Crowdfunding: A Fresh Take on Property Investor and Developer Returns
Property crowdfunding, in which developers attempt to cash in on the potential of “the crowd” to raise money for developments, is garnering global attention. It hasn’t made great strides into Africa yet, but some companies are taking the first tentative steps.
Property crowdfunding is one way for smaller developers and investors to access the tough property development market. Their individual investments are modest, but the total sum is large, and they then enjoy a split of the revenue generated through rental or sale.
For developers, it presents a great opportunity to market a property on a new platform, and to obtain sufficient capital for the development to proceed.
The potential investor “crowd” differs widely. Some crowdfunding platforms in the UK target young people who can’t raise the funds for a deposit on their own home, but who still want to invest in fractional ownership of buy-to-let properties. At the other end of the scale is the more typical developer model, where investors put money into a development and then enjoy the returns.
CROWDFUNDING IN SOUTHERN AFRICA
Realty Africa is the second type of crowdfunding platform, providing investors with investment opportunities in property developments in Southern Africa, and providing developers with a platform to showcase their plans and attract investment. It is believed to be the first platform of its kind in the region.
“We see it as part of our mission to spread the word on property crowdfunding and how this can be a tool for business owners to develop their project, as well as a tool for them to market themselves globally and build a track record,” says Erik van Eeten, cofounder and CFO of Realty Africa. “At the same time, it can be a tool for people globally to see that Southern Africa holds many opportunities for investment, and that investing in this beautiful continent doesn’t have to be as scary as some might think.”
Most people have heard of crowdfunding as applied to creative endeavours, such as music artists who fund their albums through platforms like Kickstarter. Property crowdfunding differs slightly. “There are different types: donation based, rewards based, lending based and equity based. On rewards-based crowdfunding platforms, you are not allowed to offer monetary rewards. Property crowdfunding, on the other hand, is all about investors investing directly into projects for developing property or other types of infrastructure developments, and getting a monetary return,” says Van Eeten.
Realty Africa ran a campaign on crowdfunding website Indiegogo to build global awareness and to attract some funding for its start-up company. It didn’t reach its target, but Van Eeten believes that, from a marketing perspective, they were successful. “We knew in advance that we wouldn’t reach our funding target because Indiegogo would not allow us to offer shares in the company as a perk. We chose Indiegogo because of its global reach – not many platforms out there have a global reach yet. In parallel, we used alternative ways to attract funding for our company.”
With its crowdfunding projects now up and running, Realty Africa facilitates the investment process in numerous ways. A thorough checklist means investors have the opportunity to invest in projects that passed a rigorous due diligence process. “Investors are not investing in Realty Africa as a company, or in an investment fund. They are investing directly into a project. They can choose from any of the projects available on the website at any time,” says Van Eeten.
The timeframes of Realty Africa investment projects vary, spanning one year for a build-and-sell project to 10 years for a hotel or ecolodge development, and will then operate for a number of years. Realty Africa is also attempting to source projects for investors looking for impact investments such as social housing.
Patrick Chella, cofounder and CEO of Realty Africa, says many people are hoping to participate in an investment class that helps local communities to advance. These could include social housing projects, where they get a return but also help a local community to develop. “We’re looking at not only properties in the strictest sense of how you would define a property, but also at renewable energy plants, ecolodges or those types of sustainable developments.”
The question that might be on everybody’s lips is about the kinds of returns offered. There is no standard rule of thumb. Returns vary depending on the location, duration and complexity of the project. Investments start at $1,000.
Realty Africa is currently looking for projects in three countries: Zimbabwe, Botswana and South Africa, and it intends taking the concept into other Southern African countries. Breaking into this new market with a new investment proposition is challenging because, as Van Eeten puts it, “the road is unpaved”.
AFRICANS INVESTING ELSEWHERE
While external investors are turning to Africa for its great growth potential as an emerging market, at the same time, many local investors are keen to access real-estate investment opportunities in leading stable markets around the world.
An organisation called Wealth Migrate now has offices in South Africa, and offers crowdfunded real-estate transactions with proven local operators in foreign countries. Members can gain access to details of every investment, review due diligence reports prior to investing, and manage their own real-estate portfolio online. The platform will also assist with the conversion of South African currencies to and from the currency of the country of investment.
Says Wealth Migrate CEO Scott Picken: “Henry Ford’s Model T revolutionised transportation, bringing the car to the masses. Similarly, real estate crowdfunding will change the property investment landscape, allowing more people to gain access to great investment opportunities.”
While crowdfunded property development is still in its early stages globally, and especially in Southern Africa, it looks set to take off both as a property development tool and as an investment platform. Once the foundations of this kind of enterprise have been laid, the sky is the limit for its participants.
HOW PROPERTY CROWDFUNDING WORKS
- CREATE AN ACCOUNT with a property crowdfunding platform.
- BROWSE the available investment opportunities and select one you like, based on projected timeframes and returns.
- VERIFY your identity and make your investment – if the target is not met within the timeframe, your funds will be returned.
- MANAGE YOUR PORTFOLIO of investments online.
- WHEN each investment matures, receive your returns.
The leading global property crowdfunding platforms, according to crowdcrux.com are
REALTY AFRICA FACILITATES CROWDFUNDING INVESTMENTS BY
- CHECKING INVESTORS by using a full KYC (know your customer) process to make sure no terrorist financing or money laundering is involved
- CHECKING PROJECTS for validity with the help of Deloitte
- SECURING THE PROJECT for the investor with a mortgage bond and securing the money on escrow accounts
- USING A FIDUCIARY AGENT (or similar) to represent the investor in the local market as many investors are offshore.
Words: Georgina Guedes