Equity-crowdfunding for real estateby Fiona Rotherham
Hard-up homebuyers will soon have a new way to invest in property – through equity crowdfunding.
The country’s first dedicated equity-crowdfunding platform for buying real estate is searching for residential properties, despite still awaiting regulatory approval to operate. The move comes as several platforms say they also plan to get into property-equity crowdfunding in the next few months.
Property Mogul’s adverts appeared on Facebook last year inviting people to register interest in investing as little as $1000 for a share in a residential property. It now claims to have 2600 followers and a lot of interest from prospective investors.
Wellington-based co-founders and property investors Ben Bowie and Peter Kiss hit on the idea of cashing in on Kiwis’ love of property after seeing the Auckland market skyrocket in 2015 and real-estate crowdfunding becoming more popular overseas, including in Australia, the UK and the US.
Late last year, UK-based crowdfunding platform Property Partner reportedly set a new record for the fastest equity-crowdfunding project by raising £843,100 for 42 flats in a converted Lincolnshire mill in just 10 minutes, 43 seconds. That’s £1311 a second.
Here, Property Mogul has spent the past eight months applying for a licence from the Financial Markets Authority (FMA), which has licensed eight equity-crowdfunding platforms since 2014. In anticipation of getting the go ahead, Bowie and Kiss are already hunting for suitable properties to on-sell.
Their model will be based on British platform Property Moose, which claims to have funded more than £1 million of property and to have more than 3000 members in 24 countries.
“We’re aiming to create the simplest way to invest in residential property in New Zealand,” Bowie says.
Rising prices have made home ownership harder, particularly in Auckland, and equity crowdfunding gives buyers a foot on the property ladder with only a small investment, while providing a share of monthly rental income, he says.
The rental property will be owned under a special purpose vehicle (SPV) commonly used in property syndication and development, which isolates commercial risk to that property rather than the platform’s overall operations. The property will be sold after two to five years, with shareholders getting a share of any capital gain. They also share any capital losses.
The platform plans to set up a secondary market to allow investors wanting their cash out earlier to on-sell their stake, which is fine in a market where property values are rising but trickier when they’re tanking. Property Partner has reportedly had nearly £2 million worth of “resale” shares traded on its “property stock exchange”.
Returns are likely to vary widely and will largely depend on any capital gain. Bowie originally said they would be aiming for investors to achieve returns ranging from 6% to 8%, but later modified that to “higher returns than what you would get in the bank”.
The platform charges a 5% transaction fee per investor and a separate management fee on each property.
Property Mogul is the platform’s trading name because the company name is already owned by others. Bowie won’t reveal the legal entity behind the platform, which he says he is co-funding with Kiss. Company Office records show Balazs Peter Kiss is the sole director/shareholder of CrowdInvest, incorporated in September 2015.
Other crowdfunding platforms also see the potential in raising funds from Kiwis who love to invest in property. The law limits the amount for each offer to $2 million yearly.
Crowdcube director David Wallace says Property Mogul’s model is simply “property syndication in drag”, and “that’s a model we know of, of old”. He says there’s probably a market for it, but doesn’t think crowdfunding is the solution for these sorts of deals.
Crowdcube is instead focusing on peer-to-peer lending as the next step to help companies raise capital.
PledgeMe has applied for a peer-to-peer lending licence and chief executive Anna Guenther says it’s also keen to start helping property companies crowdfund. She expects to launch PledgeMe’s first offer for a residential property within two months.
Equitise New Zealand manager Will Mahon-Heap says it’s looking for deals to help crowdfund, particularly in Australia “where a lot of things are happening”.
Similarly, Snowball Effect’s Josh Daniell says it has spoken to a range of people wanting to raise money for commercial and residential property. They haven’t found the right fit, but are “expecting to do so this year”. Daniell says that, for example, the platform could be used by property developers wanting to bridge a funding shortfall or help provide capital for residential developments to proceed before securing a large number of pre-sales.
Adam Hunt, co-founder of crowdfunding platform Liftoff, says it has talked to six property companies in the past year about crowdfunding equity for new developments, but thinks raising money for existing residential property too risky in the current overvalued market. New developments contribute to the national economy, Hunt says, but he’ll be disappointed if crowdfunding platforms begin doing a lot of real estate deals.
“The idea of crowdfunding was to drive the productive economy, not the traditional property sector,” he says.
The FMA won’t comment on specific applications, but says it’s aware of the potential for these kind of real-estate offers.
“As long as the structure of an offer fits within the regulations, then a company in the business of property investment may use a crowdfunding platform to raise funds,” says Garth Stanish, FMA director capital markets.
As with any crowdfunding offer, investors should be aware they may not be given all the information usually required when a company raises funds. Investors should be in a position to bear the risk of losing their money, he warns.
Licensed crowdfunding services typically raise funds for people not associated with the platform. If a platform offers property investments that are connected to it, the FMA would have to consider whether those offers are appropriate and meet the regulations, Stanish says.
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