Crowdfunding of Emerging Market Real Estate

 

An introduction to the crowdfunding of real estate transactions as applied to emerging markets. (https://substack.com/profile/72805072-john-p-causey-iv)

In 2021, the global real estate crowdfunding market was estimated to be worth $10.8 billion. By 2030, the market is anticipated to grow 45% per annum and to be worth $250 billion. The industry is in its infancy and is fragmented, with evolving regulatory frameworks, and investors are becoming more and more accustomed.

As private equity dries up in Latin America and Africa, could crowdfunding be a primary conduit for the next wave of equity and debt capital to enter the regions?

Crowdfunding of Real Estate

Crowdfunding is an investment and financing methodology involving the aggregation of small amounts of capital, often through technology-enabled intermediary platforms. Kickstarter in America was an early online crowdfunding platform that launched in 2009. As of February 2023, Kickstarter has received $7 billion in pledges from 21.7 million backers to fund 233,626 projects across many industries (but not real estate).

In the context of real estate, crowdfunding works very much like the real estate syndication model. In that model, funds for real estate projects are raised from a “syndicate” of accredited investors through a private placement of a limited partnership offering. The sponsor prepares a robust placement memorandum, which is distributed to suitable investors, and follow-up communications made to close the deal.

Crowdfunding improves upon the syndication model by permitting many investors to be exposed to investment opportunities in a cost-efficient and more robust manner. Communications and progress can be tracked and monitored digitally, which is important for a variety of reasons including compliance. Placement memorandums can be updated cheaper, quicker, and easier. A 1980s real estate syndicator with a thousand participants in a $3 million deal would be overwhelmed and require too much in fees for the transaction to make sense. This is the essence of the advantage of using crowdfunding and digital intermediaries.

Emerging Market Opportunity

Emerging Real Estate Digest believes crowdfunding represents an interesting opportunity to raise capital from America’s retail investors to invest in emerging market real estate. Latin American real estate is likely the most attractive destination, given its cultural and geographic closeness.

Crowdfunding is a new phenomenon and is becoming more popular by the day. No developed world platforms are materially targeting emerging market real estate transactions. The difficult-to-solve challenge is to simultaneously build a retail investor network in America, and at the same time competently manage real estate projects in the foreign markets.

Private equity has the advantage of high fees to cover the substantial costs of establishing offices overseas and having only to deal with a handful of institutional investors. The private equity model is under pressure, particularly in emerging markets, which means that the crowdfunding model may emerge as a potent vehicle to facilitate future emerging market real estate investments.

https://youtu.be/1KTvNF68LSw