For many years investment in large-scale real estate has been restricted to high net worth individuals, meaning that the market is predominantly closed off to the general public. The system in place requires high cash liquidity from investors in order to finance a project, resulting in more modest investors being excluded from many real estate investment opportunities and left to put money into smaller, less-profitable properties or other projects entirely, where costs can often outweigh the investment gains. This is the system as it stands, but the future might have something else to say about how the real estate market is funded.
Over the last decade or two, the usual funding model for developers has been to finance their projects through debt or equity provided by an exclusive club of institutional lenders or high net worth investors. There are a few problems with this. For starters, lenders and high-end investors that belong to that exclusive club tend to be looking for short-term capital, with a timeframe of no more than four to five years. This means that developers who are trying to establish more sustainable projects (with gains unrolling over longer periods of time) often end up either not getting the funding they need, or altering their vision to suit the lenders/investors and therefore compromising the sustainability of the project. There is also the problem of monopolisation: the massive amounts of capital needed for investment means that there are only a limited number of investors worldwide that can put up that kind of money, which leads to a “usual suspects” situation where large amounts of real estate are continually funded by the same people.
But thanks to increased use of and opportunities emerging through the internet, the future of real estate investment no longer belongs solely to high net worth individuals. The Crowdfunding revolution has now hit the property market, allowing everyday consumers to invest in properties that were previously unobtainable, collectively buying the property on a buy-to-let basis and sharing the subsequent rental income and capital gains. This provides a more democratised version of real estate investment and frees developers of the need to bend to the short-term goals of super-rich investors; it also allows the developers to pursue better and more sustainable long-term projects, while at the same time giving new Crowdfunding investors the chance to put money into projects they are passionate about. There is also a development of scope: Crowdfunding with sites such as Bricksave allows smaller investors to browse and invest in properties abroad, something which was not possible in the old system due to the exclusivity of the market. As a result it is now possible for individuals to create a diversified international property portfolio and generate returns that previously would have been impossible.
With the use of Internet in developing geographic regions experiencing huge rates of growth, the evolution of real estate is likely to continue, with more and more Crowdfunded properties and platforms entering the market. This will in turn result in less power belonging to the exclusive club of lenders and big investors mentioned earlier, and more power landing in the hands of both everyday investors and developers who are trying to create sustainable solutions, therefore giving more stability to the market as whole. It is my belief that Real Estate Crowdfunding will result in a global commercialisation of the real estate investment market over the next five years. At Bricksave we are excited to be at the forefront of this change and enable a whole new group of people to invest into the real estate market.
Written by Bricksave CEO, Tom de Lucy
January 18, 2016
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