An alternative financing model: Crowdfunding3rd Apr 2017
Realty Africa is a services company in the sub-Saharan region. Their dream is to empower local landowners, developers and architects in sub-Saharan Africa by developing new services and seeking partnerships with other companies. They want to create a total service portfolio that supports local real estate professionals and enables their businesses.
Realty Africa offer a unique platform where property developers can source funding for their real estate projects by marketing them to local as well as international investors: crowdfunding. They strongly believe in the future of the African real estate market and the impact that these developments have on the local community. At the same time, these projects will make excellent investment opportunities.
Africa has a long history of crowdfunding. Whole communities have been known to pool funds to create a building. This approach to financing not only facilitates the funding, but also creates a feeling of mutual ownership and care for the longer term. Realty Africa is enabling the African community to take this concept to the next level by moving the process onto the Internet, with its much wider reach, and thus allowing a national and international investor community the opportunity to participate in projects that would otherwise not be available.
Crowdfunding is a win-win for everyone. Developers have an alternative funding source and can market themselves to the local and international community. Investors have access to investment opportunities with good returns that would otherwise not be available previously.
What is crowdfunding?
Four different crowdfunding models exist today.
The original concept was donation-based crowdfunding, a way in which people could donate without receiving anything in return. This typically applies to charity causes of different kinds.
The second model to evolve was reward-based crowdfunding, with platforms such as Indiegogo and Kickstarter. This helps companies collect small contributions from people to develop a product or service. Backers donate to projects that they believe in, developed by companies they want to encourage. In return, they receive a reward in the form of a product or service that has been developed with the funds committed. These rewards are typically called perks, and a company usually offers different kinds of perks at different contribution levels. These platforms are also ideal as a market research tool, as the backers will let you know immediately which perks they like and which they don’t.
The next model to appear was debt crowdlending, basically a peer-to-peer lending structure supported by the crowdfunding logic. Just like normal debt servicing, a lender will earn interest on the loan and the company has to repay its crowdlending debts as a first priority. A variation of this model exists in developing countries, where crowdlending is used as micro finance to support small companies. With socially responsible lending in micro finance, no interest, or a very small interest amount, is paid.
Equity crowdfunding is the fourth addition to the crowdfunding genre. In this model, many investors come together to invest jointly in the shares or equity of a company or a securitised project. Companies can raise capital and the investors become risk-taking shareholders. They are paid in dividends or, hopefully, by selling their shares at a profit after an increase in the value of the company.
The key to crowdfunding is building a social network of like-minded investors who are interested in the investments that you can offer and the track record that the platform is able to build. The emergence of social networks and changes in Internet use were among the most important building blocks that made crowdfunding possible. The ambition of every crowdfunding platform is to build a global network that is as big as possible, because its existence depends on crowds coming together to support its mission.
In 2013 the World Bank produced an extensive report on the potential of crowdfunding in the developing world. A crowdfunding ecosystem depends on key enablers to build trust. “Trust does not just happen – it is a socially mediated phenomenon which relies in great part on the intrinsic trust people place in shared connections on social networks, community affinities, and the ratings of others on trusted, mainstream websites.” (World Bank report: ‘Crowdfunding’s Potential for the Developing World’)
How does development crowdfunding work?
A property crowdfunding platform is a global community. The added value of a property crowdfunding platform is that it offers a marketplace and a security-based ecosystem where the real estate and infrastructure developers in sub-Saharan Africa can meet and transact with the worldwide community of small and large investors, as well as institutional investors. The crowdfunding platform facilitates the transaction, but should also inspire trust and project the transparency of the investment for the investor’s benefit. This helps the investor make an informed decision based on all the information available, and creates clarity, a proper risk profile and an investment that offers the investor as much security as possible. The difference between normal crowdfunding and property crowdfunding is the existence of a real asset. Property crowdfunding is basically asset financing, and the asset is used as collateral.
What type of development is the ideal candidate for crowdfunding?
A property crowdfunding platform like Realty Africa typically offers a diversified portfolio of projects. Projects can be short or long term and include full development as well as refurbishment projects or asset finance on existing properties, with the right business case. A short-term project would typically be a residential development for selling. Longer-term projects might be rental properties or tourist accommodation.
Also the size of projects on the platform can vary from $200 000 to several millions of dollars. The success of the project depends entirely on the business case, the attractiveness of the project and how the interest of the investor can be captured. This means that the developer is obliged to come up with a sound, secure and transparent project that is as attractive as possible. Property crowdfunding is not just about securing funding, but even more about marketing yourself and building a track record that radiates trust.
So it is not really the type of project that triggers crowdfunding, but the vision of the developer. Developers of property or infrastructure can benefit in various ways:
• Property crowdfunding offers an alternative funding source for property developers that have difficulty accessing traditional funding sources and don’t have access to an international investor network. Also, the funding source is more risk-reward based than traditional bank loans, which in our region come at high fees without any flexibility.
• Even if property developers can access bank funding easily, crowdfunding might still be attractive. It can leverage a variety of funding sources, but, more importantly, it is also a great source of marketing. It will offer a platform online to show your ability to complete great projects and create a track record.
• Crowdfunding can also be a way of getting buy-in from the surrounding community. Offering the community the chance to invest in your project makes them stakeholders, and they will behave like stakeholders. Realty Africa offers the platform to make this happen.
How does a development get listed for a funding programme? What paperwork or plans need to be submitted?
Property developers can register and then they will be verified by our specialists. After verification, projects can be submitted online. An application form and a modest application fee are part of the process, as well as a business plan and formal documentation.
Realty Africa will provide the application form and a “Business Plan Guideline” that contains an overview of the total process, a list of necessary documents and guidelines for important items that should be dealt with as part of the business plan. These documents can be downloaded after payment of the application fee. You can always send an email to email@example.com if you need assistance.
What happens once the development is listed?
Crowdfunding attracts real investors who deserve the same transparency and quality of investment as banks. Therefore we have developed the Realty Africa ECO System to protect investors as much as possible. We apply a strict due diligence process , with the assistance of Deloitte, to vet the project and the suitability of investor proposals. This is also to the benefit of the developer. It means that only the best projects will make it onto the platform, increasing the interest of investors and the chances of success. We want to make sure that one bad egg doesn’t destroy the whole basket.
Realty Africa will have a pre-assessment performed by a team of country directors, after which we will propose a contract to the developer before submitting the project to Deloitte for further checks and balances. An important factor is security. Realty Africa provides investors with security in the form of a mortgage bond on the asset. This increases peace of mind and fundability. A trust structure has been set up to facilitate this.
Can only a part of a development be funded? If the developer wants to build a clubhouse onto an existing development, can that be financed through crowdfunding?
A lot is possible with development. Investors like refurbishments or add-ons to existing properties, as they entail less development risk and the future benefits are clearer. These types of projects offer excellent business cases and should certainly be offered to our platform. However, security would still be an important aspect of the offering, and we would request a mortgage bond on an asset.
When funding programmes have been successfully completed, how does the money move?
After a project has been successfully funded, the money is kept in escrow by the Realty Africa Trust. We disburse the money according to the phases of the development (drip funding) to protect investor funds. After each phase we send surveyors to check the building site, the progress and the materials used, before disbursing the next batch of money.
Proceeds due to the investors will flow back to the accounts of the Realty Africa Trust for disbursement.
How do the companies or individuals who have funded the development benefit? What returns can they expect?
It is a misconception that crowdfunding is only for small amounts and non-professional investors. Crowdfunding is a way of democratising investments. In our view it is ideal for local, regional and foreign investors who want more control. You can select the project that you like instead of having to give a mandate to a fund manager.
At the same time, investing in real estate in sub-Saharan Africa is also an ideal way for professional investors to spread risk in an investment class that potentially has higher yield, but may be outside their area of expertise, or in exciting properties and locations that would otherwise not be accessible. It offers an opportunity for African cross-border and multi-currency investments that can be used by investors, investment firms and pension funds to diversify their portfolios. Investors who prefer impact investments can participate in affordable housing or eco-lodge projects.
In other words, property crowdfunding in sub-Saharan Africa offers many opportunities to all kind of investors. We are looking for partners to establish a managed fund or real estate investment trust (REIT) of African real estate when the pipeline grows.
Is crowdfunding legal in South Africa? Is there any legislation that could hamper this process?
Legislation still has to catch up with the dynamics of crowdfunding. Therefore we have found one of the best financial attorneys in the country, Thipa Denenga Incorporated to assist in setting up. We operate fully within the existing legal structures.
Is crowdfunded income taxable?
Income from crowdfunding is investment income. This is taxable depending on your local tax legislation. For more tax-related information.
What are the potential risks?
Like any other investment, investing in crowdfunding entails risks. These risks vary and depend on the type and duration of the project. We give you an overview of potential risks . By applying a thorough due diligence process and drip funding with checks, and by offering security through mortgage bonds, Realty Africa is able to reduce the risk significantly.
Realty Africa has a large variety of projects in the pipeline, including luxury apartments, middle-income housing and eco lodges, but there’s also social housing and student housing.
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