Singapore – It’s not just start-ups, tech projects and social campaigns anymore. Crowdfunding in Singapore has embraced a new asset class: real estate – nascent even in countries such as the United States, France and Australia.
Two such platforms, CoAssets and DomaCom Singapore, are already available here. A third, FundPlaces, will be launched by end-May.
These platforms generally “matchmake” property deals – be they mezzanine loans to developers or equity in physical property – with investors. Properties can span land banks to development projects to completed income-yielding buildings.
The huge benefit it brings to small-time developers is a quick and efficient alternative source of funding, while sophisticated investors like it for their newfound access to real estate deals.
Yet most Singapore developers remain wary and prefer more traditional funding sources like bank loans, debt issuances and shareholder funds. Consultants also doubt that real estate crowdfunding will become mainstream in the near future.
The biggest gripe remains the high risks – risks that the promised returns do not materialise, risks that projects fail due to a developer’s negligence, or of investors not being able to liquidate their securities.
The governing regulatory framework is still vague. The Monetary Authority of Singapore (MAS), in seeking to balance between facilitating securities-based crowdfunding and putting in place safeguards, has proposed to limit such investors to only accredited investors and institutions. The industry has given its feedback, but the rules have not been finalised.
Crowdfunding platforms here themselves are erring on the side of caution and exercising various forms of due diligence to avoid non-performance. which they say would hurt their reputations and goals to be long-term players.
They ensure that the developers that list on their platforms are of a certain standing, and are target accredited, institutional and high net worth investors. The man in the street has no place in these deals.
For instance, CoAssets requires the developer to have a Singapore office and local director who would be held liable in a default.
Ong Choonfah, chief operating officer at DTZ SE Asia, pointed out however that “personal guarantees are only as good as the person who is guaranteed”.
Crowdfunding platforms can go to great lengths, but without more robust regulations, there are limits to how much they can protect investors.
Counterparty risks remain, for example.
“For most projects, we can’t guarantee they won’t fail,” said FundPlaces co-founder Tan Kok Keong. “That is a risk that all investors have to take. But we try to mitigate that risk by working with people who have shown themselves to be good paymasters, who are proper business people and have credible backgrounds.”
Lim Yew Soon, managing director of Singapore property developer EL Development, also worries that easier access to finance will lead developers to become less cautious and take higher development and investment risks, as opposed to the prudence one would naturally practise when using one’s own shareholders’ funds.
Some say that real estate crowdfunding is not new. DomaCom Singapore’s managing director Paul Zaman, for example, calls it just a modern buzzword for age-old financial practices: “In stockbroking, this process is called bookbuilding. And in property, it’s called syndication.”
EL’s Mr Lim also likened crowdfunding to some developers’ method of getting funds from business associates who are not shareholders of the company. “They are more like angel investors who put in money to fund development projects, be it local and overseas. This has been in place for years. In return, they take a percentage, say 2 per cent, of the project’s profits.”
Others highlight a slight difference: syndicates are made up of people who know one another quite well, but in crowdfunding, complete strangers could be pooling their money together to buy a property.
Real estate crowdfunding also differs from real estate investment trusts (Reit), which come with a non-customisable portfolio of properties, and private property funds, which like Reits typically buy bigger-ticket assets.
Different crowdfunding platforms also work differently. Unlike CoAssets and FundPlaces, DomaCom Singapore, a unit of Australia’s DomaCom, is more like a mutual fund with many sub-funds, each containing a property. Investors hold units in these sub-funds and reap monthly rental yields and a capital gain when a property is sold.
There is an – though not yet sizeable – online secondary market to allow investors to trade their holdings.
It is essentially a “less clunky and cumbersome” way of doing syndication, and there are available exit strategies, said Mr Zaman. The sub-funds can be terminated with a 75 per cent unitholder vote, or a 50 per cent vote after five years.
DomaCom opened its one-man office in Singapore last November. Its fund is registered with the MAS.
In Australia, it is approved by the Australian Securities and Investments Commission and backed by Perpetual Trust Services. It hopes to list in Australia in the next couple of years to improve its credibility.
The one commonality that runs through all three crowdfunding platforms seems to be the location of their projects in Australia; and the other, the conspicuous absence of any Singapore projects.
There is a reason for this: the different payment methods for developers in both jurisdictions, explained Brian Wee, CEO and co-founder of FundPlaces.
Developers of Australian properties only get their sales proceeds when their projects are completed, which means they have to fund the entire project through bank loans, equity, and mezzanine financing. The kind of “loans” FundPlaces facilitates falls under mezzanine financing, and frees up some of the developers’ capital to acquire new sites or take up new projects.
At as high as 20 per cent, the interest rates are hefty though. In comparison, Australia’s banks are lending at 4-4.75 per cent for loan-to-value (LTV) ratios of 50-60 per cent for five-year maturities. Five-year corporate bonds yield about 3-4 per cent.
Conversely, crowdfunding is less necessary for Singapore projects because the initial downpayment and subsequent progressive payments are usually enough to fund construction. It is the land purchase that requires loans, but crowdfunding platforms are unable to raise large enough an amount. Their funding quantum is capped at S$10 million.
Is it going to be a disruptive technology to commercial lending? Founders of crowdfunding platforms here say it is complementary, rather.
Ensuring that developers have first obtained bank lending before they are allowed to crowdfund gives FundPlaces some certainty of the developer’s credit-worthiness, said Mr Wee.
CoAssets, which facilitates S$1-5 million loans to boutique developers looking to do small regional projects, said crowdfunding bridges a funding gap where it might be difficult for these developers to get bank loans. “But when they have built a track record, they can subsequently go to banks,” CEO Getty Goh pointed out.
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