(Article from TODAY 29-Apr-2016)
Flip through any newspaper over the weekend and you will see a buffet of investment options in the real estate market. Typically, there are investment options from Melbourne, Sydney, London, Ho Chi Minh City, Tokyo, Bangkok, and the list goes on.
However, as many investors have found out, owning a property overseas can entail a lot of pain: The pain of finding a good absentee manager, the pain of sourcing tenants, the pain of paying the high cost of ownership, the pain to ensure compliance with taxation laws, and the pain in selling off the investment.
Perhaps it is time for a rethink. Investors in Singapore might want to rethink their allocation of resources and look at real estate crowdfunding as a viable alternative.
Real estate crowdfunding: Can it take off in Singapore?
Crowdfunding is a way to collect small individual amounts from many people to fund opportunities or causes.
In the United States, several real estate crowdfunding platforms such as Prodigy Network, Fundrise, Realty Mogul and RealtyShares have collectively raised millions for real estate projects. One of the most prominent, and perhaps the largest, crowdfunding project in the world was started in Bogota, Colombia, where Prodigy Network pulled together funds from more than 4,000 people, raising a total of US$190 million (S$255 million) to fund BD Bacata.
BD Bacata will be the tallest skyscraper in Bogota and the second tallest in South America, with 67 floors destined to be used as a hotel, apartments and a shopping centre.
Growth of similar platforms is observed in Australia, the United Kingdom and China, among others. Massolution, a leading research house on real estate crowdfunding, estimated that real estate crowdfunding value will increase by 150 per cent to US$2.57 billion in 2015, making it one of the fastest-growing industry segments of crowd capitalism. In our opinion, investing in real estate in Singapore will follow the same trend as in New York and other developed markets.
Just look at how crowdfunding has already started to change the small- and medium-sized enterprises (SME) loan market in Singapore.
What special deals can crowdfunding platforms offer?
Studying the evolution of the crowdfunding market in the US, we evaluated the offerings of one of the earliest crowdfunding platforms, Prodigy Network. Prodigy Network lets investors into commercial real estate markets in New York City.
Imagine owning part of a commercial building in New York’s renowned Wall Street or Park Avenue! Investing in real estate in major cities such as New York is attractive for two main reasons: It is a tangible asset and, considering that the demand for real estate in New York is far higher than the supply, the value of the properties has a high probability of appreciating over time. Now when it comes to what type of real estate to invest in, the choices normally come down to two: Residential versus commercial.
From an investing perspective, commercial tends to be the most sought-after strategy, given that it has lower risk and that its cash-flow generating operation increases the value of the property through time.
Historically, access to these kinds of investments was restricted to the very wealthy or financial institutions, given that most commercial real estate properties in Manhattan are valued in between US$100-US$250 million.
But now, due to the JOBS Act, which is the regulation that permitted crowdfunding in the US, and due to the power of technology, which allows millions of individuals to be connected through their mobile devices, platforms such as Prodigy Network are pooling together investments starting at US$50,000 from around the world in order to fund these projects. In other words, real estate crowdfunding is democratising some of the most attractive and profitable opportunities in the real estate sector. We think that, over time, developers in Singapore will start to explore fundraising efforts in the same way they have evolved in the US.
Technology enables, but do not forget real estate fundamentals
Even the best technology will not salvage a bad deal. Investors should be aware that while technology enables, they should not lose sight of analysis of the risks involved and whether they are equipped to accept the risk.
Understand legal structure of the investment
Investors should always remember that in a bad market there could be good investments that are well structured, and in a good market there could be badly structured investments. In a typical crowdfunding structure, investors typically buy into shares of a special purpose company (SPC) or units in a trust. This SPC or trust will then invest in the property. Such investments could be in the form of shares of a development company, a secondary loan to developers or joint ownership of a completed property. Investors need to understand the liabilities and the rights to returns or dividends when investing in such structures.
Assess the risk versus the rewards
Investors need to start to assess the risk of each investment and whether the returns are sufficient to compensate them for the risk. Do not be taken in by “guaranteed returns” as 100 per cent fail-safe investments. Even governments can default on sovereign debt.
Investors also need to start to recognise returns are either fixed or variable. In the case of fixed returns, they should ask where the fundraiser got the money to “guarantee” their returns and what the chances are of the fundraiser not being able to find money to pay those “guaranteed returns”.
Share expertise and join the community
The other important feature for crowdfunding platforms versus traditional investment models is that investors should be more willing to engage in discussions among themselves or with the fundraisers on the crowdfunding platform or social media. This concept of crowd-policing of investments might be the best way to ensure that dubious investment schemes and individuals are kept out of the investment market.
Ask the right questions before investing
Investors should look at crowdfunding platforms as an enabler of the process of collective investment. Responsible platforms are more likely to conduct due diligence on projects before these are allowed for fundraising. The new trend in real estate investment markets is rapidly changing and investors might want to start to understand more about investment structures, questions they need to ask and what is involved before getting into any deals.
ABOUT THE AUTHOR: Tan Kok Keong is chief operating officer and co-founder of Fundplaces, a real estate crowdfunding platform.