In today’s capital market, it is difficult for private investors to find inflation-protected, relatively “safe” private investment opportunities for their savings with an interest rate higher than 3%. Real estate crowdfunding offers an interesting opportunity to access interest rates of 5 to 7%. How does it work?
By Ferdinand Bräutigam
Crowdfunding is a financing and investment model originating in the USA, which private investors initially used to predominantly finance companies, especially innovative start-ups. Real estate crowdfunding developed from this model and this type of crowdfunding has existed in Germany since 2012.
In the years before the financial crisis, in 2007, it was common for banks to finance 90, 95 or even 100% of the purchase price or project costs. In 2010, the banking regulations were switched from Basel II to Basel III in order to reduce the risks of another possible financial crisis as in 2007. This significantly increased the capital requirements for banks and borrowers.
Since then, real estate investors have found it increasingly difficult to finance their properties or projects with a high debt ratio. This is why they are increasingly resorting to alternative financing options.
Real estate crowdfunding offers the real estate investor the opportunity to secure capital from private investors in order to implement projects with a financing share comparable to that of 2007. The capital provided or invested by the investors is so-called mezzanine capital, which in most cases takes the form of a subordinated loan.
Mezzanine capital is by its nature located between equity and debt capital. There are many different types of mezzanine capital, depending on whether it tends to be classified as debt or equity.
At first glance, the so-called subordinated loan has many characteristics of debt capital, because investors receive a fixed interest rate, have no say and the term is fixed from the outset. In contrast to “real” debt capital, which is usually provided by banks, it has the characteristic that in the event of the insolvency of a property or project company, it is “subordinated” to all other creditors in the insolvency estate. This means that the investors bear a higher risk than the debt financing banks, but this is also compensated with a correspondingly higher interest rate.
According to the German Capital Investment Act, §13 Vermögens Anlagen Gesetz (VermAnlG), the platforms must provide investors with an asset information sheet in which the most important contractual principles are listed and in which the risks of the investment are also pointed out. Furthermore, the asset information sheet must be submitted to and approved by the Federal Financial Supervisory Authority (BaFin).
In addition, the real estate crowdfunding platforms must point out the risk in accordance with §12 (2) VermAnlG: “The acquisition of this asset investment is associated with considerable risks and can lead to the complete loss of the invested assets.”
In addition, it is not possible for private investors to invest more than 10,000 euros per project (§2a Abs. 3 VermAnlG) and the funding per project, which is financed by a swarm or a crowd, may not exceed the sum of 2.5 million euros. (§2a Abs.1 VermAnlG).
The platforms strive to offer high quality projects, because a bankruptcy would, through the publicity that real estate crowdfunding entails, mean an enormous image loss for the platform. For this reason, most platforms only work with experienced project developers and the demands on the project are very high.
As mentioned at the beginning, the crowdfunding model was mainly used to finance companies, especially innovative start-ups. Since 2016, real estate crowdfunding has overtaken crowdfunding for companies in Germany in terms of volume, and in 2018 a total of over 210 million euros were brokered via real estate crowdfunding platforms. Looking at the first half of 2019, the volume brokered via real estate crowdfunding platforms already exceeded 155 million euros.
The growth rates in the real estate sector speak for themselves in absolute terms. In the years from 2015 to 2017, the volume tripled annually. From 2017 to 2018, the growth rate was +63.2 percent. Today’s largest platforms such as Exporo and Zinsland were founded in 2014 and have contributed significantly to this growth.
The table shows that the market leader Exporo has a market share of 59.5 percent among the platforms. With a growth rate of almost 300 percent in 2017 and a growth rate of 50 percent in 2018, the platform is the absolute market leader in this segment. However, the market is highly competitive and platforms such as iFunded or Engel & Völkers Capital achieved growth rates of over 800 and 900 percent respectively in 2018.
The average volume per project was 1.085 million euros in 2017 and 1.453 million euros in 2018.
Kensington Crowd now also offers small investors the opportunity to invest online in real estate projects. Under www.kensington-crowd.com, investment is possible starting from only 250 EUR.
