Understanding Real Estate Crowdfunding
- Mar 22, 2016
- 2 min read
The first dedicated real estate crowdfunding website identified was launched in 2010. The market has developed rapidly and we now have more than 100 dedicated real estate crowdfunding platforms worldwide, although we believe the actual number may be much larger.
The search for higher returns is one of the main drivers for investors to consider crowdfunding, particularly as bank interest rates on savings are so low. Returns are usually predicted for equity based investments and fixed for debt based. Note that returns will be influenced by location, type of property, build stage and local market demand.
In return for taking on higher risk with equity based investments you expect higher returns. UK Forecast returns range from 7% to 33% per year, with an averageof 18% per year. Debt investments advertise strong fixed returns of between 7% and 19% per year. The average is 14.25% per year. These returns remain consistent with the IDP UK Commercial Property total return index, showing that these returns are realistic.
The exit for equity and co-investment models relies on the sale of the underlying property. Each investment states when the developer hopes to sell the property to achieve the targeted return. Some equity models allow investors to sell their shares to other shareholders with permission from the investment provider.
Debt investments typically have a defined exit on maturity of the loan, when it must be repaid in full. It is difficult for investors to exit before this date as yet there is not an established secondary market, although some platforms will look to implement marketplaces to facilitate this, as has been seen in the P2P markets in the UK and US. Investors may also be allowed to sell their investments privately before maturity with permission from the with permission from the investment provider.
The real estate crowdfunding concept is growing rapidly and in locations all over the world, giving investors the benefit of an asset backed real estate investment and the opportunity to achieve stellar returns at a much lower investment level.
Crowdfunding provides more options to the investors around the investment timing, type and location of the property.
71% of platforms undertake some form of due diligence before listing an investment
38% of investments were structured as equity and 40% debt
Average annual returns from equity based real estate crowdfunding are 18%
Average annual returns from debt based real estate crowdfunding investments are 14.25%
Residential property based investments were the most popular with 57% of the market
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