By Getty Goh& Dr SehHuanKiat (Guest Contributors)
In the recent Budget Speech, Singapore’s Finance Minister Tharman Shanmugaratnam commented that the government was studying the potential of equity crowdfunding. To the casual observer, this may appear to be just another way for start-ups to secure funding. In reality, the benefits of such a policy, if introduced, could have far reaching economic and social benefits. Although I cannot speak for the other sectors, perhaps I can share my take on how crowdfunding can potentially change Singapore as well as the region’s real estate landscape.
A bit of background on crowdfunding
Crowdfunding is defined as the pooling of funds via the Internet to support projects initiated by individuals or companies. The crowdfunding movement started to take off in the US, with the Federal government passing legislative acts to promote economic growth. This was done via the Jumpstart Our Business Startups Act (also known as the JOBS Act), which was intended to encourage funding of US small businesses by easing various securities regulations.Specifically, this meant that small companies were now able to raise more funds byhaving more shareholders, without having to list on the stock exchange.
In Singapore, there is presently no similar legislation.Based on the Companies’ Act, the maximum number of shareholders a private limited company can have in Singapore is 50. If companies wish tohave more shareholders, they would either have to find some legal way to work around the current regulationsor be listed on the stock exchange as a public company.
So how can crowdfunding benefit the real estate sector?
Unlike other types of business, property development tends to be more capital intensive. While it could cost just several hundred thousand dollars to get most businesses off the ground, it would typically cost several million dollars to kickstart a development project. Most aspiring property developers would have some seed capital to buy the land and get the project started. However,they often require additional funds to keep the project going. This is especially true for countries where construction loans for foreign developers are not available. In those instances, where can these developers turn to for the funds they need?
Although approaching banks for such financing needs may seem like the obvious choice, these financial institutions are typically not interested in deals that are less than S$5million, as the fees from making those loans may not be commensurate with the effort.
Another possible funding avenue could be from wealthy individuals.However, even if they find the project attractive, many of them would not be keen to take the huge financial risk of investing several million dollars in a single project.Hence, many aspiring property developers currently face difficulties in realising their projects – that is where real estate crowdfunding comes in.
How does real estate crowdfunding benefit stakeholders?
Pooling different like-minded individuals together to support viable projects through a real estate crowdfunding platform results in severalbenefits for the various stakeholders.
Developers are able to raise the funds they need to push ahead with projects and some of these developments could bring opportunities to improve the wellbeing of members within that community. Also, through these platforms, developers will be able to proceed with projects in burgeoning regions (i.e. Myanmar, Cambodia, Thailand, etc.) where construction loans are not readily available
On the funders’ end, these crowdfunding sites help make the real estate markets more transparent. The most immediate benefit to users would beto give them access to opportunities that were once reserved for banks, funds and wealthy individuals. Apart from that, by aggregating different like-minded individuals to partake in the same deal, each “crowdfunder” would have to come up with less capital (often just several thousand dollars) to take advantage of the good returns that some developers offer. These crowdfunders can also spread their risks by not putting all their eggs in one basket as theydo not have to invest in whole units,unlike regular real estate investments.
Being in an online environment, users can do their researchby using interactive online property tools to understand the overseas marketsbefore making a decision. Users can also exchange notes with other crowdfunders to do cross- references about a particular developer or project. When these developers know that their reputation is at stake, some of them would definitely think twice before putting up a dud deal.
Teething Issues – Gaining user confidence
Having listed some of the benefits of real estate crowdfunding, it is important to highlight that such sites are not without risks. Having been around for only the last 2 to 3 years, the crowdfunding industry is still in the infancy stage. One of the common concerns relating to crowdfunding is the lack of recourse should the project fail to materialise. Interestingly, this is actually less of an issue for real estate crowdfunding as there is usually some form of asset (i.e. land title) that crowdfunders can stake a claim to.
Apart from that, another issue that has to be overcome is the scepticism that some users could have. Many people are not comfortable with the anonymity of the opportunity providers and would prefer to meet with the developers before considering funding their projects, especially if they are doing it for the first time. This is especially important for real estate crowdfunding, as the funding amounts can be substantial. Therefore, having offline contact is an important step to gaining user confidence.
Is there a demand for real estate crowdfunding?
At present, it is still too early to say if there is sustained demand for real estate crowdfunding. However, based on what we have seen on CoAssets, areal estate crowdfunding platform my company operates, we have observed a growing trend.
As there is currently no legislation that is similar to the JOBS act in Singapore, CoAssets is simply a targeted leads generation site that connects opportunity providers (i.e. developers, bulk sellers, etc) and users. Akin to any regular property site, we do not get involved in the deal and any arrangement is directly between the stakeholders.
Based on this approach, the crowdfunding platform grew from 200 to more than 1,300 engaged users (with a reach of more than 20,000 secondary contacts) within the first 6 months. More thanS$12million worth of deals were also shortlisted and put on the site, with many more turned away. As a whole, even though this may not appear to be much, it validated the business process and suggests that more can be achieved in time to come.
Apart from that, we are also seeing keen interest in the inaugural Expo for Property Investing and Crowdfunding (EPIC)that CoAssets is putting together. This is the first time that a real estate crowdfunding event is being organised in South East Asia. Real estate crowdfunding is gaining traction in the region.
This article just scratches the surface of the topic of real estate crowdfunding and there are definitely other risks as well as issues not highlighted. Despite my apparent bullish view towards real estate crowdfunding, the reality is that only time will tell how this will pay out.
Nonetheless, when you put all the considerations together, crowdfunding is definitely an area for the government and industry stakeholders to explore further as the pros outweigh the cons. The true potential behind real estate crowdfunding, if correctly executed, will be the ease in channelling resources from one region to another, in support of financially viable or socially beneficial projects. And the full potential can only be achieved if there is more clarity in the crowdfunding regulations.
Mr Getty Gohhas a Masters in Real Estate from the National University of Singapore (NUS) and heis the CEO of CoAssets.com, South East Asia’s first crowdfunding website. Mr Goh is also a director with Ascendant Assets Pte Ltd, a real estate research consultancy and think tank. Dr Seh Huan Kiathas a PhD from Massachusetts Institute of Technology (MIT) and he is the CTO of CoAssets.com.