Over the past few decades emergent technologies have impacted nearly every part of the economy, and finance has been no exception. While some could argue that the dominance of large institutions in financial markets has led to a relatively slower uptake of so-called “disruptive” technologies in the sector, the change is now definitively underway. From retail banking, to consumer loans, to money transfers and even asset management, technology is integrating itself into finance more than ever before. Similarly, capital raising methods have been subject to major changes, and it is in this area that will focus our report.
While equity crowdfunding and marketplace lenders (formerly “peer-to-peer lending”) have garnered the most media attention, real estate crowdfunding has become a major force in both the global real estate market and the capital-raising business.
Real estate investing is considered to be one of the earliest forms of investment, and yet despite this, until only a few decades ago direct investing in the market, or using expensive and hard-to-access investment funds, was the only way for investors to partake. The opportunity of investing came with significant risk, as the market lacked liquidity and the sector became known for strong price swings, such as in the Financial Crisis of 2008, or in various “land fever” events in the preceding two centuries. Yet, in 1970, this again began to change as financial and technological innovation brought a step-change to the sector.
The 1970s saw the advent of Real Estate Investment Trusts, or REITs, which were both a financial, regulatory, and technological innovation. This special form of company allowed investors to commit capital to real estate in a lower-fee and high-liquidity medium. REITs are obligated to give back 95% of their returns to shareholders, and hold 75% of their capital in real estate, but so long as they do so, they can avoid being taxed at the regular corporate rate. For the first time, investors could trade in and out of positions with relative ease, all while making good returns. Investors have historically earned robust returns in the sector which have outpaced the S&P 500.
However, challenges remain for REIT investors, as the sector is highly sensitive to interest rates, and is generally well correlated to the overall market, lowering its suitability for use in diversification.
Now a new innovation is growing in real estate which is set to yet again yield a seismic shift in the industry. That innovation is real estate crowdfunding (RECF), and like its predecessor, the REIT, it is a product of technological, regulatory, and financial development. For the first time, real estate crowdfunding allows investors the ability to make targeted equity and debt investments in specific opportunities. Rather than having to commit money to a fund or a REIT, investors can place capital directly into real estate investments.
Investments sizes vary greatly, with many investment minimums starting from just $5,000 or lower, with a theoretically unlimited top end. The flexibility of being able to invest small sums in varying amounts of different opportunities simultaneously allows highly targeted investing, while also offering some benefits of diversification. It also generally has much lower costs than other forms of real estate investing as it cuts out the middle man and allows investors to go directly to the source of the investment. In turn, this allows those raising capital to go directly to a larger pool of investors, and compete by offering better terms than if they had to use an intermediary.
While real estate crowdfunding had been limited to accredited investors in the US, as of November 2015 the United States approved a new measure as part of the JOBS act which allows all investors to partake in the market. We thus see this a growth catalyst for sector. In our view, real estate crowdfunding is the next step in the evolution of the real estate investing market, following on its predecessor and cousin, the REIT.
You can access our full report on real estate crowdfunding here: https://dealindex.co/research.html
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