2015 SAW THE AUSTRALIAN property market in many areas continues its stellar run. In fact, rising property values have meant that some investment in the great Australian dream is out of reach. However, in the future, there may be an alternative: the opportunity to pool funds with others or make large numbers of investments through crowdfunding.
WHAT IS CROWDFUNDING?
Crowdfunding is an investment platform that harnesses the power of the masses and social media to allow those with limited capital to invest in some of the most exciting projects on the planet. It is also considered a form of alternative finance – outside the traditional finance system. There are two types of crowdfunding: rewards-based crowdfunding and equity crowdfunding.
On sites such as Kickstarter, Rewards-based crowdfunding has seen millions of dollars raised from micro-investors for a wide range of projects from the Pebble Watch to movies, including Veronica Mars.
Equity crowdfunding, on the other hand, is a collective effort of individuals to provide finance, where the backers receive shares in the company. It is the concept of equity crowdfunding that allows real estate transactions to occur.
WHAT IS REAL ESTATE CROWDFUNDING?
Similarly, real estate crowdfunding allows a broader range of investors (the ‘crowd’) to make smaller investments in real estate assets and ventures more efficiently.
“The aggregation of smaller amounts of capital from a broad group of investors results in the creation of a significantly larger pool of new capital, allowing the crowd to collectively buy properties, lend money to homeowners and property developers, or take equity stakes in new development projects as joint venture partners.”1
The popularity of real estate crowdfunding is growing exponentially. A report from the United States-based research organisation Crowdnetic showed that two of the top three crowdfunding sectors are property-related.
THE AUSTRALIAN ANGLE
Australia has enthusiastically entered the crowdfunding arena with the launch of a number of crowdfunding technology platforms, including Perth-based CrowdfundUP, which aims to connect potential property investors with property developers in search of capital.
Founder and CEO Jack Quigley says, “Previously, there was no easy way to connect investors with property developers, so we aimed to become the Wotif of the property industry, giving visibility of great opportunities to retail investors.”
In 2015 the crowdfunding ball really got rolling with a number of new entrants into the market, including VentureCrowd and Melbourne-based Estate Baron, who are also focused on lowering the barriers, offering investment opportunities from as low as $2,000.
But while they are connectors of investors to developers, they are not ‘parties’ to the actual crowdfunding transaction (as with some reward-based crowdfunding schemes); the end transaction is between the developer and the investor via a developer’s corporate vehicle.
This means that equity crowdfunding of these real estate assets is a form of financial investment and is hence governed by ASIC regulations, which prohibit the number of investors without appropriate Product Disclosure Statements (PDS) or Australian Financial Services Licences.
For example, Estate Baron has the required licences, but each project opportunity is still carefully reviewed before finance and development partners craft a package that is fully compliant with ASIC regulations. Other platforms operate on a similar basis.
But this somewhat defeats the true concept of crowdfunding as we know it – the notion that very small amounts of capital can be provided by large numbers of people to fund a project (or property, in the case of real estate). If the developer or crowdfunding platform does not have the correct licences, this may inhibit the total number of retail investors that can take part in a particular project, meaning that larger amounts of money need to be invested by fewer people. So it is legislation, in a way, that holds us back.
WHAT ABOUT RESIDENTIAL PROPERTY?
This remains to be seen.
With rising property prices and under-30s organising their lives through smart devices, it’s not a big leap to foresee them taking control and no longer relying on a bank to purchase property, no matter how big or small the investment. It is yet another type of potential disruption to the industry that may be on the cards.
Quigley says, “Crowdfunding will allow younger people to build up their equity in different properties to eventually be able to afford to purchase their own home without a guarantee from Mum and Dad. Then, even when they have that property, they can continue to diversify. This is not a new concept, though; it has been going on for years with large investors, but we provide the tools to allow small investors to build their own portfolios in the same way.”
Accounting firm BDO Chairman Sherif Andrawes also agrees.
“It is highly likely this will happen, although it may be more of an extension of the peer-to-peer lending platforms than the current property crowdfunding ones.
“It probably sits between both now, and I expect the major banks to get involved and sit behind these platforms using a multi-brand approach,” he says.
The Turnbull Government is working on legislation to allow Australian businesses to crowdsource debt and equity funding, but we are not there yet.
Andrawes doesn’t see this happening any time soon.
“I don’t see the Government making any legislative changes in the short term,” he says.
“Currently investment and lending laws seem to be able to cope, unlike those covering equity crowdfunding which are currently undergoing change.
“This can change very quickly, though, when someone comes up with a new disruptive twist that we haven’t seen before, and that can happen at any time.”
“The Turnbull Government has been instrumental in pushing the innovation agenda, so we’re really happy about that.
“How that affects residential purchases of property we are not sure yet; we will all have to wait until it’s finalised.”