Operators fascinated by the idea of investing in 'bricks and mortar' can count on a new form of online fundraising that is experiencing strong growth in Italy: real estate crowdfunding. This is an innovative way of allowing numerous investors to participate in the financing of a real estate project in the residential or commercial sector, in exchange for a return on capital. Projects can be related to the purchase of a property as a source of income, but also to the renovation of real estate (again as source of income or to be sold for a capital gain), or the development of a greenfield project. In addition, real estate crowdfunding projects can also relate to infrastructure.
Investing through a real estate crowdfunding platform is quite simple. The process normally involves a few steps:
- Registration: as a first step you need to register on a platform as an investor.
- Opening an account: Upon completion of the registration, a virtual account is automatically opened and must be used to transfer capital within the platform.
- Investing in opportunities: at this point, you can select the best opportunities based on your risk profile, return and duration.
Business models in real estate crowdfunding
In Italy, there are several platforms that allow you to invest in real estate. These operate mainly through two business models: Equity model and Lending model.
When you invest in an equity-type platform, the investment is made directly in the company that undertakes to build the property. You therefore buy a share in the company and the return will be given by the difference between the sale price of the property and the capital invested. All Italian equity platforms are authorised and supervised by Consob.
When you invest in a lending platform, the return is usually given by the interest rate that you agree to receive from the person collecting the funds. The object in this case is the loan and not the building company. In some cases, however, it is also possible to obtain an extra return linked to the possible sale of the underlying property.
The state of the sector in Italy
According to the 5th report on real estate crowdfunding by the Politecnico di Milano, excellent development scenarios are envisaged for the Italian market. In the last 12 months a value of approximately € 908 million has been reached, of which € 159 million was invested through equity portals and € 749 million through lending portals.
Lending crowdfunding has continued its rise as the segment with the highest growth rate in the crowd-investing landscape. This is mainly due to capital injections from institutional investors. Platforms are growing and their number is increasing, and a substantial growth of loans issued is expected.
The growth of real estate crowdfunding derives in particular from the difficulty companies have in accessing credit through traditional methods. In the coming year, the estimated attainable target for operators in the sector is around €60 million.
Why invest in real estate crowdfunding?
When it comes to financing real estate projects, crowdfunding has the potential to become a complementary tool to banking and it could even be used to leverage bank credit.
The farsightedness of Italian lawmakers has meant that in 2013 our country was the first nation in Europe equipped with a specific regulation for equity crowdfunding. Moreover, with the 2017 Stability Law, the activity was also extended to SMEs, which can now count on a new tool to access credit.
Traditionally, real estate investments have only ever been accessible to a limited number of large investors, this is because they require - by definition - the immobilisation of substantial resources in terms of capital and, subsequently, an active management of the property that absorbs time and resources. Moreover, real estate investments are generally characterised by low liquidity and limited diversification possibilities. Real estate crowdfunding solves some of the problems related to this type of investment, such as
· The possibility of participating in a project with low amounts of money;
· The opportunity for diversification, as by lowering the capital required for a single investment each individual can invest in a larger number of projects with the possibility of diversifying their investments both by geographical area and by size and type of property;
· Delegating the management of the property to the project promoter;
· Greater liquidity, where platforms have implemented a secondary market where it is possible to sell investment shares to other interested investors;
· Direct control over the investment and the possibility to interact with the promoters (whereas classic real estate investment funds offer little opportunity to involve the saver in asset allocation choices.
Thanks to the enormous potential offered by the sector, the time has come to put all active crowdfunding portals in a position to compete on an equal footing within a single regulation, with the same security safeguards and the same obligations. Fortunately, the proposal for a single European regulation goes in the right direction.
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