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Monday, July 13, 2020

Crowdfunding – an alternative way to invest in real estate

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While being two very disparate investment markets, crowdfunding and the real estate market are a perfect fit and one that allows investors a new way to leverage profits from the real estate markets.

Fractional ownership or crowdfunding in real estate is not a new concept; it has been around since the 1960s and has been facilitated through real estate investment trusts (REITs).

REITS are companies that own, operate and finance income-producing real estate assets, and can even be traded on major exchanges like many other securities. In most cases, REITs operate by leasing space to tenants and passing on profits from collected rent to its investors in the form of dividends.

There are two ways that individuals have traditionally diversified their portfolios by investing in REITs; by purchasing their shares directly on an open exchange and by buying into a mutual fund that specialises in real estate.

The implications of crowdfunding are tremendous and very promising, especially for the average investor. The high entry point of real estate would no longer be a barrier to investment, and, similar to buying shares in a company’s stock, investors would be able to buy and sell fractions of properties. This allows the investor to participate in any potential capital appreciation of the asset, and possibly provide a passive dividend income, depending on how the investment is structured.

The concept of crowdfunding in real estate has more recently taken centre stage, particularly due to the rapid development of technology, making the process safer, faster and more accessible.

The next frontier

Will blockchain, most commonly known as the technology that underlies cryptocurrencies including  Bitcoin and Ethereum, be the catalyst for the next step in fractional ownership of real estate. Still in the dark on blockchain? Let’s recap the Google Docs metaphor for blockchain, developed by William Mougayar: When collaborating with colleagues using Google Docs, all parties have access to the same document at the same time, and the single version of the document is visible to them all, simultaneously.

Everyone is in sync, version history is recorded, and the ‘sharing’ negates the need to send documents back and forth. This also forms the basis of trust, with all document collaborators becoming ‘fractional owners’ of the document.

In the blockchain world, literally millions of computers keep an encrypted record of an event or transaction in a public ledger, and this is virtually impossible for anyone to tamper with because they’d have to access and manipulate thousands of computers simultaneously.

In real estate investments, there are numerous fees and processes involved in the purchasing process of a property. Blockchain technology can reduce costs by decreasing the need for mediators and ‘centralised record keeping’ entities, along with the reduction or elimination of unnecessary and additional fees such as transfer, legal, title fees and more.

If properties’ share ownership were stored on a blockchain in a process called “tokenisation”, the overheads and costs needed to buy and sell property could be dramatically reduced and crowdfunding a property would become much easier.

It has been predicted that by 2021 most real estate crowdfunding platforms globally will leverage tokenisation, due to an increase in demand, which may see key international players such as EquityMultiple, CrowdStreet, Alpha Investing, and RealCrowd implement the technology on their platforms. If they fail to tokenise, the real estate assets will continue to be illiquid and will make them costly to trade.

Some may argue that the innate advantage of real estate is based in its illiquidity; but many see it as key for crowdfunding companies to adopt more efficient ways of working through technologies such as blockchain.

A key local player in the crowdfunding space is Smart Crowd, which is a digital real estate platform which allows investors to build a diversified portfolio of pre-vetted real estate, as well as receive a regular income from rental channels. While the platform works to lower the barriers of entry for people to build an asset portfolio it does not yet use blockchain.

As we progress into 2019, the benefits of property ownership continues to present an attractive proposition for investors and residents. Generally, with the prices being what they are, there is the sentiment of growth of the UAE property market post-2020.

The UAE government’s efforts in creating an easy and seamless process for property owners will greatly benefit from the implementation of technology in crowdfunding, providing potential investors with alternative ways to join the real estate ladder. 

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