An introduction to the crowdfunding of real estate transactions as applied to emerging markets.
In 2021, the global real estate crowdfunding market was estimated to be worth $10.8 billion. By 2030, the market is anticipated to grow 45% per annum and to be worth $250 billion. The industry is in its infancy and is fragmented, with evolving regulatory frameworks, and investors are becoming more and more accustomed.
As private equity dries up in Latin America and Africa, could crowdfunding be a primary conduit for the next wave of equity and debt capital to enter the regions?
Crowdfunding of Real Estate
Crowdfunding is an investment and financing methodology involving the aggregation of small amounts of capital, often through technology-enabled intermediary platforms. Kickstarter in America was an early online crowdfunding platform which launched in 2009. As of February 2023, Kickstarter has received $7 billion in pledges from 21.7 million backers to fund 233,626 projects across many industries (but not real estate).
In the context of real estate, crowdfunding works very much like the real estate syndication model. In that model, funds for real estate projects are raised from a “syndicate” of accredited investors through a private placement of a limited partnership offering. The sponsor prepares a robust placement memorandum, which is distributed to suitable investors, and follow-up communications made to close the deal.
Crowdfunding improves upon the syndication model by permitting many investors to be exposed to the investment opportunity in a cost efficient and more robust manner. Communications and progress can be tracked and monitored digitally, which is important for a variety of reasons including compliance. Placement memorandums can be updated cheaper, quicker and easier. A 1980s real estate syndicator with a thousand participants in a $3 million deal would be overwhelmed and require too much in fees for the transaction to make sense. This is the essence of the advantage of using crowdfunding and digital intermediaries.
Prodigy Network in Colombia
In 2015, NYC’s Prodigy Network successfully crowdfunded Bogota’s BD Bacata, the first ever crowdfunded skyscrapper. The 67 story building is the largest in Colombia, and 6th largest in South America. The project costs of ca. $240 million were largely borne by 3,000+ Colombian retail investors and the minimum investment size was $150k.
Unfortunately, this high profile crowdfunded project is mired in litigation, still not complete, and can be considered a failure from the investors’ perspectives. The mistakes in this case were choosing the wrong developer (Spanish firm) and partners, and not adequately overseeing the works.
Prodigy Network is now bankrupt and was based in New York city. It raised $600 million, from investors in 37 countries, to invest in mostly NYC-based real estate projects. The firm was formed in 2003 and was an early crowdfunder of real estate to reach scale. The video below is of the deceased CEO, Rodrigo Nino (native Colombian), describing his firm seven years ago.
Emerging Market Opportunity
Emerging Real Estate Digest believes crowdfunding represents an interesting opportunity to raise capital from America’s retail investors to invest in emerging market real estate. Latin American real estate is likely the most attractive destination, given the cultural and geographic closeness.
Crowdfunding is a new phenomenon and is becoming more popular by the day. No developed world platforms are materially targeting emerging market real estate transactions. The difficult to solve challenge is to simultaneously build a retail investor network in America, and at the same time competently managing real estate projects in the foreign markets.
Private equity has the advantages of high fees to cover the substantial costs of establish offices overseas, and having only to deal with a handful of institutional investors. The private equity model is under pressure, particularly in the emerging markets, which means that the crowdfunding model may emerge as a potent vehicle to facilitate future emerging market real estate investments.