Online private investment “crowdfunding” is a major advancement for the technology-averse commercial real estate industry and is proving to be a popular investment vehicle for real estate investors.
- Over $1 billion of capital was in fused into the real estate space through various crowdfunding platforms in 2014.(1)
- During the period of 2013-2014, real estate crowdfunding grew 156%.(1)
- In the first 15 months of the 506(c) General Solicitation exemption, real estate outpaced almost all other sectors in capital commitments. Real estate development has recorded capital commitments 284% greater than the tenth place industry – venture capital.(2)
- Crowdfunding is estimated to finance $2.57 billion of real estate in 2015 – a 2.5x increase from 2014.(1)
Like any innovation, however, real estate crowdfunding early resistance from some long-term stakeholders in the market. What some of the more resistant operators, developers, and/or investors and in the real estate industry fail to realize, however, is that crowdfunding isn’t a complete “revolution” of the capital raising landscape – it’s an evolution of existing processes. That’s in part why crowdfunding is such a natural fit for the regulatory opportunity presented by 506(c).
Syndication: Smart CRE Financing
In the sub-$20 million property market, sponsors have long divvied up equity in their projects to groups of high-net worth investors through private placement (“Reg D”) offerings. This private syndication process pre-dates “crowdfunding” by decades, and was growing in popularity even in advance of the passage of the JOBS Act in 2012:(3)
- From 2009-2012, aggregate capital raised for real estate private placements accounted for $63 billion, excluding capital raised under private equity and hedge fund indicators.
- 5,617 separate Reg D offerings for real estate were conducted over the four-year period from 2009-2012. In 1,900 Reg D offerings for real estate took place in 2012.
- In 2012 alone, over 47,000 investors participated in syndicated real estate deals.
- The average offering size for a Reg D real estate offering over the period form 2009-2012 was $15 million.
Private syndication has proven itself to be a smart way for sponsors to fill the capital stack while reducing their exposure to risk and lessening their reliance on institutional funding. Yet the traditional limitations of private placements under Regulation D allowed sponsors to only raise capital from members of their existing network. 506(c) crowdfunding enables operators to utilize technology to access a broader pool of captive investors, ultimately shortening the transaction timeline.
- As of December 31, 2014, there had been 140 506(c) capital raises for real estate development or investment.
- 66 successful raises for about a 47% success(2)
- Total 506(c) capital commitments of $54,570,698 to real estate development or investment in 2014.(2)
Crowd Investors Like Real Estate
Alternative investments are on the rise as more investors gravitate to assets that are not correlated to the stock market. McKinsey & Company estimates that alternatives will account for over 26% of institutional portfolios by the end of 2016.(1) Due to the resurgent market and return opportunities, investors are showing greater interest in real estate than other alternatives.
- The level of commercial real estate investment in the fourth quarter of 2014 was the highest ever recorded by CBRE.(4)
- Total returns for institutional-quality direct real estate investments, as measured by the NCREIF Property Index, stood at 0% in 2013 and was estimated for 11.0% in 2014.(5)
- Investment in real estate in the Americas rose 12% to $410 billion in 2014. 26.5% of property trending is in the multifamily residential market.(6)
- Real estate is expected to approach 10% of larger investment portfolios by the end of 2016.(1)
Crowdfunding (or “crowdfinance”) provides investors with a new means to access real estate opportunities. As Crowdnetic puts it (3):
Real Estate Development [is] an Industry to which investors continue to flock in crowdfinance, and their enthusiasm for deals in this industry is evidenced by the speed at which some of these deals reach their target, with some raises concluding in a matter of days.
Unlike other industries, such as e-commerce in which there are ample investment opportunities yet not as much capital on an absolute or average-per-successful basis, a physical asset backs real estate securities. Furthermore, the average investor generally understands property, buildings and the other assets that fall under real estate; therefore, investors committing capital to this space can understand what they are purchasing through these securities, as well as what some of the basic risks are. When investing in something less tangible, such as a technology company, the returns may be greater were one to discover the next Facebook, but generally so are the risks, which is one reason why real estate may enjoy such success, relative to other industries.
(1) Massolution Crowdfunding for Real Estate report March 2015
(2) Crowdnetic’s Quarterly Private Companies Publicly Raising Data Analysis for the Period Ending December 31, 2014
(3) Bauguess, Scott and Ivanov, Vladimir; “Capital Raising in the U.S.: An Analysis of Unregistered Offerings Using the Regulation D Exemption, 2009- 2012”; July 2013.
(4) CBRE Sponsored Report featured on Newsweek.com March 2015
(5) ULI/EY Real Estate Consensus Forecast from October 2014
(6) Cushman & Wakefield International Investment Atlas 2015