Maintaining Confidence in Real Estate Crowdfunding

The global real estate crowdfunding market was estimated at USD13.2bn in 2018 and is expected to reach USD868.9bn by 2027¹. In addition, the market is expected to grow at a compound annual growth rate (CAGR) of 58.3% from 2019 to 2027¹. In Europe, excluding the UK, real estate crowdfunding transaction value was USD600.1m in 2018². But can this level of confidence be maintained?

If we look at factors contributing to the rise of capital flows towards real estate crowdfunding platforms, digital accessibility during numerous lockdowns and low initial investment in a period of economic uncertainty for more traditional investment vehicles have been key. In France, for example, the average initial investment is €1,581, and returns are close to 9% with a default risk of less than 1% over an average investment horizon of 24 months: shining the spotlight on real estate crowdfunding as a viable alternative to direct real estate investment.

Real estate professionals using these platforms can also enjoy a number of advantages, including shortened transformation times compared with traditional equity financing solutions; the ability to control cash flow and maintain autonomy for as long as possible.

Monitoring risks on the horizon

The pandemic has inevitably caused a slowdown in global construction activity. While the impact of this may not yet be evident, the expectation is that it will weaken the cash position of property professionals. So while the controlled risk/return ratio has proven very attractive, the economic crisis is likely to bring the first defaults and an increase in late payments.

State-guaranteed loans, such as France’s PGE, have enabled some developers to delay their repayments. But those who struggle to repay any state-guaranteed loan in the coming years may find themselves unable to meet their obligations to lenders via crowdfunding platforms. This is a risk to be monitored, particularly if the fall in property prices – the first signs of which were visible at the end of 2020 – is confirmed.

2021: More rigorous project selectivity to maintain confidence

While real estate crowdfunding continues to be attractive, the mechanisms underlying growth in 2021 are lengthening project times and marketing phases, and a potential lack of capital needed to launch other projects and maintain an active pipeline.

In France, we are already seeing additional start-up costs for the latest projects accepted by some developers, with a corresponding extension of the repayment period. In short, real estate professionals would like to increase the financing period, while investors want to reduce it to maintain their investment liquidity.

Against this background, real estate crowdfunding platforms’ project screening process must become more demanding, not least by using comprehensive and accurate selection grids. This selectivity will enable platforms to ensure the right level of return on the projects chosen and offered to the public, reflecting the level of risk of the underlying operations, transparently and objectively.

The challenge for crowdfunding platforms today is to continue to offer high-yield projects while minimising the risk of default to maintain confidence in this new form of investment. By strengthening policies and project selection grids that reflect new economic parameters, real estate crowdfunding platforms can help support the attractiveness of this new form of investment for the general public and professionals alike.

This article was written by Claire Gueydan-O’Quin, Head of Real Estate Consulting Europe, and Matthieu Guignard, Senior Real Estate Consultant at Mazars.

¹ https://www.globenewswire.com/news-release/2020/12/07/2140604/0/en/Global-Real-Estate-Crowdfunding-Market-Size-Will-Reach-to-USD-868-982-Million-by-2027-Facts-Factors.html² https://www.statista.com/statistics/412487/europe-alternative-finance-transactions-crowdfunding/