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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   December 2015

Overseas Investors Join the Crowd

Crowdfunding is channeling global investments into U.S. real estate

Overseas Investors Join the Crowd

In turbulent overseas markets, especially China, investors are eager to hold fixed-income investments and hard assets, including U.S. commercial real estate properties and securities. Where do they find those investment opportunities? Increasingly, they’re turning to crowdfunding platforms.

A confluence of events in both domestic and global markets has created an exciting  opportunity for commercial mortgage originators in the United States. The Internet has created efficiencies in capital formation that can create advantages for savvy lenders and investors.

The first key development is the growth of crowdfunding investment in the U.S. With the passage of the JOBS Act in 2012, followed by implementation of U.S. Securites and Exchange Commission rules on crowdfunding, lawmakers and regulators created a safe harbor for private offerings, allowing those seeking private investment to advertise offerings for the first time. This spurred the rise of investment crowdfunding in the U.S. by allowing the creation of platforms advertising investment opportunities that no longer run afoul of decades-old securities regulations.

Global markets took notice, and if the story were to end here it would still mark a watershed for capital formation. In fact, it would be irresponsible to suggest that the United States even led the charge. Italy and the United Kingdom, for example, have had regulated investment crowdfunding since 2011 and 2012, respectively, encompassing both equity and debt models. This is very much a global phenomenon.

Platforms have every incentive to weed out faulty deals
before they collect a dime from any investor.

At the same time, investors outside the U.S. are  becoming comfortable with crowdfunding, as indicated by a report from crowdfunding-research company Massolution, which found that crowdfunding grew by 320 percent in Asia in 2014, the fastest rate of any global region.

Enter China, a country very much in the news recently thanks to the well-publicized tumult in equity and debt markets, and the Chinese government’s willingness to prop-up stock prices. The market turmoil has led many Chinese investors to look abroad, in search of fixed-income and hard assets. This includes real estate, and more specifically U.S. real estate. Chinese  investors recently surpassed Canadians as the number- one foreign purchasers of real estate in the U.S.  Furthermore, a recently enacted Chinese program called Qualified Domestic Individual Investor (QDII2) allows residents of select Chinese cities to invest  directly in overseas assets.

It isn’t just Chinese investors looking abroad.  According to CBRE Group, investors from Middle Eastern countries poured $11.5 billion into global real estate markets during the first half of this year, for  example. This is creating a situation where investors are now forced to compete for increasingly limited global opportunity.

So, the floodgates have opened, allowing private offerings to be generally solicited to accredited investors. You have various global markets jumping into the crowdfunding arena, and global investors are becoming more comfortable with the idea of online investment. The opening of the investment floodgates and increased comfort with crowdfunding, combined with the fact that monied investors in mature overseas markets are increasingly seeking opportunities overseas, create prospects for capital generation in domestic real estate projects that were once inconceivable.

Rules of engagement

Can one draw parallels between what is happening on crowdfunding sites like Kickstarter and what happens on real estate investment platforms? The answer is yes, absolutely. Crowdfunding as an idea has some basic rules that don’t change from application to application, even when comparing projects as different as a kitschy board game and a commercial high-rise building.

If there is one thing to keep in mind about crowdfunding, know that online investors expect ultimate transparency and availability. If you’re uncomfortable pulling the curtains back for a total stranger, crowdfunding might not be for you.

The value proposition of this market is access to myriad investors spanning a state, an entire country, or even the globe. This comes at a cost. Expect to allocate significant time and energy to developing relationships with these investors, answering their questions and making them comfortable with your ability to deliver on a promise.

Your online footprint

If someone searches your company or your name in Google, what will they find? That will be key if you’re considering crowdfunding as a means of raising capital, because search engines are often the first stop for investors doing basic due diligence on a real estate offering. This is the “sniff test,” and you can’t hope to attract significant investment if you can’t make it past this first rudimentary hurdle.

Online reputations are a lot like credit scores. A good one speaks for itself, but no history can be just as detrimental as a bad history. Spend some time becoming comfortable with how you project online.

In addition, keep in mind that if the goal is to reach global investors, a Google search may not be the best first step. There is no Google penetration in China, for example. So if Chinese investment is the end game, check your footprint on Baidu, a major

Chinese- language search engine, or a similar site. Make sure you have an official, professional website that lists  accomplishments and credentials at the very least, and make sure it’s the first thing that shows up in a logical search.

Picking a platform

In March, Massolution said there were 85 crowdfunding platforms and predicted that the number will  increase significantly worldwide.

So how do you choose among the platforms? Consider the following five key criteria.

  • Scope: Are the platform’s real estate projects focused in a specific market, or are they generalized? Which serves your specific niche most effectively?
  • Investor base: How many investors are active on the platform? Where are they located?
  • Leadership: Are the stakeholders trustworthy?
  • Funding: Does the platform have a long runway? What is the funding history for the platform itself? Who holds a stake?
  • Approach: What is the vetting and underwriting process? How does the platform approach marketing deals?

Because crowdfunding is a nascent industry, it isn’t just the proverbial crowd that will be doing the hard vetting. Platforms have every incentive to weed out faulty deals before they collect a dime from any investor. Consider that on many real estate crowdfunding platforms, less than 10 percent of potential deals even make it to the funding stage.

Crowdfunding platforms are going to take into account all of the usual underwriting criteria, in addition to the points mentioned above. Their concern is your funding success and your ability to deliver, and many platforms will err on the side of caution when considering those two key criteria. With some knowledge and preparation, real estate professionals can become well-positioned to take advantage of one of the most exciting times in global real estate investing. 


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