Property crowdfunding is a relatively new concept that is empowering many people in South Africa. How is it done?
The dream: to own property or begin to build a property asset portfolio. The reality: it will take years to save enough to afford even just the transfer fees or deposit. The solution: Property Crowdfunding.
From as little as R10 000 (not per month, nor per year), you can own property – well a piece of property … it’s a share or shares in a property. Crowdfunding as a concept has become popular on the internet as a form by which funds can be raised, or funds invested, in an opportunity or venture.
It was first used by rock band Marillon in 1997 when it sought sponsors to finance a tour. Within six months their crowdfunding appeal had raised the required US$60 000. It’s since become an alluring business concept and has grown exponentially with the rise of crowdfunding host sites that attract all ages and types of investors to support concepts or tangible ownership, which require funds without using traditional financing routes.
Commonly, as with its origins, crowdfunding is peer-to-peer but now there are many different categories, including rewards-based, donations-based, profit-sharing, debt- securities and equity crowdfunding, the latter of which is a focus for property investors.
Consider for a moment that property has long been considered a solid investment choice, largely because it is less volatile than, for example, the stock market. It provides investors with an opportunity to own a tangible asset, which may also be used as an additional income stream.
Entering the real estate market, however, has always been constrained by the ability to have enough capital to meet the basic requirements of ownership. This generally excludes a huge percentage of the population that struggles with affordability challenges. Equity crowdfunding removes this barrier to entry because it allows individuals to pool money together to invest in properties for a fraction of the price of traditional real estate. In so doing they become owners in the form of shares, also known as equity. The best thing is that there is no debt involved.
Zak Omarjee, CEO and founder of the South African Equity Crowdfunding platform Crowdprop, says that property crowdfunding is still in its infancy in the country but extensive work is being undertaken to increase exposure and inform citizens that these opportunities exist.
“By fractionalising ownership and allowing investors to collectively own a property from as little as R10 000, our platform is enabling more South Africans, businesses or trusts to own property, and all investors need to do is verify their identity as per FICA requirements.”
Omarjee explains that Equity Crowdfunding is not yet regulated in SA, which is why investors should be cautious of crowdfunding platforms and do their homework. “Crowdprop is structured in such a manner that it fits within the existing regulatory environment. For example, Crowdprop is managed by a licensed financial services provider, ELA Asset Management, which allows the company to market investments directly to investors. Secondly in being a non-listed public company it is entitled to raise funds from the public and issue them with shares in return.” Crowdprop has also worked closely with the intergovernmental fintech working group in ensuring that its model will be aligned to regulation once it comes into effect, which ensures protection for both investors and property owners.
Crowdprop offers investors all types of investment properties such as residential, industrial, commercial and even agricultural. Omarjee explains that these investments are subject to a strict due diligence process, “including consultations with independent property and investment professionals to determine the viability and safety of the investment for investors. Crowdprop does the hard work for you, so you can rest assured knowing that your funds are being used to purchase pre-vetted and verified property investments.”
The properties on offer can be both a buy-to-let or development opportunity. Funds are collected from investors who are then issued with share certificates in proportion to their ownership rights in the property, and which allows them to benefit from rental income and/or proceeds of the sale of the property when the time comes.
Investments are listed for 30-90 days to raise the amount required and are held in trust in a custodian bank account. If the required funds are not raised within the set timeframe, a full refund is made to the investors. Each investment is also ring-fenced and owned through a Special Purpose Vehicle (SPV), meaning that one property cannot be pledged as security for another, and cash flows from one cannot be used for another.
“Simply, investors will have direct ownership in the specific property that they choose to invest in as opposed to a fund where there is uncertainty about what is owned. Each property is also completely freehold, which translates into no matter what happens, there will always be a fully-paid for property backing the investment, with no risk of repossession from a bank or financial institution,” says Omarjee.
There are fees, but these are not excessive and are in return for Crowdprop management of the investment and the property, with regards to negotiations with tenants or owners. The capital raise fee and the management fee with Crowdprop are both capped at 5% of the total raised amount and net cash flows of the property respectively. Returns are property specific as each property delivers returns based on location, type and associated demand. In the case of a buy-to-let property, the returns are quarterly, paid into a Crowdprop wallet. Each investor’s wallet can be accessed at any time, whether it’s for reinvestment or withdrawal.
Although it is in its infancy, property crowdfunding is a disruptive innovation in the market that allows more South Africans to access and earn from property investments. How it will impact agents is at this time unknown, but will likely not be noticed at all for years to come. If anything, it has the potential to create new investors in the property market, particularly Millennials and Gen Z who, through property crowdfunding, will be able to quickly realise the value of owning a property asset and potentially achieve a wallet big enough to support their future property investments.