Part I of II originally published in REW.ca (Real Estate Weekly).
The Sharing Economy is in the news, disrupting traditional industries such as hotels (AirBnB) and taxis (Uber), the latter in many cities like Edmonton and Toronto, if not yet BC. While the BC real estate industry has adopted many new technologies like virtual tours, this innovation has unfolded slowly to date for real estate finance.
Crowdfunding? People generally associate it with gadgets or creative works pre-sold on platforms like Kickstarter or Indiegogo or crowdfunding as donations to causes or people in need on sites like GoFundMe or FundRazr. In fact, the fastest growing type is actually investment or equity crowdfunding and the largest type overall is debt or crowdlending.
And it turns out that the hottest sector for both equity and debt crowdfunding globally happens to be real estate. While relatively new to Canada, over $2.6B in real estate projects were crowdfunded in 2015, up 156% from 2014.
Part I introduces real estate crowdfunding, it’s benefits and risks and activity in other countries. Part II takes a closer look at the Canadian market and opportunities.
What is Real Estate Crowdfunding?
Real estate crowdfunding is a new financing approach where many investors team up to provide the equity or debt required to buy, finance or develop a property or real estate project, typically via an online crowdfunding platform.
With interest rates at historic lows and high demand from domestic and foreign buyers in Canada, real estate crowdfunding has evolved much more slowly than in the US. The market is about 3-4 years behind the US but a look south of the border is enlightening. (For more on Real Estate Crowdfunding in BC, see keynote deck done for Greater Vancouver Home Builder’s Association here.)
Over 175 real estate crowdfunding portals are active in the US and huge sums have been raised with rates of return as high as 8-25% and minimum investments as low as $100-$5000. FundRise claims 80,000 members and to have made $3B USD in real estate investments. Realty Shares has raised $130M USD for 160 properties and Realty Mogul claims to have raised $196M USD from 78,000 investors.
What is driving growth?
A number of factors have combined to fuel crowdfunding including the massive wave of mobile and social network adoption, liberalized securities laws, the search for alternative investments given risk volatility and soft stock and bond market returns, and the broad interest in the hot real estate sector.
Now, real estate financing is carefully regulated by the provincial regulators like the BC Securities Commission. Historically, the vast majority of capital for larger-scale real estate projects and new developments was raised using the Accredited Investor Exemption or the Offering Memorandum Exemption.
A new prospectus exemption was introduced in BC in 2015 called the Startup Crowdfunding Exemption. A maximum of $250,000 in capital can be raised twice annually by project owners and retail investors can invest a maximum of $1500 per campaign. While the caps are modest, the exemption does open up previously inaccessible investments to regular Janes and Joes.
Part II will elaborate on this new investment opportunity.
What type of real estate is involved?
In the US, the majority of funds to date have been raised for residential property development, such as multi-family, and for “fix and flips.” Commercial real estate is next in line with some major International projects like BC Bacata Tower, a mixed use project in Bogota, Columbia that raised $175M from 3500 investors to build Columbia’s tallest building.
In the US, markets like California, Arizona and Florida have seen considerable interest from investors in investing in renovations that can be liquidated in relatively short time frames to generate strong investment returns.
Most of us are comfortable with investing in real estate when talking about our primary residences or recreational properties. We deal with banks, mortgage brokers or possibly secondary lenders. What about the opportunity to invest in entirely new opportunities like multi-family, commercial, industrial, resort or even skyscrapers? The portals are specializing in certain geographies and property niches so the sky truly is the limit.
Benefits for property sellers and developers
Speed, flexibility, community building and access to new investors at a lower cost than traditional funding avenues are just some of the drivers for interest in this method by owners of existing real estate and developers of new projects. The approach also allows them to seek community support for projects that may have faced resistance or low market acceptance.
Benefits for Investors
Attractive returns, transparency, access, convenience and diversification are some of the factors drawing investors to real estate crowdfunding investing in Canada and other markets.
Another way to look at real estate crowdfunding is as a new form of syndication that offers returns to investors. The technology of the portals creates much greater reach for the projects and unlike REITs or Mortgage Investment Corporations (MICs), investors can conveniently access a diverse selection of opportunities and then select specific properties that they are interested in.
The opportunities vary in returns, risk/reward and length but the commonality is that the investments are curated by the platforms and backed by the real estate asset itself. This is quite different than investing in a business startup and hoping for an eventual return. Liquidity varies and R2Crowd indicates a range of 6 months to 5 years for debt liquidity and 3-10 years for equity investments.
Real estate in BC is booming with new developments under construction everywhere and wealth accumulating for the developers involved or lucky property owners cashing in their equity. Yet, many people feel left out of this boom for a variety of reasons including lack of networks, income, multiple offers and foreign investment. Well, maybe you can participate.
In Part II, we’ll reveal the players in Canada and how Canadian investors are currently utilizing this method and the opportunities that will be available in the future. We’ll introduce Canadian portals and discuss the foreign investment “crowdfunding” that has been in the news recently.