Real estate crowdfunding: investments, risks, and opportunities

Real estate crowdfunding is a new system that aims to finance real estate operations using a broad investor base. To understand this new phenomenon, we must start from the meaning of the word “crowdfunding” which means “crowd financing“. For the most part, these fundraisers take place through dedicated web platforms. In recent years, this form of online real estate investment has grown a lot both in Italy and in the rest of the world.

 

Real Estate Crowdfunding – how much does it make?

In 2017, when the real estate crowdfunding portals appeared in Italy, there were many doubters about this form of financing in the brick market. But now the data shows that the sector is constantly growing there are almost 100 million collected in 2021 to finance 267 projects. According to the Crowdfunding Buzz observatory, a clear improvement compared to 2020 when the collection was 51% lower and the projects financed were only 186. The opportunity for any type of investor to enter a historic sector such as brick has been rewarded in terms of the trust.

 

Real estate crowdfunding investments in Italy crowdfunding investments in Italy are a relatively recent phenomenon. The development steps of this online real estate investment industry are as follows:

  • the first 7 projects were funded in 2017 with a collection of only 1.8 million
  • increased then to 18 in 2018 and a growth in the collection up to 11.4 million
  • the real exploit took place in 019 when 108 projects were financed with a total collection of 35 million.

 

The most significant development was achieved by lending crowdfunding platforms, which financed 243 real estate projects compared to 167 the previous year. The portals of real estate equity crowdfunding have collected 42.1 million compared to 29.3 of the previous year for 24 funded real estate projects.

 

Lending crowdfunding – peer to peer lending

Lending crowdfunding is a loan with higher interest rates than a bank loan, to carry out a project. The most common solution lately is that of peer-to-peer lending or social lending. P2p lending crowdfunding is therefore the meeting between investors and constructors by eliminating the intermediation of banks.

 

Let’s see step by step how real estate crowdfunding works in Italy in a peer to peer lending model:

 

  • a manufacturer requests financing from the portal;
  • a platform shall carry out the verification of the financial viability of the company. The portal returns a rating with a predefined interest rate;
  • if the manufacturer accepts the assessment, the project will be placed on the platform;
  • an investor registered on the portal decides whether to finance the project;
  • if the total sum is reached, the money is delivered to the manufacturer;
  • a company then repays the loan at the predetermined interest rate.

 

Growth data of Lending Crowdfunding

Usually, the lending crowdfunding subsidizes the renovation of real estate units, with an average collection per project that in 2021 was 235 thousand euros. The development of this form of financing is demonstrated by the fact that in 2021 the average investment grew to 2400€ compared to 600€ in 2018.

The reasons for the success of this phenomenon lie in the mix between economic compensation and the average duration of loans. The average annual rate was 9.9%, virtually identical to the previous year, with a range ranging from 6 to 12%. On the other hand, the average duration of reimbursements has increased from 11.5 months in 2020 to 11.9 months in 2021.

The factors that have most helped the growth of the Real Estate Crowdfunding sector can be summarized as follows:

  • Active platforms: portals that closed at least one campaign went from 10 in 2020 to 16 in 2021;
  • Highest collection: half of the active platforms raised one million more than the previous year, with three portals raising more than 10 million (Ethical Performance, Recrowd, and Trusters);
  • Higher growth: among the active portals in 2020 the one that has grown most was Recrowd (+11.7 million), followed by Ethical Performance (+5.8 million) and Trusters (+4.2 million);
  • Best new entries: among the novice portals of 2021, Crowdlender has collected 1.2 million for 6 projects Build Lenders has collected 653 thousand euros and prepay 359 thousand euros;
  • Development of large collections: 8 campaigns in 2021 were over one million euros, 5 more than in 2020. Widening the considered interval, have been 13 the campaigns that have collected a sum between 500 thousand euros and 1 million;
  • Diversified offer: three portals (Relender, Crowdlender, and Business Lending) also offer entrepreneurial projects, as well as real estate projects.

 

Equity Crowdfunding Real estate

Having understood how Lending Crowdfunding works, we now focus on the functioning of real estate crowdfunding in Italy in its Equity form. The main difference that diversifies Lending and Equity Crowdfunding is:

  • in the first case (Lending) one does not become the owner but makes a mere p2p loan
  • instead in the second case (Equity), a share of the project is acquired.

In the case of Equity Crowdfunding, lenders participate as shareholders in individual projects through platforms such as 200 crowd or mamacrowd.

 

 

This means that the investors are formal partners of the company that will carry out the project, and consequently participates in any profits deriving from the entrepreneurial initiative.

In Italy, real estate equity crowdfunding works in the following way:

  • a company presents the project to the crowdfunding platform to quote the collection;
  • a project is evaluated and if eligible is published on the web portal starting the collection;
  • an investor can access and participate in the collection of the project with only 100€ (split investment);
  • if the campaign reaches the minimum collection target, funders become partners. If the goal is not reached, the quotas are returned to the funders.

With this type of real estate crowdfunding, the average collection is much higher in comparison to lending. The average collection in 2021 was 1.8 million euros, up from 2019 when it was 1.1 million euros.

The duration of the investment, which is on average longer compared to lending, also goes hand in hand with the higher average yield. The average extension for this form of real estate crowdfunding in 2021 is 21.2 months, down from the previous year when it was 25.3 months.

As a consequence of the above, we also have higher average profitability. The platforms offer an average annual rate of 11.9% in 2021, with a range between 14% and 8.4%, lower than 12.1% in 2020.

Continuing the comparison with the Lending, the average investment is higher; having been 8200€ in 2021, up from 7000€ in 2020.

 

Mattone Crowd approach – Tokenization of rented properties

Unlike the approaches already used in real estate crowdfunding, that is equity and lending, Mattone Crowd is positioned with a new formula. Our Real Estate experts select properties suitable for short-term rentals such as Airbnb rentals, booking, and the like.

The property is then tokenized:

  • NFT representing the rented property is generated;
  • NFT series is produced based on the commercial square meters of the property: for example, 120 MQ is generated by a limited series of 120 NFT;
  • NFTs are listed on the mattone crowd platform, with priority for the most active users.

The token incorporates a share of the tokenized property and its rights, that is, the income from daily rentals net of operating costs. To avoid the notarial costs related to the management of the fractional real estate, from the offline point of view, the user of the platform buys a share of the real estate fund (company distinct from the mattone crowd platform) that holds the property. In this sense, the approach of mattonecrowd.it is similar to real estate equity crowdfunding.

The main difference is that real estate equity crowdfunding usually finances projects under construction: the investor buys part of the real estate project still to be completed and sold, bearing the related business risks and the success of the project. The mattone crowd formula focuses instead on “rent” properties, rented and leased in tourist areas, bringing investors a stable real estate rent.

The use of NFT in real estate crowdfunding brings several advantages for the investor:

  • Greater visibility: in addition to approaching real estate investors, NFTs involve a younger and more technological audience.
  • Increased transparency: Tokens generated using NFT technology (nonfungible token ERC 721) are recorded on the blockchain. Therefore, all the fundamental steps like quotation, payment of annuities, etc… can be consulted on a register accessible with a blockchain explorer.
  • Increased liquidity: NFTs can be traded on several liquid platforms such as Opensea, Mintable, and Binance (NFT section) as well as on mattonecrowd.it.

tokenizzazione immobile

 

Real Estate Crowdfunding risks

Risk is inherent in every form of investment, real estate crowdfunding in Italy is no exception. Therefore, it is essential to understand in advance the risks that this form of real estate investment can hide.

The biggest risk is the possible insolvency of construction companies that have applied for online financing. The online platforms do everything possible to check the financial situation of the companies that apply, but sometimes this is not enough. Even a very solid business project can reverse course due to a chain of events more or less unfortunate.

In the field of real estate crowdfunding of the lending type, you can incur delays in the payment of interest. The causes can be various:

  • complications in the work;
  • bureaucracy;
  • difficult reallocation of real estate.

The risks of real estate crowdfunding in Italy in equity mode are greater because the investor becomes a shareholder of the company. Moreover, the period in which the investment can be covered could be longer than the form of lending. Quite simply, construction times can be lengthened, which leads to higher costs (crane rentals, permits, etc.) which result in an erosion of the margin initially foreseen by the business plan.

In the event of the failure of the construction company, the lender of the equity project must respond with equity capital, resulting in the limited possibility of recovering the initial investment.

The investor does not run any risk if the minimum funding established at the platform is not reached. The money invested goes back to the funder and the campaign is deemed null and void.

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