How Crowdfunding Can Help Real Estate in Emerging Markets
Real estate industries in emerging markets often suffer from a crippling inability to access finance, a problem particularly prominent on the African continent. Crowdfunding holds a potential key to unlocking value in this industry, providing much needed finance with greater accessibility at comparably cheap rates.
African nations particularly struggle to access finance for real estate for multifarious reasons. One reason is a lack of online records in a large number of countries, which raises suspicions of corruption. The Jones Lang LaSalle 2018 Global Real Estate Transparency Index features 4 African nations (Libya, Senegal, Mozambique, Côte d’Ivoire) within the 5 least transparent real estate markets. Another reason for the lack of access to finance relates to the cost of inputs: in many African nations the cost of cement remains high, and equipment and machinery continue to be imported. Unpredictable devaluations of local currencies, consequently, adversely affect contractors, notably when contracts are denominated in foreign currencies; the strength of the US dollar, in particular, has made it hard for some investors to service their debts. These issues form part of a broader set of endemic problems, which have in large parts quashed the banking sector’s appetite to finance long-term projects.
Homeowners face similar difficulties accessing finance. The 2019 Centre for Affordable Housing Finance in Africa report identified that in only 4 countries on the continent (Algeria, Egypt, Namibia, Morocco), over 50% of urban households can afford the cheapest newly built houses. In 9 nations (Liberia, Niger, Ethiopia, Central African Republic, Ethiopia, Democratic Republic of Congo, Burundi, Malawi, and Mozambique) this figure is below 2%. Mortgage markets present seemingly impossible conditions on new homeowners, preventing most from accessing necessary finance.
In Nigeria, typical mortgage interest rates are at 25%, and this goes as high as 34% in Ghana; by comparison, typical mortgage rates in Germany and Denmark are as low as 1.63% and 0.73%, respectively. Furthermore, many of these mortgage markets are chronically underdeveloped, compounding this problem. Focussing on Nigeria again, just under 100,000 mortgage transactions took place between 1960–2009.
Establishing new avenues of finance is critical in helping these markets take off. Crowdfunding may pose just such an avenue, having already taken off elsewhere in the world. In Europe, we’ve identified 61 real estate crowdfunding platforms with 3,928 deals funded, and in the US alone we’ve documented 20 real estate crowdfund platforms which have collectively funded 2,329 deals. For real estate developers, crowdfunding presents a less bureaucratic and more direct process to accessing finance. They can present their projects openly to pools of investors and attract finance that doesn’t entail exacting tolls.
For homeowners, crowdfunding also shows promise. Already across Europe there are firms such as LendInvest who crowdfund both real estate projects and mortgages. Accessing mortgages at a lower interest is critical for expanding the base of potential homeowners, providing some much needed help to a struggling market.
Crowdfund investors will not ignore opportunities to invest in emerging market real estate, particularly on the African continent which will see 92% of global population growth over the next 80 years. As low interest rates persist around the world, casual investors will look to secure crowdfunding platforms as financial opportunities. Growing populations require housing and facilities, and investors will be attracted to these underlying fundamentals.
Current channels of finance are not enabling actors on the African continent to realise their real estate potential. Crowdfunding offers a secure and more affordable route to finance; establishing better real estate and mortgage crowdfunding networks on the continent could prove pivotal in the near future.
