is not a failsafe method.

“There will be start-up websites that know nothing about investing or about real estate and this won’t necessarily help people to invest” says Picken. “ … I do believe that just like the ‘dot-com-button-boom’, we will actually lose money but this is not to say that the internet is all fraud.

“There are many sites and just because you know how to build a website, it does not mean that you know anything about the fundamentals of real estate and how to invest safely and to make returns in the long run. This is all based on experience and track records … investors and property providers need to be very careful and this is why we place such an emphasis on education.”

Scott Picken believes that crowdfunding is based on fundamentals; if you steer away from these fundamentals, then you are taking a chance. His advice is to stick to one space or vertical that you understand and to know exactly who you are dealing with.

“… Essentially, technology is an enabler and people need to understand this. Even in the real estate space, the fundamentals will remain the same, it’s just that technology plays as an enabler and it makes it more efficient.”

Nowadays, digital footprints and reputation are key. The problem with long term entities, such as real estate and investing, is that there is a very long tail and this may not be suitable for individuals who prefer a hands-on approach, as they will have very little control over the management of their investments and developments.

For example, as Picken explains, if two parties were to invest in a project, neither of these two parties would be able to tell how good each other’s performance would be for at least the first two years. There could be a five to ten year waiting period where each party will struggle with credibility and this is where pure technology is not going to be able to assist. There will be the call for a third party to be introduced who will be required to make sure that both parties are sticking to their side of the deal.

“Like any technology space, it is going to take time to evolve and when it is in place, it would be fantastic for the consumer.

“It will change the face of real estate, investment, finance and banking in South Africa and globally, just like technology has done in every other space it has disrupted,” concluded Picken.