(MENAFN- Khaleej Times) Property ownership in international markets is often considered the playground of high net worth investors, real estate investment trusts (Reits) and sovereign funds who have large amounts of cash to spare for such big-ticket investments. The small-ticket investor - say who has spare capital of around Dh15,000 to invest - can rarely pick and choose projects as they are guided by the managers of Reits and real estate mutual funds.
Crowdfunding in real estate is a familiar concept in more mature property markets globally. But EstateUp, which has introduced the concept to investors in the Dubai property market, affirms it is a win-win for both developers seeking alternative avenues of finance and small-ticket investors.
"Exponential returns in real estate have always been limited to individuals with large amounts of capital or at least the ticket size has traditionally been one unit of residence, office or retail. Hence, common investors have been priced out of a significant market on which they have reliable judgement. We believe that by selling small tickets online to global investors, we can extend the growth potential of Dubai real estate to common investors across the globe," says Nilesh Jadhav, co-founder of EstateUp, a crowdfunding platform.
The idea of aggregated investor demand is also likely to benefit new developers, who face difficulty raising project finance through traditional methods. By ensuring the financial closure of projects before the start of construction, EstateUp does away with the risk of a project stalling for lack of funds.
The practice of flipping is also eliminated since all shares allotted to investors have a certain holding period.
"Traditionally, developers have relied on a group of select investors to fund the initial stages of the project, which could then be offered to the market in the form of off-plan units when the project demonstrates progress. We decided to combine this practice with a technological platform to make it available to the general public," adds Jadhav.
Aakarshan Kathuria, also the co-founder of Estate-Up, explains: "For relatively new developers, off-plan sales aren't a very feasible option as it involves large marketing costs and limited access to global investors. As such, the only option left for the developer is to target few institutional investors. Our idea helps the developer target a large pool of investors through technology and keeps the investor updated on the progress of fundraising, giving them the safety cushion of receiving their investment back in case the funding goal has not been reached."
So, how does the scheme work? When a developer wants to list with EstateUp, it carries out a background check to understand the firm's background, financials and profile. After the project is pre-vetted in-house, the documents are passed on to a legal firm and an independent audit company. Upon successful vetting, the project is listed on EstateUp's portal for the crowd to get involved. "We ensure that the projects, approved on our platform, have a clean history in terms of the personnel involved, and are financially feasible for the investors to partake in," says Kathuria.
EstateUp will only consider developers and projects registered with the Real Estate Regulatory Agency. The land needs to be owned, contractors and consultants should have been assigned, and the developer should not have taken any loan on the asset. Once a project fulfils these criteria, it will be listed on EstateUp's website for between 90 to 120 days to raise finance.
Meanwhile, the developer calculates the returns for every project. "Under no circumstances do we, as EstateUp, guarantee our investors returns in the project. As in every other investment, returns are based on market dynamics, but the developer equips us with their projected return on investment and that is provided on our portal," clarifies Jadhav.
The investors' funds will be placed in an escrow account and released to the developer as per construction progress. The project manager will monitor the release of funds from the escrow account.
"We curate updates from the fiduciary, legal team, developer, consultants, project manager and contractors and then provide them in a systematic manner to our investors in the form of images, videos and infographics through our portal. Updates are provided every quarter as we want the investors to be aware of the progress of their project," informs Kathuria.
EstateUp's first project - a residential tower in Dubailand - was listed on February 11 this year. "Around 85 per cent of the available tickets are already pre-sold. The holding period for this project is 30 months, so the investor can expect the returns within that time period. We are vetting six other projects which, if approved, will be launched on our platform shortly. The online response has been positive, and currently we are completing documentation for several investors who have approached us to invest in the project," says Jadhav.
The promoters of EstateUp have seen three categories of investors on their crowdfunding platform so far. According to Jadhav: "The first category is the medium- to large-ticket investors who have substantial amounts to invest but not enough to get them a unit in any of the projects currently offered off-plan by Dubai's premier developers. The second category of investors are people who have invested in real estate through either managed professional funds or by pooling funds together with friends and other investors. The third category of investors is individuals with savings, who in the past never considered real estate for investment due to lack of suitable investments available."
EstateUp offers three investment categories for the project currently listed on its portal: platinum investor, for a minimum investment of Dh60,000; gold investor, for Dh33,000; and silver investor, for Dh14,000.
The finance range offered to investors will vary as per the project size. "We want to bring down the ticket size to Dh5,000 in the near future. If the developer requires a large amount of money to be raised, then it's not feasible to keep small-ticket sizes. We are working closely with project owners to bring down the ticket size to make it accessible to an even larger pool of investors," says Kathuria.
EstateUp only plans to list projects confined to Dubai. "It is very important for us to track the status of construction on a regular basis," says Kathuria, adding: "Our investors are majorly from the UAE."
Bringing stalled €¨projects back to life
Crowdfunding can also offer reprieve to stalled projects. In the wake of the effects of the global financial crisis in 2008, there were stalled projects in the UAE where certain developers had limited access to funding. "By reaching out to the crowd and offering them equity in these projects, the developers can bring these projects back to life," says Aakarshan Kathuria.
"Through crowd funding, developers have an option to kick-start their projects even during this phase and investors can reap the benefits of investing into a sector when the price is rather attractive and the ticket size is kept relatively small," adds Kathuria.
How investors make a profit
Crowdfunding can also offer reprieve to stalled Developers have traditionally relied on off-plan sales ahead of construction to raise finance. However, in case of projects supported through crowdfunding, off-plan sales will happen during construction and are the profit-making machine for investors.
"The fiduciary acting on behalf of common investors takes care of the sales velocity needed in order to sell the project and have the returns ready for the investors by the time the project is completed," says Aakarshan Kathuria.
According to Jadhav: "Off-plan sales generally allow the developer to take advantage of future gains in the project by part-selling units and use the receivables and further incremental sales at higher rates to better margins. This puts pressure on developers to sell stock competitively while having the demands of a project under construction. We give developers an opportunity to fully fund their project prior to construction."
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