Real estate crowdfunding poses challenge to market

A report commissioned by the Investment Property Forum (IPF) has shone a light on the nascent but fastgrowing real estate crowdfunding market and warned that it could have a far-reaching impact on the wider property market.

Globally, real estate debt and equity crowdfunding accounts for a relatively small portion of the global real estate market.

In 2015, property debt and equity crowdfunding totalled $7.8bn, whereas there was $760bn invested in commercial real estate.

The total is also small compared with the wider crowdfunding market although there are significant differences between the three main markets of the US, UK and China.

Real estate accounts for 5% or less of the crowdfunding markets in China and the US but it accounts for more than 20% in the UK.

The UK real estate crowdfunding market is heavily weighted towards debt, which accounts for 88% of activity. At $0.93bn, debt crowdfunding represented about 1% of all lending in the wider UK commercial real estate market in 2015.

The IPF report, which was carried out by Dr Brenna O’Roarty of RHL Solutions, said the focus on property debt was partly down to the lack of availability of debt finance from other sources for small developers and housebuilders.

In other markets, crowdfunding in the real estate industry has developed differently. In China, established developers have used crowdfunding to fund schemes. For example, last year Dalian Wanda Group launched a crowdfunding project called Stable Earner No. 1 to finance shopping centre developments, with a minimum investment of $161. Retail investors contributed 10% of the $800m raised over three days.

In the US, crowdfunding platforms have also been involved in larger deals than in the UK. For example, property crowdfunding platform Realty Mogul has been able to fund a $49m loan. This is partly because platforms were unable to market to retail investors until this year, which has led to greater institutional investment through credit lines and co-investment.

The report highlighted how the different models from around the world demonstrated how disruptive fintech could be. It said the business models of intermediaries, such as financial advisors, could be threatened and fees could come under pressure.

“UK crowdfunding is currently focused on niche products in the residential sector and, as such, there is time for the wider market to respond to what the growth of crowdfunding illustrates: consumers seeking greater discretion, control, lower fees/higher returns, greater ease and speed of investing and greater transparency in reporting at the asset level,” it said.

Concerns have been raised about the lack regulation of the industry, especially as platforms are targeted at retail investors. However, the report stated that “governance standards in the industry would appear to be good.”