The current Lebanese financial and currency crises could be an opportunity for everyone to pool their fresh dollar funds and access real estate through crowdfunding. Not only will investors benefit from the drop of property prices in fresh dollars, but they will also put their money to work for them and earn both short term income and medium term capital gains.
The odd marriage of crowdfunding technology and the oldest form of investing appears to be getting along quite nicely and allowing investors to leverage investments in the global real estate market, diversify their portfolios to mitigate risk, and earn much better returns than stashing their money in saving accounts. The idea of making real estate transactions online had its doubts, but as more investors have been embracing the business model the real estate crowdfunding market value reached $8.3 billion in 2020, with the United States and Canada serving as the leading players (CrowdCrux).
In the current economic situation, real estate acquisition could attract more players from the Lebanese diaspora and those with access to fresh USD who are now able to buy goods, services, and assets (specifically real estate) at low price tags with their fresh dollars. With the threat of losing their savings in the banks, many Lebanese rallied towards the purchase of property using their lollars, which were accepted by those developers owing loans to the banks. This has pushed the property prices in lollars (USD bankers checks) irrationally high, while on the other hand, due to the devaluation of the value of the lollar as compared to the dollar, property prices dropped by 50 – 65 percent in fresh USD term, depending on the location and the property type. This represented a buying opportunity for vulture funds and anyone who has enough fresh dollars to afford to buy a property on their own.
Built-in protection for all parties
The global real estate crowdfunding market is on the rise. According to a publication by Facts & Factors (Dec 2020), the global market size will exceed $869 billion by 2027. That’s more than 100 times the size of the global market size of 2020, which translates to a compound annual growth rate (CAGR) of 18.96 percent. Using crowdfunding as a vehicle to invest in real estate, many of the platforms allow investors to start with as little as $500 without the need for a down payment of at least 20 percent of the property price, which is the practice with conventional real estate investing. This provides an opportunity for investors to diversify their investments and reduce their risk while earning good returns on their investments. It allows investors to be a part of deals that were previously unattainable to them. Residential properties are the primary source of real estate crowdfunding investments. These properties currently account for more than 50 percent of all crowdfunded real estate investments. Experts predict, however, that the growing commercial sector is likely to play a larger role in years to come. This could mean lucrative future gains for investors ready to support this particular high-risk, high reward play.
Real estate crowdfunding has come a long way since Fundrise launched its first project in 2012 in America and raised $350,000 from 175 people. With investors earning their dividend checks, more confidence was gained in the business model and the platform grew exponentially four years later with closing one project a week and raising more than half a million dollars a day, according to co-founder Ben Miller (CNBC). Eight years later in 2020, Fundrise has more than 150K active investors and has crowdfunded over $5.1 billion in real estate projects with more than $100 million net dividends earned by its investors. The industry is now full of success stories like these, with many platforms experiencing rapid growth. From their launch in March 2013 to October 2013, Realty Mogul’s cumulative investments rose from under $2 million to $8.07 million, with 23 properties under their belt. Two years later, they have now financed over 265 properties valued at over $600 million. Other platforms like Ground Breaker, Patch of Land, and Crowd Street among many others have their share of similar success stories.
The legal side of real estate crowdfunding is simple to set up and comes with built-in protection for all parties. Investors can invest small amounts of money in either the equity or debt of a real estate project to realize income. This can happen through a combination of rent, lease, or debt repayment, as well as from capital gains when the property is sold when its price appreciates over time. The sponsor will propose an exit strategy at which the property will be sold at a profit and, which is usually within an estimated period of time, referred to as a term. But, if the target exit date so happens to be in the middle of a bear market, it may be prudent to keep holding and collecting rent until the cycle turns. Investors effectively become limited partners in the investment. Acquired properties are usually owned by a Limited Liability Company or a Limited Partnership with the sponsor participating as the General Partner or Manager and the investors participating as limited partners or passive members.
Governments leveraging real estate crowdfunding
Because of the integral role that real estate plays in the economy, major economies across the world have started looking for solutions to facilitate investing in real estate. As an investment model, real estate crowdfunding started in the US in 2012, and the Securities and Exchange Commission passed several regulations under the Jumpstart Our Business Startups (JOBS) Act that now allow both accredited and unaccredited investors an unprecedented opportunity to take part in online equity and debt investments, including investing in real estate in their own neighborhood and beyond. The European countries and Latin America followed suit and made real estate investment-based crowdfunding increasingly accessible to investors and project developers to boost this major pillar of their economies. From the investor’s point of view, it is not necessary to spend a large amount of money, thus assuming a little risk and allowing the investment to be diversified.
When it comes to the MENA region, this business model is rarely heard of, except in Dubai. While its legal system was not ready for real estate crowdfunding in 2016, Dubai’s real estate authority started working on a system that allows the issuance of “partial title deeds” that will give assurance to investors to engage in such schemes. The government has facilitated the registration of the acquired properties in the names of Special Purpose Vehicles (SPVs), which are legal entities that list the investors who crowdfunded the relevant projects as shareholders in the fund. SPVs benefit from a less complex application process, reduced registration and licensing fees, and are allowed to use their existing companies as the registered office of the SPV. An SPV also offers a range of advantages, including tax neutrality, no restrictions to foreign ownership, limited liability to the amount of the shareholders’ commitment to the company’s share capital, and a robust regulatory and legal system.
Founded in 2017, SmartCrowd became the UAE’s first real estate crowdfunding platform with an entry ticket of $1,400 per investor, thereby reducing barriers to an investable asset class that is out of reach for many. One year later, the company has completed approximately $1.5 million in transactions with individual investments ranging from $1,400 to $34,000). With the company outperforming the UAE’s real estate market returns by paying out multiple dividends with annual net returns ranging from 6.5% to 8%, it kept attracting more investors and it has completed more than $6 million in transactions in 2020, at a time when the real estate market dropped in the UAE as the pandemic was impacting the whole economy. The successful market entry of SmartCrowd opened the doors to other platforms, such as Ellington Properties and Stake, which launched in 2020 and started offering opportunities to invest in the UAE’s real estate market and take advantage of the attractive lower prices (35% lower than their 2014 peak values).
Fresh USD into the Lebanese economy?
If the purchase of real estate is made accessible to the Lebanese diaspora (specifically those who cannot afford to purchase property with their own funds) with crowdfunding, it will help the remittance of fresh dollars to the economy, which can help in mitigating the short supply of fresh dollars and the further devaluation of the Lebanese pound. Real estate crowdfunding allows all those transactions to take place online and through bank transfers, which provides transparency to the amount of fresh dollars being exchanged for the purchase of the real estate. As a side note, it would not make too much sense for lollar holders to convert them into fresh dollars and lose more than two-thirds of their lollars to purchase property in dollars. The recommended practice for lollar holders and who wish to purchase property is to look for rare buying opportunities (distressed deals) where the asking price in lollar is not inflated compared to 2019 prices.
The current Lebanese legal framework is a hurdle for real estate crowdfunding platforms to make property investing accessible to almost anyone. This limitation makes investing in real estate reserved to those who have the capital to scoop properties and benefit from opportunities.
Without a doubt, Lebanon’s real estate laws are outdated, as they were promulgated 90 years ago with no real updates or modifications that make the property registration process seamless, transparent and proof from being manipulated by corrupt front-end clerks. With great proven models from the west and the UAE, such reforms could (and should) be rolled out quickly by just “borrowing with pride.” At the same time, the outdated rental laws froze down thousands of properties since their promulgations and caused many buildings to deteriorate with time with no maintenance whatsoever since the landlords of such non-performing assets do not have any incentive to do that.
The business legal framework is also outdated and is not welcoming enough to entrepreneurs, both nationals or foreigners, to conduct business with minimum cost and setup hassle. Recent modifications were drafted, but the hurdles and obstacles for crowdfunding startups were not eliminated, but on the contrary, exacerbated, thus making it only accessible to large capitalists and financial institutions that can afford a capital of more than 1 billion Lebanese pounds. This drafted crowdfunding law applies to small and medium enterprises (SME) or startup companies aiming to get funded for their operations and traction by the general public with investments ranging from $500 to $10,000 in return for ownership of equities or shares in these companies.
In the absence of a law specifically drafted for real estate crowdfunding, the Capital Markets Authority (CMA) is treating Real Estate Crowdfunding (REC) startups as if they wish to get funded as a company by the general public, whereas the REC business model is about crowdfunding a portfolio of properties. This process is never-ending, when listed properties get funded, new ones will get listed on the crowdfunding platform to be made available for investors to pitch in. This gets more complicated the legal entities that will own a handful of properties to protect the investors’ ownerships are factored in. This will entail a capital of 1 billion Lebanese pounds for each legal entity that owns a small portfolio of properties. This is a hurdle for the REC business model. The fact the property will be owned by a legal entity, in which the investors own their respective shares, is a solid enough protection for investors.
There is a large potential for an influx of fresh dollars through fractional real estate ownership through crowdfunding. Although the capital flow will go through the banking system but it will eventually get parked in tangible real estate assets.
Habib Chammas
Founder of CasaBayt
