Is Crowdfunding a Viable Option for the Commercial Real Estate Sector?

Crowdfunding and Real Estate

Crowdfunding or the pooling of small amounts of capital to establish something new and out-of-the box had a quiet birth in the aftermath of the 2008 global financial crisis. It enabled individuals without access to huge funds but with ambitious ideas to realize their dreams and ambitions. Since then crowdfunding has empowered and encouraged many new players in varied professional fields. After its beginning in the West, this new financial model quickly spread to Europe and developing markets like Asia and Africa.

Today, crowdfunding is making its way slow and steadily into the real estate sector. It has transferred the power of making big investments into the hands of people, away from the business elites; simply by virtue of being able to invest flexible sums of money based on incomes. In India, crowdfunding has created one of the fastest growing marketplaces in recent times.

The Risks and Benefits

While the prospects are enticing, it is not a risk averse business. Crowdfunding may have opened up the investment “playing field” but investors are not clued up real estate professionals. Limited expertise with regard to evaluating risk, not carrying out due diligence or seeking legal counsel could result in unsafe investments. As no explicit laws exist that govern this new breakout version of an old, intractable industry, the marketplace is dotted with fraudulent deals that investors must be vigilant about. (Read : Opportunities for Foreign Investors in Indian Real Estate)

So crowdfunding has begun to change the rules for investors even as it defines the market for developers. This alternate means of raising capital has broadened their options, especially the less established or those whose capital requirements are not entirely covered by banks or other traditional financing agents.

This dual requirement of investors looking for pre-vetted properties and developers needing an alternative method for generating capital through multiple sources has created the need for common platforms to facilitate business. Online platforms such as Smart Owner (India), iFunding (Asia) and CoAssets (Southeast Asia) have come about with precisely the aim to be the digital meeting ground between the two ends of the crowdfunding real estate spectrum. They provide end-to-end solutions and minimize the risks involved in what is already a risky business.

Digital platforms for crowdfunding have now made it possible for investors to overcome geographical restrictions, and diversify their portfolios of investment by splitting their money between different types of real estate projects the world over. This also helps create a safeguard buffer should one’s investment fail.

Need for Regulation

Finally, crowdfunding in real estate is a relatively new trend. In the USA, due to regulatory restrictions, it was not possible for the real estate sector to capitalize on crowdfunding until the passing of the JOBS Act (Jumpstart Our Business Startups Acts) in 2012. In India, equity based crowdfunding is now legal but given that the real estate market is not a transparent one, legal norms have to be put in place to eliminate corruption and illegal money that finds its way into the sector.

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