The emergence of online crowdfunding as a viable means of raising large sums of capital for major property developments has the potential to shake up real estate financing.
Speaking at a recent Property Council of Australia event on future industry trends, Michelle McNally, general manager, commercial services at ISPT, pointed to real estate crowdfunding as a phenomenon that has already gained traction, as well as one that is potentially poised to transform financing in the property sector.
“Real estate crowdfunding is moving fast, gaining scale and testing boundaries,” she said. “It’s a trend that has the potential to dramatically change the real estate industry.
“It is an internet-based facilitated means for sponsors to source funds from a multitude of investors for a particular project or initiative. It is real estate combining the need for a financial asset, and then putting it on a technological platform for distribution.”
McNally noted that real estate crowdfunding is a natural progression that follows in the wake of other online platforms that foster the creation of a sharing economy or shore up economic efficiencies by granting people access to goods, services or resources that would otherwise remain untapped and idle.
“Uber, AirBnB and their technology platforms have brought together spare rooms and personal transport, as well as people’s willingness to enter into the sharing economy, to completely disrupt transport and hotel market,” she said.
“Post-GFC, the excess of human capital as well as the desire for organizations and people to move from a fixed-cost to a flexible-cost base has enabled start-ups like AirTasker and Freelancer to dramatically change the way people source work in today’s environment…so how will these platforms shape [the real estate] industry moving?”
Data shows that the popularity of real estate crowdfunding has exploded in recent years. While in 2012 it’s estimated that only $2 million in real estate projects were crowd funded globally, this figure is expected to rise to $2.5 billion in 2015, with more than 80 different platforms already in existence.
According to McNally, a big reason for the sudden boom in property crowdfunding is its ability to confer expand the pool of potential investors via “the democratising of real estate,” providing major benefits for both those ponying up the money and developers jonesing for capital.
“The benefits [of] the model is the ability for individual investors to gain access to developments or assets that they previously wouldn’t have had access to, while also enabling them to access individual projects and assets and select them, rather than having to invest in a company or a REIT that invests on their behalf,” she said.
“For the developers and the sponsors of the projects, it gives them access to new forms of capital, and that new form of capital could potentially be at a lower or different cost base.”
While the use of crowdfunding confers a raft of benefits to all parties to transactions, McNally notes that its future expansion remains highly contingent upon an adaptive response from regulators.
“One of the main challenges is the ongoing role of regulators and the legal framework,” she said. “As we all know, property investment occurs within an established legal framework and is highly regulated. Real estate crowdfunding in all countries, including Australia, are pushing the boundaries and asking the questions around some of these regulations.”
Another key factor will be ensuring the ongoing sustainability and reputation of such platforms to ensure their long-term viability.
“In a low interest rate environment with a high level of liquidity, sometimes these things can flourish,” said McNally. “But it will be the long-term nature of these platforms, in terms of establishing them as a real alternative, that will require a deep understanding of financial and real estate capabilities.”