Real Estate (RE) – as other alternative investments such as hedge funds, private debt and equity – increasingly meets the interest of retail and institutional investors, notably because of its high yield, compared to classic asset classes.
There are three ways of investing in real estate:direct (buying assets), listed vehicles (on the stock exchange) and unlisted vehicles. Fund managers are especially concerned by this third form. Thus, among the $200bn raised globally for investment in real estate in 2018, fund managers raised $193.7bn – which includes $185.4bn for non-listed real estate, a 15.7% rise [1].And momentum is about to continue, 70% of 203 fund managers surveyed expecting capital raising activity to increase.
Digitalization of retail clients journey goes with this rising interest for the asset class.
Platforms and marketplaces: different levels of digitalization
REIT digital platforms - RE investment market is historically driven by Real Estate Investment Trusts REITs), especially in the US, where an estimated 80 million individuals own approximately $3tr of assets ; $47bn in public markets offering have been raised in 201. These vehicles are considered as equities (e-REIT) or bonds (Mortgage REIT) because their value fluctuates according to supply and demand, regardless of properties’ value and associated revenues. They could be bought and sold –directly or through ETF or Mutual funds – on classical digital trading platforms.
Distribution marketplaces - Concerning unlisted real estate vehicles, where Asset managers operate, digitization mainly takes place in France, where platforms account for 10% of ‘SCPI’ distribution market. Thus, most of sales are intermediated by bank networks, insurers,and financial advisers (FAI). This is particularly the case in Germany where the level of purchasing process digitalization is poor while more than €6bn have been invested in open-end real estate fund.
Three levels of digital services have been identified:
- The first one is Intermediation marketplaces where individual investors are connected with asset managers’ offering, the website proposing intermediation services. Investors can access to a large list of SCPI (up to 170 for LaCentrale des SCPI), their features and marketing material. Additional services are also proposed, such as informational and educational services, comparator, virtual portfolio or simulator of cash and credit purchase of different fiscal types of RE investments. Most of platforms also propose advice and personalized packages. SCPI-8 have robotized this service, using Preconys’ tool. It automates the proposal of a choice of one or more SCPI adapted to the user’s profile from an interactive questionnaire aimed at defining the savings effort,the tax situation, the duration of the project and the sectoral and/or geographical preferences of each. Finally, intermediation marketplaces proceed subscription with asset managers on behalf of the clients, based on a form completed digitally by the client and/or by the advisor. But it still remains a paper-based procedure for the final signature.
- The second level of digital service is proposed by monitoring platform where investors can have – from a mobile, a tablet or a PC –within the same user account, a global view of its shares, their valuation in real time, in direct ownership and/or in property dismemberment. MeilleureSCPI is currently the only aggregator available on the French market, which can be used to monitor the shares held without going through the customer space of the different management companies.
- The third level of service, offering the complete dematerialization of purchasing process, is proposed by subscription platforms, rather suited to autonomous and well-informed investors. It is therefore necessary to complete a customer knowledge questionnaire and a test of investment adequacy.The first platforms have given a choice of SCPI limited to a few parent-company’s vehicles (those of La Française for Moniwan.fr, two SCPI for Corum.fr). More recently, FranceSCPI has been able to propose a more extensive range, with some thirty SCPI eligible to dematerialized subscription. Additional services are also proposed by these platforms: funding, scheduled deposit, instant income collection, floor yield.
It is also possible to access SCPI through Real-estate Unit-Linked Life Insurance plan. Beyond the usual digital subscription process proposed by Insurance companies or Banks, few platforms have recently proposed specific contract subscription, such as Linxea, Patrimea or MonFinancier.
Platforms are setting up partnerships for better exposure and services
Open-end RE funds platforms have started by forming partnerships with high reputation websites, such as Moniwan with Bourse Direct – an online brokerage leader – or FranceSCPI with SeLoger - the undisputed specialist of classified real estate ads – to enhance their exposure and enrich their partner’s service offering.
More recently, partnerships have been concluded with robo-advisors, putting their know-how from the customer journey at the service of SCPI’s online subscription. The user, instead of being offered a list of SCPI, must complete a questionnaire that identifies his or her expectations, investment objectives,and wealth and tax situation. Grisbee and WeSave have thus partnered with Arkea Immobilier Conseil and Marie Quantier with FranceSCPI.
At last, some platforms have started to propose B2B services. Thus, Voisin has partnered with Manymore – a software provider for wealth management professionals – to provide FAIs with a digital subscription tool that facilitates this key step in their relationship with their clients. It proposes the e-subscription and the dematerialization of its regulatory communications, after having launched an extranet and the e-convocations and e-votes at the general meetings of SCPI. Moniwan is also “thinking” of opening a B2B solution.
BrickVest – the UK’s online investment platform,the only fully regulated in Europe with an AIFM “Full Scope” license – launched BrickVest Select in 2018, its B2B marketplace dedicated to professional investors,family offices and institutional investors, which gives its members access to institutional-grade deals ranging from €5 million to €300 million. During the six months following its launch, BrickVest Select proposed 39 projects in Europe, the US and the Middle East worth more than €3.2bn, of which €1.9bn opened for investment via the platform. During the same period, BrickVest Select has attracted more than 200 investors and close to 850 real estate companies.
Real-estate crowdfunding: a rapid-growth market, which is not anecdotal anymore
Crowdfunding is emerging rapidly at a global level. A World Bank report estimates a $93 billion market size for this alternative approach as compared to $34 billion in 2015. The real estate industry is among the fastest growing global crowd-funding industries. It marked a transaction of $400m in 2013, approx. $3.5bn in 2016 and have reached $8.2bn at the end of 2018.
In the U.S., crowdfunding represents $2.5bn only in the commercial real estate market, which is $7tn (2017) . A platform like Fundrise alone claims $1.4bn in investment in just a few years. The same dynamic can be found in Canada or Australia, via platforms like NexusCrowd.com, Sharestates.com. In China, RE crowdfunding, which is mainly focused on debt, increased from $0.2bn to $5.5bn between 2013 and the end of 2015, representing 5% of the wider crowdfunding market.
With £2bn raised at the end of 2016, the UK RE crowdfunding is the biggest market in Europe, accounting for approximately 13.4% of the global RE crowdfunding market. But, at 22%, RE crowdfunding in the UK accounts for a larger share of the national crowdfunding industry compared to other regions . Two major players share the country: The House Crowd and Property Partner.
In the others European countries, we also note a sharp growth of the market, with players as Exporo, iFunded, Zinsland or Bergfüst in Germany or Housers in Spain. In France, the volume collected in 2018 via the various property crowdfunding platforms has increased of 83%compared to 2017 .Far from being an epiphenomenon of the collaborative economy, crowdfunding for real estate has even become the most lucrative branch of the sector as a whole.Since 2012, more than 185 million euros have been raised on all specialized platforms.The average amount of collections remains stable, around €500,000 for 2017 and the average ticket per investor also remains the same, around €7,000.
Notably,several crowdfunding platforms have recently changed course to diversify their offer in real estate (Wiseed and Anaxago, which account for 50% of the market). Similarly, large groups are positioning themselves towards this sector by buying up real estate crowdfunding platforms (Credit.fr, a Tikehau subsidiary, bought Homunity)
RE funds and crowdfunding platforms offer complementary ways of investing
Thanks to crowdfunding, it is possible to invest property by property in conditions similar to RE mutual funds: low starting stake, no passage in front of the notary and no management of tenants. But some differences appear between these two approaches :
Risk and return: if mutual funds could appear safer for investors, returns displayed by crowdfunding platforms are in a range between 8% and 12%, much higher than the 4% to 6% performance of asset managers. This gap is explained by the investment natures (mostly rental property for the firsts, housing development funding,sometimes associated to leveraging, for the seconds, size of deals), the level of fees (significantly weaker for crowdfunding) and the risk taken considering diversification of investment.
Transparency and diversification: crowdfunding platforms allow investor to choose the property(ies) in which they want to invest depending on their own criteria while the choice is made by asset managers in mutual funds.Moreover, investors can interact with the other associates and keep more powers concerning decisions taken during the life of buildings. If diversification is the nature of RE mutual funds, some crowdfunding platforms offer packages to invest in a portfolio of several projects.
Taxation: considering the large variety of investments,many fiscal opportunities are open to savers. They have to be taken into account when choosing the investment method.
Liquidity: open-end real-estate funds benefit for a quite good liquidity, which is not usually the case for crowdfunding investors have to wait until the end of the venture, generally around 3 years. Nevertheless, more and more platforms offer liquidity services such as buy back guarantee (Crowdestor) or secondary market (Housers, Property Partner). Some platforms, especially in the U.S. like Fundrise, promise even a buyback of the investment at the original amount within the first 90 days in case of dissatisfaction.
Type of investors: An increasingly number of crowdfunding platforms are interested in making a transition from working exclusively with retail to the inclusion of institutional investors and family offices (through “exclusive clubs”). In a competitive market, it became harder to source quality product due to the time lag between listing a project and reaching the target funding because of the number of participants required. Given the importance of timing for development returns, platforms began to embrace interest from institutional investors,whose presence could increase confidence for smaller investors with lack expertise. It has also enabled crowdfunders to pre-fund deals and increase the quality and scale of loans.
Realty Mogul has thus been able to fund a $49m loan. Fundrise for its part bought $5m in tax-exempt bonds related to the construction of 3 World Trade Centre and offered the opportunity to invest in these through its portal. Perhaps a new way for asset managers to diversify the distribution of their deals, carrying their expertise label?
Tokenization is enhancing real estate liquidity
We have seen that liquidity is a major issue in RE crowdfunding, especially at times of uncertainty. And for platforms, getting clients to reinvest is not an easy task, even for the well-established ones. To face this issue, blockchain technology has started to integrate the real-asset world, and especially, real estate platforms’ one by introducing “tokenization” in crowdfunding purchase process.
Tokenization is a method that converts rights to tangible or intangible assets into digital shares(tokens) issued via systems based on a Blockchain. And because Blockchain is an immutable shared ledger, once a transaction is completed, token acts as a legally binding contract, as all legal documentation, compliance and certifications, that are automatically generated and recorded on the blockchain. In other words, tokens represent partial direct ownership in the real estate asset, that could sold or bought on platforms in a primary or secondary market, anywhere in the World. Thus, tokenization offers more liquidity, control and even security for investors.
Moreover, because tokenization enables investors to trade directly and immediately peer-to-peer,it eliminates fees from intermediaries,including broker, realtor, accounting and notary public fees. Time is also saved as smart contracts and irreversible ledgers enable the automation of legal documentation, agreements and dividend payouts.
Elevated Returns is the company behind the first tokenized real estate offering, in 2018. It has recently claimed that they will tokenize $1bn of real estate assets. Since this launching, retail distribution platforms solutions have emerged all over the World: Reitium in the U.S., InvestaCrowd in Asia, iEstate in Germany… offering technical infrastructure to enable any established real estate crowdfunding company to tokenize a real estate property.
Conclusion: a propitious environment & an opportunity for AM
Several drivers are able to favor the development of digital solutions for direct collective investment in real estate: the disintermediation trends, a need for proximity with the property, or even with the tenant. Moreover, following the tightening of the conditions for access to loans, real estate developers are increasingly turning to crowdfunding, which allows them to respond to their capital problems while maintaining a larger margin than if they used investment funds.
Nevertheless,to hope a rise comparable to that observed in the U.S., European rental real estate crowdfunding will have to go through new stages depending on the legislator’s willingness (taxation, lifting of the heavy burden of profile validation) and technical developments, in particular to improve the efficiency of the secondary market.
These new distribution processes can also be the source of new opportunities for asset managers, who can be both providers of expertise, labelling of the offer,management services, even of infrastructures and can see in some actors potential partners to enrich their offering range and their image.
Author: Pascal Buisson - May 2019
[1] Capital raising survey 2019 (Anrev, Inrev and NCREIF) ; [2] Source: Nareit ; [3] Société Civile de Placement Immobilier (French name of open-end RE funds) ; [4] Source : BVI ; [5] Crowdfunding’s Potential for the Developing World - 2013 ; [6] Sources: Agriya, Forbes ; [7] CFX Markets ; [8] IPF Research Program - 2016 ; [9] Financement Participatif France – 2019 - https://crowdfundingmagasine.com/wp-content/uploads/2019/02/Cf_Mag-FPF-bilan-4-ans-de-crowdfunding_20190124.pdf
