In any business you need a source of fund, be it a loan from the bank, savings, venture capital or investment from entrepreneurs. Often obtaining loans from banks can be inconvenient due to various reasons like the high interest rates, strict lending policies, mortgage issues etc.
Crowdfunding is an appropriate solution in such scenarios. This is a method of raising capital through the collective effort of a large number of people or crowd, hence the name.
Individuals or organisations can invest in or donate to crowdfunded projects in return for a potential profit or reward. In modern times, crowdfunding is carried out primarily online via social media or crowdfunding platforms all over the world like Smartcrowd, Kickstarter, Indiegogo, Realty Mogul, Oporajoy and so on.
Crowdfunding in real estate
Real estate crowdfunding is gaining popularity all over the globe although it is a relatively new method of raising capital for investments in this sector. Through this process, investors can invest in a wide variety of properties without having to deal with mortgage brokers, agents or contractors.
Previously, obtaining external investment from investors in the real estate sector was difficult as it depended mostly on business connections. In many developed countries like the USA, Australia and UAE, since the crowdfunding investment model has been adopted by all, developers can get connected to a large number of investors very easily.
Investors can also choose where to invest their money from safe and convenient platforms.
There are two major types of real estate crowdfunding- equity (equity-based) crowdfunding and debt (lending-based) crowdfunding. Debt-based crowdfunding is also known as peer-to-peer lending. In this type of crowdfunding, investors lend money to businesses like real estate developers or other individuals with the expectation of getting repaid along with added interest.
On the other hand, equity crowdfunding is a mechanism that enables broad groups of investors to fund the real estate project in return for equity. That is, investors and business owners have shared ownership of the project and profit is shared according to the investment ratio or as per discussion.
The major risk associated with this type of investment is that, since investors have an equity stake in the property,they can lose money if the value of the real estate project decreases.
Donations or rewards are also a type of crowdfunding, but this type is not applicable in real estate as the investment amount is huge, which cannot realistically be covered by donations or rewards. Still, in some countries like Malaysia and Indonesia, there are some organisations (e.g., Singapore-based EthisCrowd) which, besides equity crowdfunding, also operate on donations and rewards to finance real estate projects like community houses.
There are many reasons as to why crowdfunding in real estate is gaining popularity. Some of them are listed below:
Lower capital requirement: In the past, in order to invest in a real estate, investors would require large amounts of capital to cover the upfront costs. The real estate crowdfunding market has enabled non-accredited, as well as non-professional investors, to get involved without the need for large amounts of capital to get started.
Accessibility and freedom: The real estate investment market is now far easier to access because, with the help of technology, real estate crowdfunding platforms online are very easy to use. It also empowers you to make your own decisions as you can choose how much you want to invest and where you want to invest.
You can get access to different platforms and make a comparative study between the best real estate developers, thus investing in the best property markets only.
Worldwide platform: People from all over the world can invest in a real estate property regardless of the currency. And of course, it helps investors browse and invest in properties in countries all over the world.
Efficient management: Real estate has always been an "admin-heavy" business which requires a lot of paperwork. Since most real estate crowdfunding is done online, investment in a property is handled by the platform itself. Information is available easily. Thus, with increased efficiency and better transparency, the project duration decreases making the investment more profitable.
Global real estate crowdfunding market
According to the report by Facts and Factors Market Research, the real estate crowdfunding market has grown drastically over the years from $19.1 million in 2012 up to $2.57 billion by 2015.
Globally, the market is predicted to be worth approximately $13.21 billion in 2018, and it is expected to grow up to a dramatic value of around $868.98 billion worldwide by 2027.
The largest crowdfunding market belongs to the USA. In 2018, the crowdfunding real estate market was $6 billion. All the most known crowdfunding platforms specialised in real estate was born between 2010 and 2014 in the USA and the most active platforms are based in California.
Real estate crowdfunding in Bangladesh
Crowdfunding in the real estate sector is a relatively new concept in the Indian subcontinent, and so in Bangladesh. But there have been a few researches and some surveys which have given promising results. Nowadays we are seeing that community living is being promoted in Bangladesh and livable premium gated communities are being introduced.
Such projects can also be a lucrative source for crowdfunding in future as the whole community demands a large amount of investment for its development and the government can earn a good amount of revenue from it. We are already familiar with similar concepts like Group Buying Policies in real estate.
Research done by the R&D wing of Suvastu Properties Ltd has given insights to us about the most preferred areas in Dhaka city where people want to invest in a group for buying apartments or getting lucrative returns on their limited amount of investment. This has a similarity with the concept of real estate crowdfunding to some extent.
Although crowdfunding investments in real estate is at its emerging stage in many countries, it has potential to revolutionise the way in which individuals invest in real estate as well as how business raises capitals for their projects. In some countries, it is becoming a stand-alone industry.
Crowdfunding has also allowed investors to have a voice in the project development process and be more involved than ever. From the trends seen all over the world, it is safe to say that with a properly designed online platform, backed by a strong and well managed organisation, crowdfunding in real estate will take on the market very rapidly in Bangladesh.
Our government is very much concerned about the organised development in the real estate sector and crowd funding may be a good tool to facilitate this sector with smart cash flow in order to build a healthier economy.
So, the policy level work from the government side would be to check the feasibility of real estate crowdfunding in Bangladesh and how to make it more effective.
Amit Chakrabortty is the Chief Marketing Officer of Suvastu Properties Limited.