Crowdfunding: Democratizing real estate investments and empowering small investors
Consolidating relatively smaller investments, and a sizable number of individual investors, to provide the capital needed for a business venture has come into vogue in recent years. ‘Crowdfunding’, as the practice is labelled, has seen renowned names like Indiegogo, Gofundme and Kickstarter established in the past few years. However numerous other platforms have been emerging, including many specific to particular industries.
‘Crowdfunding’ in real estate was an innovation that first appeared in the US market as part of The Jumpstart Our Business Startups (JOBS) Act of April 2012 that legalised the practice for accredited investors, later adding non-accredited investors as well. (1) Dubai’s real estate industry, with a long history of dynamism in approach and innovation in practice, has recently dipped its toes into the concept, and the early response is enthusiastic. As a property market that is among the most lucrative globally, the Dubai property sector has always attracted investor interest. With the current investment climate being seen as particularly positive, with bright future projections, this interest is experiencing a surge. Sunil Gomes, CEO, Gemini Property Developers believes Crowdfunding has the potential to add to this momentum significantly by creating a powerful synergy between small investors and Dubai’s developer community.
So what does Crowdfunding do for real estate? It creates avenues for smaller investors
Crowdfunding platforms specialising in real estate investments act as a mechanism to pool small contributions from both accredited and non-accredited investors. While real estate has historically been one of the most secure investments, the large initial capital outlay it demands has limited its access to wealthier individuals and institutions, out of reach of smaller investors.
‘Crowdfunding’ democratises this process.
Relatively smaller amounts of capital can be invested, in exchange for a proportional stake, similar to shareholdings. In the most usually followed arrangements, investors either earn a profit as interest or through rental returns.
As a model that can produce significant stimulus for the sector, while also enabling the participation of small investors, crowdfunding has made its debut in the UAE real estate market in the form of Smart Crowd. In April 2018 the real estate crowdfunding venture Smart Crowd became the first financially regulated digital investment platform in MENA, as a result of The Sharjah Entrepreneurship Center’s
(Sheraa) incubator program. Located in DIFC (Dubai International Financial Center) and regulated by DFSA (Dubai Financial Services Authority), Smart Crowd’s innovative crowdfunding model has already collected several accolades. These include the 2017 Sharjah Entrepreneurship Festival Pitch, the Accenture Innovation Award at GITEX 2017, a place in the inaugural round of Dubai International Financial Centre’s ‘Fintech Hive’, the region’s only Fintech Accelerator, second place in the Smart Dubai Global Blockchain Challenge, and winning the Seedstar UAE contest. (2)
This string of recognitions underscores the massive potential of the concept and how ready the UAE real estate market is for such an opportunity.
Low upfront costs with lucrative returns and an expanded investment pool
Dubai offers investors a significant advantage in lower entry costs while continuing to deliver higher rental returns, as compared to several of the world’s other premier real estate markets. The absence of an ongoing property tax adds yet another positive to this investment profile, making the available real estate opportunities in Dubai highly attractive. Sunil from Gemini Property Developers elaborates that by lowering the cost of entry to as little as Dh5,000 ($1,300), the Smart Crowd platform enables a very similar investment opportunity in the real estate asset class. (3)
By removing entry barriers for investors with limited resources, the crowdfunding model of real estate investment opens up doors to a larger pool of investments and a new profile of investors. It also helps create economic equitability in the sense of allowing nearly everyone access to properties and portfolios that would otherwise not fit their financial profile. Fundamentally, it is this win-win for all stakeholders that will result in unfettering resources and adding an unprecedented stimulus without the liabilities and overheads that funds from outside the UAE entail. Smart Crowd’s model of low entry cost, below the REIT fee structure and regulatory security, offers a platform for investors and developers to create a mutually beneficial eco-system (4).
Proactive legislative stimulus, bright forecasts and a temporarily lowered market rising slowly but steadily, are all factors fuelling the growing optimism in the resurgence of the UAE real estate sector, creating an increasingly favourable environment for investments, which could greatly benefit from an expansion of the investment pool. Crowdfunding in real estate enables support for multiple projects by changing the investment dynamic in both scale and scope. By lowering the risk and cost of entry of individual contributors, it empowers more flexible business models and an entirely new class of investor. In essence, this innovative model allows freer flow of capital and unlocks the economy’s inherent
strengths, while also allowing small investors to benefit from a market that is projected to deliver strong returns. Sunil, Gemini Property Developers, concludes that by expanding the access of small investors through consolidation and co-ownership, crowdfunding has the potential to disrupt Dubai’s real estate market and accelerate growth significantly.