4 ways crowdfunding benefits the Singapore real estate market

In the last few months, the crowdfunding movement has been gaining momentum in Asia and more people are becoming aware of the potential that crowdfunding has. There have been two major crowdfunding events organised in Singapore in July and August namely Expo for Property Investing and Crowdfunding (EPIC) and Crowdfunding Asia.

The marketing efforts on these two events have, to a certain extent, raised the level of awareness on the crowdfunding scene in Singapore. The negative news on Hero Pirate3D, a Singapore company that listed on Kickstarter, falling short on investors' expectations also added to the buzz.

Interestingly, according to Vulcan Post, Singapore is among the top 10 countries to be supporting Kickstarter campaigns where it contributes $6,710,961 out of the $1 billion pledges.

So what is crowdfunding? Crowdfunding is generally defined as the pooling of funds, typically through the Internet, to support projects initiated by individuals or companies. By leveraging on the Internet to reach out to a wide network of people, the aggregation of small amounts of capital from a large number of individuals to finance a new business venture has never been easier.

The proliferation of technology and ease of access to internet has enabled crowdfunding to gain popularity.

With the passing of the JOBS Act in 2012, the United States has led the way for the crowdfunding industry. According to Forbes, in 2013 alone, crowdfunding raised approximately US$5 billion worth of capital, which includes debt, equity, rewards, and donations.

The industry is projected to grow exponentially, contributing US$500 billion and generating US$3.2 trillion in economic value per year by 2020. (https://www.forbes.com/sites/groupthink/2014/08/19/the-investors-guide-to-real-estate-crowdfunding/).

In response to the increased market demand, some Asian governments have started to state their views on crowdfunding. While some financial hubs like Singapore are still behind the curve in stating what their position on crowdfunding is, places like Malaysia and Hong Kong have started to provide some clarity on the crowdfunding initiative in the Asian region.

For example, the Securities and Futures Commission (SFC) of Hong Kong has issued a circular on crowdfunding legislation on 7 May 2014, while the Malaysian Securities Commission circulated a consultation paper on a proposed regulatory framework for equity crowdfunding on 21 August 2014.

This shows that many Asian countries are starting to take crowdfunding seriously and there could be many opportunities for the savvy entrepreneur.

In the last few years, many well-known crowdfunding sites like Kickstarter, Indiegogo, GoFundMe, etc. have been founded. If you think about it, even before the concept of crowdfunding became popular, individuals were already coming together to co-invest in properties.

Strictly speaking, the difference between real estate co-investing and real estate crowdfunding is nuanced. Hence, some stakeholders, including us, believe that crowdfunding can have direct benefits on the regional real estate markets. So what are they?

Benefit 1: Aspiring developers can secure "bite-sized" funding for real estate projects

Unlike other types of businesses, property development tends to be more capital-intensive. While it could cost just several hundred thousands to get most businesses off the ground, it would cost several millions to kick-start a development project.

Most aspiring property developers would have some seed capital to buy the land and get the project started, however they often require additional funds to keep the project going.

For example, during times where the market is quiet and pre-sale of units is sluggish, boutique developers may run into cash flow issues and require additional working capital. Other unforeseeable circumstances that may result in cash flow issues could be the rise in material cost, changes in government regulations, and foreign labour policies.

Although approaching banks may seem like the obvious choice, these financial institutions typically charge very high interest rates for such bridging loans, as the fees from making those loans may not commensurate with the effort. Hence, real estate crowdfunding can give local aspiring developers an alternative avenue to find financial backers.

By allowing them to post their deals online, they are able to leverage on technology to find like-minded individuals who believe in their projects and are keen to fund it.

Benefit 2: Investors can diversify their risks by taking a small stake in the projects

Funds and wealthy individuals do not lack investment proposals. However, even if some of these projects were attractive, many funds and accredited investors would hesitate to take on the huge financial risk by being the single investor and the practice of syndicating investors to take on high risks projects is not uncommon.

Hence, by using a real estate crowdfunding platform, like-minded investors could similarly be aggregated to take on real estate deals. That in turn reduces the risks that each investor has to bear.

Moreover, these crowdfunders can also spread their risks by not putting all their "eggs in one basket" as they do not have to invest in whole units, unlike regular real estate investments.

Benefit 3: Singaporean retail investors can have access to exclusive global deals

Another benefit that real estate crowdfunding brings to retail investors is that they are able to have access to opportunities that were once reserved for banks, funds, and wealthy individuals. By being able to bring together different individuals online, they are all able to collectively partake in exclusive deals that would have been previously out of their reach.

With a relatively low quantum as entry point, a common Singaporean worker will be able to invest without having to make a large financial commitment and at the same time, earning attractive returns.

Benefit 4: Increased transparency for crowdfunders

At present, the real estate market is highly opaque. However, as real estate crowdfunding operates in an online environment, users can do their research by using interactive online property tools to understand the overseas market before making a decision.

Users can also exchange notes with other crowdfunders to do cross-references about a particular developer or project. When these developers know that their reputation is at stake, some of them would definitely think twice before putting up a dud deal.

The flipside – teething issues to overcome

At this point, it is important to highlight that real estate crowdfunding is not without risks. Having been around for only the last 2 to 3 years, the crowdfunding industry is still in the infancy stage and many accounting and legal processes are still not in place.

According to a circular from the Hong Kong Securities Commission, some of the potential risks for crowdfunding risks include (1) risks of default of the investment project or business, (2) risks of illiquidity, (3) risks of platform failure from temporary or permanent shut down, (4) risks of fraud arising from the anonymity created by online aspect of crowdfunding, (5) risks arising from platform that operates in different jurisdiction, etc.

All things considered, while some of these issues may be more apparent in other forms of crowdfunding, this is less of an issue for real estate crowdfunding.

To illustrate, based on a Bloomberg article that was published in August 2012, it was reported that 75% of the projects funded through Kickstarter.com, one of the most reputable crowdfunding site, did not finish on time. There have also been some cases of crowdfunding projects not materialising despite being funded.

In comparison, when it comes to real estate crowdfunding, there is usually some form of asset (i.e. land title) that real estate crowdfunders can stake a claim to. There are also established legal processes, in terms of charges and trustee structures, that real estate crowdfunding can fall back on.

While it does not mean that real estate crowdfunding is risk-free, this particular sector could be an area that crowdfunding embraces first.

Conclusion

In conclusion, this article just skims the surface of the topic of crowdfunding. Nonetheless, when you put all the considerations together, crowdfunding definitely holds exciting potential.

If correctly executed, the whole crowdfunding movement will be able to open new markets and help to bring development to regions that need it. With many government and private stakeholders starting to realise the possibilities that crowdfunding holds, it will just be a matter of time for a breakthrough to come along, especially in Singapore where technological innovation and concepts are widely embraced.