Vicenç Hernández Reche / Economist. PhD in Economic Psychology / General Manager of Tecnotramit and Treshabitat
Until relatively recently, if someone wanted to launch a project and funding was needed, they had a number of fairly limited options. From the well-known option of applying for a loan from a financial institution or requesting a grant, to the well-known 3F (friends, fools & family). But in recent years there has been a new option that is not so well known to the general public but which is gaining more and more followers. This is crowdfunding or micro-patronage.
By crowdfunding we mean the collective cooperation carried out by people who make up a network with the aim of obtaining money or resources to finance initiatives by other people or organisations. This network is carried out through a web platform that enables a meeting point between supply and demand of money.
Crowdfunding came about from the initial Open Source projects where developers offered their work in a disinterested way. Due to their success and the hours of work required, they began to ask for donations. Once again, the proposal was a great success. Crowdfunding came about among users demanding creative projects and willing to pay for them, and creators needing to finance their projects. This new option opened up a field of possibilities for the financing of creative projects thanks to the small contributions of many people.
Today there are several crowdfunding websites that help finance different projects, which has brought a bit of fresh air to such a highly banked Spanish financial system. The typology of projects financed by crowdfunding has not stopped growing and today it is easy to see many ranging from start-up projects to charity projects.
How it works depends largely on what kind of crowdfunding we are talking about (rewards, donations, investment, and loans) but the basic functioning always follows remarkably similar patterns.
First the entrepreneur or publicist sends the project to the website indicating description, funding required, time limit for fundraising and reward offered to the investor. Some of these projects are evaluated in a community way and others are evaluated by the web itself. The website promotes the project and publishes it by giving a number of days within which contributions can be received. After the deadline, the project receives funding, or not, if it has not aroused any interest from people.
In short, we could define crowdfunding as a system that allows people with money to trust people with ideas to move a project forward.
What does this type of investment/financing have to do with the real estate sector? Crowdfunding or micro-patronage has arrived in the real estate sector.
Crowdfunding real estate allows anyone with a modest amount to invest in property and benefit from a return through monthly rental income, plus a capital gain from the sale. Other types of projects include funding for construction or renovation of buildings, among others.
Real estate crowdfunding does not elude achieving the same objectives as traditional crowdfunding we talked about before, since it pursues on the one hand that a person can invest a modest amount to purchase a home or lend money to a developer, and on the other hand it eliminates the dependence that the latter has on bank financing.
In Spain, several platforms are making a place for themselves in this emerging market. The platforms that are dedicated to Equity Crowdfunding (investment) establish the minimum investment in the participation of the purchase of homes, premises, and industrial buildings between of approximately 100 and 500 euros, although this amount may vary depending on the project and the platform that promotes the project. In Spain they have already adapted their systems to comply with the limits established by the crowdfunding law. This will mean that non-accredited investors will have a limit of 3,000 euros per project and a maximum of 10,000 euros invested in 12-month period on the platform. Accredited investors will have no investment limits.
Equity Crowdfunding companies allow diversification of investment in different homes to minimise non-systematic risk, and each project enjoys a different return depending on whether the purpose is to rent or sell the home. The property can be sold once the target value has been reached or the sales period has been reached. But this does not mean that investors cannot extend the marketing if the target return has not been achieved.
The ideal option is that this type of platform allows investors to sell their shares in a domestic market if the investor needs liquidity before the maturity of the investment. There are platforms that allow you to invest in real estate indirectly, since the money is not destined to buy a property directly, but the money from the investors goes to Listed Companies for Real Estate Investment in Vehicles (Socimis) which are the ones that invest directly in real estate.
In contrast, platforms that are dedicated to crowdlending allow investors to finance property developers’ projects with small amounts of money. The Wanda Group used this formula last year to finance five of its major complexes. This form of micro-patronage enabled the
Chinese group to attract more than 72 million euros from individuals and 648 million from institutions and companies.
Finally, we must point out that real estate crowdfunding has nothing to do with the three most well-known legal figures in our extensive legislation on real estate law. Timeshare, co-ownership, and housing cooperatives are different figures from crowdfunding and it is necessary for the investor to distinguish the three fundamental differences.
The first is that the joint purchase of the property is carried out by the vehicle company created expressly for this purpose once it has gathered the funds. Therefore, the owner is the company, the investors are participants in that company in a proportion equal to the capital paid for the purchase. The second difference is that with crowdfunding you do not have the option of enjoying the property being invested in either. Thirdly and finally, it is indeed a cooperative by concept, but of an investor and profit-making nature.
The estimates of the different agents are that the Spanish real estate crowdfunding market will reach a turnover of around 60 million euros during this year. An ambitious figure in my opinion, considering that the level of financial culture in the country is still low, that real estate investment is still conceived in the traditional way and that the new investment channels and platforms are still a reason for mistrust by the average investor.
We will see, therefore, if real estate crowdfunding reaches the notorious quotas that are being reached in England, the United States and a many South American countries. For Spanish investors, finding alternatives for placing their surplus savings that do not require a large outlay and offer a return that exceeds inflation is a cause for joy. Not to mention the property developer, who despite the current desire of financial institutions to open the credit tap, still find different obstacles to carry out their projects.
Therefore, it was necessary to breathe fresh air into investment and project financing modalities and the most forward looking investor will certainly receive this with special attention, but its global implementation in Spain will still be slow and will require more promotion and, above all, transparency.