What is real estate crowdfunding?

In general, crowdfunding involves the collective effort of “backers” or sponsors who support initiatives that require financing.

Transactions are made mostly through online platforms or portals, which are responsible for:

  • Formulating policy
  • Establishing a funding mechanism and feedback loop
  • Implementing rules and conditions
  • Examining and vetting projects
  • Accepting monies on behalf of recipients
  • Manitaining the payment gateway
  • Distributing the sourced funds appropriately.

Internet-based crowdfunding began in the early 2000s as a means of pooling donations, whether for profitable or nonprofit causes, and thus implied unconditional giving. Examples would be enabling fans from around the world to contributie to the launch of a band’s album; and facilitating the acceptance and distribution of financial aid from civic-minded individuals, on behalf of declared beneficiaries in a disaster-stricken area.

Innovators eventually used the system to elicit financial support while offering incentives and rewards to the backers.

More often than not, the crowdfunding deal is for online-platform administrators to hold the pooled money until the project has been fully funded. If the target amount is reached within schedule, the monies will be released to the intended recipient. If not, the contributions will be returned to the backers.

For-profit crowdfunding

In commercial use, crowdfunding has given rise to such terms as “equity crowdfunding” and “debt-based crowdfunding”.

In equity crowdfunding, backers pool their money to support a profitable campaign, such as a startup incubation or the expansion of an already-operational business. This is in exchange for a monetary stake in the project. If the project earns, the profit will be divided at the pre-agreed rates. However, if it fails to meet the declared goals, backers are entitled to recover their funds, although they will have to assume certain risks and losses.

Meanwhile, debt-based crowdfunding treats contributions as loans from backers. The parties in need of funding are essentially borrowers, who are bound to repay the principal plus interest.

In both cases, the online-platform administrators or operators are duty-bound to offer maximum protection for all parties, and security in the transactions.

Crowdfunding for real estate

In the real estate space, crowdfunding gained ground with the creation of online platforms for projects in North America and South America. In the first quarter of 2013, Realty Mogul launched the first-ever portal for the niche, to match pre-vetted properties with accredited investors. Within twelve months of starting the business, the company raised more than $100 million across its portfolio.

Networks like Prodigy and Fundrise soon followed in Realty Mogul’s footsteps, to indicated that the market was responsive to the concept. Markets in Western Europe and South-East Asia have also adopted the concept.

In the Middle East landscape, HBR has opened the gates of real estate crowdfunding to investors worldwide. It initially showcases vetted properties in the UAE, particularly Abu Dhabi and Dubai, with an overarching goal of revitalizing the regional market.

Who can source funds?

Property development and/or management companies that are legally operating in the UAE are eligible for HBR accreditation toward raising capital.Two funding options are available:

  • Equity investment
  • Loan investment.

Accreditation Process

To ensure the satisfaction of all parties within the HBR community, companies seeking accreditation as project operators are made to undergo a rigid application process and a set of due-diligence checks.

Basic requirements include:

  • Company information and corporate profile
  • Complete and updated government papers
  • Proof of the company’s financial soundness and good credit standing
  • Proof of property development and/or management experience
  • Verifiable track record and portfolio
  • Expansion strategy
  • Proposed project/s and timeline/s
  • Proposed payment structure
  • Guarantor information (for the Loan Investment option).

The screening and review process that HBR undertakes involves a thorough examination of documents submitted, background investigation that also looks into the criminal records of company executives and key personnel, inspection of investment opportunities to be presented in the portal, and other procedures that may be required by law.

The entire accreditation period takes and average of thirty (30) business days to complete. Upon approval, project operators are informed in writing and will be assisted with their portal-profile setup by HBR account executives.

Who can invest?

With crowdfunding significantly reshaping the property investment landscape, “small” players or retail investors are now empowered to channel their financial resources to big-name, equitable real estate ventures.

Two funding opportunities are available:

  • Equity investment
  • Loan investment

Registration Process

For the HBR portfolio, individuals or organizations seeking to invest in the listed projects are required to register with the site. This process is important in protecting the HBR community, especially from unscrupulous entities, such as those who could be exploiting the portal to launder money from criminal activity.

Requirements include:

  • Basic personal or organizational information
  • Investor expectations
  • Other pertinent details.

The review entails due-diligence checks, and usually takes five (5) business days to complete. Once registered, investors get access to the HBR portfolio and the library of resources to help them make well-informed decisions.

Investment Caveat

In real estate crowdfunding, investors do not necessarily conduct ocular inspections of the properties they are considering. More often than not, they place their trust on the sites that manage the transactions.

Despite the fact that online-platform administrators like HBR strive to maintain their reputation and their portals’ credibility, investors are urged to exercise due diligence at all times. The latest news on the market is widely available from reliable digital publications, including official releases from the UAE government, but portfolio-specific updates are posted on the HBR site.

What real estate crowdfunding in NOT

While real estate crowdfunding has more flexibility than the traditional model of property investment, it also carries a set of restrictions to protect the interest of all parties involved.

Among others, the HBR portal DOES NOT engage in the following:

  • Flipping real estate, in which properties are purchased low and quickly resold for a profit
  • Off-plan or ground-up developments, in which residential, commercial, and/or industrial structures have yet to be erected
  • Real estate brokerage that involves sales and purchases of the physical structure.
  • Real estate investment trust (or REIT) securities, traded or otherwise.
  • Public offerings and other securities listed on stock exchanges.
  • Investor fund management and/or assuming fiduciary roles for any of the users.

In the UAE, real estate crowdfunding is not synonymous with government goals on reviving stalled projects. For instance, HBR cannot vet projects under the Dubai Land Authority’s Tamnia initiative that seeks to resurrect off-plan structures.