Moneycontrol
Sep 14, 2017 08:20 PM IST | Source: Moneycontrol.com

Types of crowdfunding and why it is beneficial for real estate sector

The global crowd-funding industry generated about USD 34.4 billion in 2015.

Types of crowdfunding and why it is beneficial for real estate sector
crowdfunding

By Varun Sheth

Crowdfunding is a method of raising capital through collective effort of friends, family, customers and individual investors.

This approach taps into the collective efforts of large pool of individuals primarily online via social media and crowdfunding platforms. Apart from raising capital, crowdfunding is also a way to create awareness among the masses and support for a project from the people around you.

Simply put, its means of funding that allows individuals to make their ideas a reality with the power of “Crowd”.

Types of crowdfunding in India

“Coming together is the beginning”, a tagline applies to the emerging Crowdfunding industries in India.

Crowdfunding has exploded new ways to raise funds for start-ups, social sector, real estate, inventions and so on.

In short crowd-funding platforms are proliferating. Very different models are being tried and tested by different players in this sector.

Today in India we have three types of crowd funding: donation and reward based model, lending model and equity based model.

However, traditional venture capital investments, equity based crowd funding, donation based crowd funding and lending based crowd funding is eventually moving out of scope area whereas, reward-based crowd-funding, pre-financing of products, art, music, films, social space, software or scientific research is in-scope.

It is imperative to note here that, equity based crowdfunding is illegal in India.

The prospects of crowdfunding in India

The global crowd-funding industry generated about USD 34.4 billion in 2015.

In India, transaction value in the “Crowd-funding” segment amounts to a meagre USD 6 million in 2017.

Transaction value is expected to show an annual growth rate (CAGR 2017-2021) of 24.8 percent resulting in the total amount of USD 16 million in 2021.

The average funding per campaign in this segment amounts to USD 171.60 in 2017. Also in this segment the number of funding campaigns is expected to amount to 60301 by 2021.

According to Bloomberg, India is second largest internet market with more than 342 million mobile users and online payments options which make it easy to give money.

Not only this population of 1.2 billion with the rising middle class segment is a boon to the power of capital formation necessary for crowd-funding.

Crowdfunding expanding to real estate

Crowdfunding is a new model but with passing time it is covering most of the sectors from social to health.  That concept has now been carried over to the real estate industry and real estate crowdfunding took off with hundreds of millions of dollars raised in 2015.

The most used method for real estate crowdfunding is “equity crowdfunding” which helps individual become partial owners in distinct properties, allowing them to participate alongside real-estate companies who acquire, redevelop, or build.

Investors invest passively; they don’t have to manage the property and are entitled to a fixed share of profits. The range of fees charged by a platform for this is typically between 0.5-3 percent annually.

Most investors in a crowdfunded real-estate project are professionals - from doctors and lawyers to executives and small-business owners.

For these individuals, real-estate crowdfunding offers the opportunity to participate in the ownership of projects that were previously available chiefly to institutional investors.

It’s now common for a real-estate project to be funded with a combination of a bank loan, funds from the real-estate company itself and investments from both crowdfunded investors and non-crowdfunded investors.

Another type of crowdfunding used for real estate is syndicated debt crowdfunding. This fast growing platform takes some or all of an existing real-estate loan, secured by a deed on the underlying property, and syndicate it out to a network of individual investors at a fixed rate of return.

Less riskier than equity investment, here debt investors are entitled to repayment before equity investors earn a return.

Then we have the platform-issued also known as the “pre-filled” debt crowdfunding where individuals invest in a real-estate-backed loan, but the platform acts as the lender, doing their own diligence and issuing a loan to the borrower, removing the middleman.

Most of these loans are for small and compact homes that the borrower is planning to renovate and resell for a quick profit. Platforms typically charge an annual fee of 0.5 -1.5%.

Clearly, crowdfunding as a concept will gain traction in India in coming years.

(The author is CEO & co-Founder of Ketto. Views are personal.)

 
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