Real estate crowdfunding does not exist: it is more correct to speak of crowdfunding applied to real estate. This definition has become widespread because the application of the benefits of online collective financing to the construction industry has had such remarkable market results that it deserves a label all to itself and dedicated industry studies. This is evidenced by the fact that there are platforms dedicated exclusively to what is also referred to as real estate crowdfunding, which is now fundamental in terms of investment volume and number of campaigns.
Indeed, the real estate sector inherently possesses certain characteristics that make it particularly sensitive to the opportunities offered by crowdfunding and suitable for this financial instrument. It should not be forgotten, however, that we are not talking about a different game with its own rules: we are talking about lending crowdfunding (to a very large extent) or equity used for real estate projects.
As with crowdfunding in general, for real estate specifically, the pioneers have been the U.S., where the first specialized platforms emerged as early as 2012. Europe, however, once the momentum picked up, experienced very rapid growth.
Real estate and crowdfunding: why it is an effective combination
Historically, "the brick" has been considered by most to be the ultimate safe investment, solid and long-term, the ideal way to secure and make one's savings pay off. Equally solid, however, is the reality that fewer and fewer people can now afford such an investment, which requires substantial economic resources. For that reason, it is also an investment that allows little diversification, another theme dear to investors.
Additional obstacles are the paperwork and technical issues that inevitably accompany any construction, renovation, or marketing of a property, which not everyone can or wants to deal with. Indeed, these are issues that require both time and expertise.
The crowdfunding-real estate project pairing makes investing in this area accessible to all, because the economic effort is collective and no longer individual, and only small amounts are needed to participate. In addition, all practical and bureaucratic management is left to the company proposing the project.
These advantages also apply from the point of view of the enterprise itself: carrying out a real estate project is very expensive and returns are usually seen after a long time, so crowdfunding turns out to be a practical and fast way to obtain liquidity to start work and spread the burden of expenses without having to undergo the time and conditions of a bank loan or similar forms of traditional credit.
At the same time, the enterprise can still maintain control over the management and administrative aspects of its project.
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Real estate lending or equity crowdfunding: how does it work?
The two types of crowdfunding in which real estate activities move are lending and equity.
A company that is to carry out a real estate project and launches an equity crowdfunding campaign to finance it sells shares. Investors buy shares in the corporate vehicle promoting the construction project and thus become part owners of the property in question. But almost always they are owners "through an intermediary," that is, through the company in which they have become partners; only in some cases are they registered as direct owners of the property.
If the equity crowdfunding campaign is successful, the company promoting the project must put it into practice, as long as no returns are derived from the sale or rental of the property with which to remunerate the member-investors. The latter, in addition to property rights, will also have administrative rights, established upstream by the company: they usually do not include or severely limit the right to vote at the shareholders' meeting, so that the management of the project remains the responsibility of the founding partners.
Sometimes the company that proposes a real estate project in equity crowdfunding may be an SPV (Special Purpose Vehicle), created specifically for this purpose and intended for liquidation (with corresponding exit for investors) after completion.
The company that chooses to finance a real estate project through lending crowdfunding, on the other hand, collects financial resources from crowd investors on loan, and thus remains the sole owner of the property. It will only have to pay back the loan plus agreed interest to investors within the agreed time frame.
This second mode is definitely preferred by Italian companies and investors in real estate crowdfunding because it is faster and less demanding.
The cost of money obtained in this way is higher than that of a bank loan, but the advantages outweigh this disadvantage:
- much shorter time frames than a bank;
- involvement of investors who can be useful in the future;
- visibility.
Real estate crowdfunding in Italy
The 2022 report of the Milan Polytechnic's Crowdinvesting Observatory, which we often cite for the breadth and accuracy of its data, confirms what has been said so far about real estate crowdfunding in Italy.
Real estate is a crucial sector of Italian crowdinvesting and is dominated by lending crowdfunding, with 20 specialized platforms (6 more in 2022 alone), not counting generalist ones that also deal with real estate. By contrast, 7 are dedicated equity crowdfunding platforms.
According to the report, "crowdfunding plays an important role as a boost in initial financing thanks to the speed of fundraising and the absence of real guarantees." Translated into numbers, this boost in 2022 exceeded 127 million euros (+38.1% compared to 2021). These are significant figures, but they usually represent only a minority portion of the enormous resources required to complete entire real estate projects. Crowdfunding should not be considered the sole source of funding because it would hardly be sufficient and/or sustainable. However, it can serve as the source of essential initial liquidity to get the construction started while awaiting other forms of financing.
This is why lending crowdfunding is the favorite of real estate: campaigns are shorter than equity campaigns and thus allow resources to be obtained more quickly and with fewer bureaucratic and administrative constraints. It is not uncommon for a company to do several successive lending crowdfunding campaigns to finance different phases of a real estate project through its now-loyal investors.
The potential of crowdfunding for the real estate sector is indeed diverse and extensive, but to harness it, one must be adept at marketing. If the statement that crowdfunding is more of a marketing operation than a financial one is always true, it holds even more weight for real estate. This is because platforms place significant emphasis, during the selection phase, on the availability of investors even before the campaign launch. Alongside the robustness of the project, it is a fundamental criterion in this particular domain. Therefore, it becomes essential to engage in marketing to gather expressions of interest in investing in your project even before presenting it to crowdfunding platforms.
By building a pool of loyal investors, it will be possible to make one's real estate business repeatable and able to generate increasing and dynamic returns, both for the company and for the investors themselves.
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