Investors want new ways to achieve higher returns. Technology has caught up with their ambitions.
Jilliene Helman, CEO and Founder, RealtyMogul.com, Los Angeles
15 September 2017
Crowdfunding technology is changing how we finance and build properties. It connects borrowers with capital faster and more easily than traditional fundraising, by enabling investors to co-fund initiatives using advanced online platforms.
One of our goals is to educate a new generation of investors. Before crowdfunded real estate, most investment opportunities were only available to those with deep pockets. Now, accredited investors can access them for as little as $10,000, while borrowers receive major capital infusions, closing equity or debt financing faster and more easily than via traditional channels.
The tech boom and appeal of alternative investments can help explain why crowdfunding, and crowdfunded real estate, are becoming so popular. Excitement over tech start-ups, exhibited by sky-high valuations and investor confidence, prompted legislation such as the US’s Jumpstart Our Business Startups Act to allow easier market access for smaller investors. Crowdfunding initiatives such as AngelFund, allowing investors to buy start-up shares, brought these opportunities to market.
Investors want new ways to improve returns, especially in a period of low interest rates. Technology has now caught up with their ambitions: crowdfunding offers easy ways to invest in alternative assets. This explains the rise of “fintech” companies such as peer-to-peer lender Lending Club.
Global crowdfunding totals were up from $6.1bn in 2013 to $34.4bn in 2015, reports crowdsourcing consultant Massolution, and was on course to account for more funding than venture capital in 2016. The North American market for all types of crowdfunding – real estate, donations, equity – grew 145% between 2013 and 2014, according to research from DealIndex. Now imagine how those numbers change when, for example, you bring crowdfunding into real estate, which is valued at almost $40tn and is the largest asset class in the US – 1.5 times larger than the entire US stock market.
The opportunity is becoming real as the US and UK now have laws to regulate crowdfunding. As a result, new market entrants know how to stay legal and individuals can invest with more confidence. Other countries are now paying attention, and have been working on crowdfunding regulations. After a stuttering start, China’s first crowdfunded commercial real estate product raised more than $600m in three days. Such regulations must make it easy for platforms to attract and disperse capital via appropriate investor protection.
In the US and abroad, crowdfunded real estate platforms need to keep up with consumers. Millennials (people born after 1980) are 10 times more likely to use peer-to-peer services than previous generations. These platforms must offer the user experience that this demographic has come to expect from online giants such as Apple and Amazon.
Trust breeds confidence, and allying effective regulation with user friendliness would help these alternative investment opportunities to thrive. One thing is clear: like any good construction project, the industry already has a sound foundation to build upon.
The World Built Environment Forum facilitates industry leading discussions harnessing the enormous potential of the 21st century's people and places.