Is Crowdfunding Applicable To Real Estate Investments?
Much has been said about crowdfunding being the next strategy to be adopted by Entrepreneurs and Investors alike. However, before making any decision or simply jumping into conclusion, studies should be undertaken beforehand coupled with some form of mentorship to ensure that the investment is sound.
Proper mentoring could prove to be advantageous for start-ups in the current weakened market in terms of building a strong brand or team or in overcoming cash flow challenges.
Author of Kitabul Daimyo and Property Investor Nazhrat Zain who is also known as Nazz says that crowdfunding is relatively new to Bumiputera investors.
“Crowdfunding requires an assembly of a complete team led by an experienced and knowledgeable investor. The leader should be someone dependable and trustworthy who knows the mathematics of the investment,” shares Nazz.
Likening crowdfunding to basically an advanced level of property investment, he says this warrants surgical planning precision. For one, the other team members must be able to meet their loans.
Nazz says that crowdfunding is still one strategy to attract young or first-time investors. This is because the leaders themselves have gone through a few cycles of the property market and investments per se, thus they can guide new investors to not repeat these costly mistakes.
He shares that seasoned investors are usually loaded with loan to value (LTV) ratio considerations, thus making it slightly more difficult and costly for them to invest in additional properties. New investors or start-ups on the other hand, have the advantage when it comes to the Debt Service Ratio (DSR) given their relatively low borrowings.
Therefore, with the combined teamwork, this strategy can prove beneficial. Nazz shares that the crowdfunding strategy can benefit investors in terms of trust, management and long term reliability.
Nazz adds that an investor can have a lot of documental support and skills but if the joint venture (JV) begins with even a slight distrust between any of the members, then it is wiser not to embark on the journey of investment together. A proper JV would thus require paper work such as trust deeds.
“A JV should only be done for a pre-determined period such as a maximum of seven years before a property can be disposed of. This would teach the whole team how to properly plan for the investment,” adds Nazz. The goal is to get profits from the sales of the property which can then be used by individual members to invest on their own.
Hopefully, within the JV period, the investors would learn a lot on how to invest and make profits. The method would be like going back to college – just that in this case, the investor would make huge sum of money when he or she graduates.
On another hand, Chur Associates Founder and Managing Partner Chris Tan says that crowdfunding can entail getting financing from the masses. A crowd in this context is a collection of individuals or a segment of the public.
Raising funds from the public is a regulated activity in Malaysia – from what is commonly known as the initial public offering (IPO) for Bursa Malaysia to the very progressive at any crowdfunding stage.
“We are the first country in Asia which has a regulatory framework for crowdfunding. The Securities Commission (SC) has of to date, issued six licenses for equity crowdfunding. Recently, six more licences were issued for Peer To Peer (P2P) crowd-funding company,” says Tan.
There is no real estate crowdfunding as yet with the closest real estate related crowdfunding being a real estate agency. The best benefit for crowdfunding investors would be the lesser risk due to the lower entry point in terms of pricing as well as the bigger room for value appreciation since this represents an early stage for investors who mainly comprise start-ups.
Commenting on whether the certainty of this strategy can be beneficial Tan says, “I am not sure if crowdfunding would make you a better investor but it is certainly a different ball game which requires a different skill set from a different investment perspective”.
Significantly, it is not the usual shares investment pertaining to the listed stock exchange. Regulated crowdfunding in Malaysia is also not as liquid as the stock exchange and there is no secondary market just yet. The compliance is relatively lesser so it is risker than the regular stock exchange.
“You must have the vision to spot the next Jack Ma and Elon Musk at the almost infancy stage of the business. The holding period is also naturally much longer for investing at this stage,” advises Tan.
If one were to compare crowdfunding to traditional real estate investment, leveraging on bank financing is extremely challenging unless there is an anchor investor with great credentials and credibility.
Tan says there are some challenges with regards to the process of crowdfunding by an investor. The first deals with the lack of track records in this form of investment, given that it is relatively new. Gaps in information also exist especially when it involves untested business models and speculative technology. The relatively lower transparency and corporate governance and lack of information on the crowdfunding processes are other challenges.
Tan opines that there are less options and liquidity due to the lack of secondary market when it comes to exiting the investment. To him, it seems more appealing to users/investors than just pure investors who are generally speculative in nature.
The Securities Commission (SC) Malaysia has drawn out the Guidelines on Recognised Markets for investors and related parties to know more and explore the possibilities in future, inclusive of Chapter 12: Equity Crowdfunding Platform and Chapter 13 : Peer-to-peer Financing Platform on diversifications investment portfolios.
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