The Story of Real Estate Crowdfunding
Real estate has long been a popular investment choice, and that’s not without good reason. Less volatile than other forms of investment such as the stock market, real estate offers a stable home for the funds of investors. Whether it’s a new build in a prime rental location, a deal on a housing estate, or a buy-to-let apartment, properties offer investors the chance to gain a tangible asset and create an additional income stream.
Yet, despite the attraction, the chance to enter the world of real estate investment has been limited to those with enough capital to meet the high baseline prices of real estate. With such high barriers to entry, this meant the majority of real estate investments were only accessible to high-net-worth individuals, who would then provide the necessary funding for a project. The average investor on the other hand was prohibited from a large segment of the real estate market, also making it harder for developers and project owners to find the right investors and raise capital.
The origins of real estate crowdfunding begin in 2012 with the passing of the Jumpstart Our Business Startups (JOBS) Act in the United States. The JOBS Act allowed non-accredited investors to invest in properties as well. Project owners and developers could now market their projects publicly to a larger crowd of investors and raise capital easily.
Real estate crowdfunding (REC) gives new groups of people the ability to invest in properties for a fraction of the price of traditional real estate. By allowing individuals to pool money together and divide investment costs, real estate crowdfunding can cater to a much more diverse group of people. The barriers to entry are much lower, and it is a lot easier to diversify one’s investment portfolio. Crowdfunding also offers fast liquidity and optimal efficiency in the use of cash for developers, while investors can enjoy the benefits of investing in real estate from their laptops and phones at home.
In Europe, financial and regulatory barriers for entry have historically been much lower than they are in the United States, and thus real estate crowdfunding has seen a meteoric rise in the region.
In recent years, legislation in many European countries has been passed to protect investors and regulate the market. On October 5th, 2020, the European Parliament adopted the final text for a Regulation on European Crowdfunding Service Providers for Business. Some of the key highlights:
- Any crowdfunding platform operator will be able to apply for a license from the “European Enterprise Crowdfunding Service Provider” (ECSP)
- The maximum price for each crowdfunding offer should not exceed the €5 million thresholds. This amount will be calculated over 12 months.
If you would like to read about more key regulatory highlights or the continued development of property crowdfunding, read the full version of the article on our blog.
