REALpac releases Real Estate Crowdfunding Research Report

 

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Equity and Debt Crowdfunding in Canada: Implications for Commercial Real Estate

Crowdfunding – the raising of funds through the collection of individual contributions from the general public – is opening the sale of corporate equity stakes through online platforms. Crowdfunding makes real estate investment more accessible to the broader community and reduces the overhead and cost of capital for developers, real estate syndicators and private equity seeking new capital sources. This paper analyzes equity crowdfunding in the real estate context and evaluates the relative costs, and benefits for crowdfunders and investors, and the likely impact on the commercial real estate industry in Canada. It also discusses the recently approved financial regulations governing crowdfunding in Canada, which were passed by the Canadian Securities Administrators in November 2015.

 
Non-member companies are welcome to purchase the paper via realpac.ca.

But here are a few high level points:

  • There are currently more than 175 crowdfunding platforms in operation and the emerging industry, in many cases, is competitive with REITs and can offer similar or better returns (Joseph, 2015). According to U.S. data, the average REIT stock pays somewhere in the range of 4% annually, and the investment portfolio is a diversified range of high-grade properties with low levels of debt (Drake, 2015). The popularity of crowdfunding is in part due to the fact that return on investments can be high, depending on the project. For example, the Hard Rock Hotel Palm Springs is offering a USD $1.5 million campaign, in which investors can help fund redevelopment of facilities and amenities. Investors have been advised that they could earn a 15-17% return. Investors will also receive a share of the income if the property is ever sold.
  • Prior to November 2015, equity crowdfunding to unaccredited investors was, not possible in Canada due to regulatory restrictions. In response to the financial crisis of 2008, the CSA enacted new regulations requiring enhanced disclosure for securitized products and narrowing the class of investors for these products (Pallett, Valo LLP, 2014). There are two types of rules effectively legal in Canada following adoption of MI 45-108: BC 45-316 Start-up Crowdfunding Registration and Prospectus Exemptions [Multilateral CSA Notice]; and Multilateral Instrument 45-108: Crowdfunding (Robertson, 2015).
  • Given the complicated nature of crowdfunding exemptions and low amount thresholds, it’s expected that this program will not be widely used by sponsors in the real estate space at least in the short term. Since the quality of commercial real estate projects is higher where the property values are CAD $10 million and up, the sheer number of individual investors required (given small amounts allowed) makes it impractical for a crowdfunding portal to use the crowdfunding exemption. Hence, a majority of the crowdfunding portals will rely on either using an Offering Memorandum or Accredited Investor exemption and simply using an online format to collect, organize, present and administer such investments. It is to be noted that from a practical standpoint not much has changed at the fundamental level on how such raises and investments have worked in the past. Simply put, technology is now being used to scale it and have wider access to the investor base.
  • Fundrise, a Washington-based online crowdfunding platform, has partnered with over 50 developers nationally, is located in 16 major American cities, and offers investors access to real estate deals in most asset classes. Fundrise has raised more than USD $31.0 million in financing from a consortium of real estate and financial groups including Chinese social media site Renren. Fundrise is raising nearly USD $1.0 million a week on their country-wide offerings (Wiggin, 2014). Fundrise offers shares in single-family homes, apartment buildings, and commercial properties and investments can be made for as little as USD $100. Fundrise’s online portfolio provides users with the opportunity to view detailed due diligence, including monthly leasing updates, photos of the property, construction invoices, geotechnical reports, as well as certain financial documents and records. Investors can also see the identities of other co-investors (Wiggin, 2014).
  • Some technology and crowdfunding groups fear that Canadian investors or startups eager to get involved in the new industry will rush to the U.S., where the industry is comparatively more mature. This may leave Canada even further behind where it is now (Rheaume, 2012). Conversely, owners of various crowdfunding platforms are concerned that this form of fundraising may grow too quickly, much like the dot.com bubble in the 90’s that eventually burst. It is assumed by many in this industry that when crowdfunding is de-regulated, it could be a ‘wild west’ for investors as well as new portals. Though this may be true in other industries where equity and debt crowdfunding has taken hold, as it pertains to real estate, a majority of the crowdfunding in the real estate space will be done either with an Offering Memorandum or through Accredited Investors provisions, which would mean a much higher level of sophistication. Given larger nature of re projects, using the Crowdfunding Exemption in real estate simply doesn’t work. In addition, with real estate crowdfunding, the investors are secured on title in a hard asset which retails its value much better compared to more risky start-up companies.
  • Crowdfunding will continue to grow. According to crowdfunding-focused research firm Massolution, crowdfunding platforms raised USD $2.7 billion in capital in 2012 with expectation that the number would reach more than USD $5 billion by 2015. And while these figures take into account all crowdfunding models, the equity model could see a huge spike (Drake, The 6 Waves to Watch in the World of Crowdfunding, 2014).
  • Real estate crowdfunding will go global. As of 2015, there are more than 90 real estate crowdfunding portals in operation in the U.S. Real estate crowdfunding start-ups are being incorporated around the world; a trend expected to continue. There is an expectation that crowdfunded investments across national borders will be more popular than it is today, once the industry matures. There may be significant value in the case of developing countries, where investors will gain access to real estate ventures; the same kind that usually would be inaccessible to them (Rogal, Can crowdfunding cure income inequality?, 2015).
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