lpsychia.icu

The Australian government has finally made up its mind and decided equity crowdfunding could be a good idea. ASIC has been given some resources as it requested to study and establish the framework under equity crowdfunding can be established. We expect this process to go on for another few months and the regulations to be similar or slightly more conservative than what New Zealand is upto.

So instead of the current 20 12 rule which allows an issuer to make offers to 20 retail people to invest upto 2 million dollars we may see a far larger number of investors participate. This could be upto 200 or unlimited. It is also expected that crowdfunding platforms will be asked to self regulate to prevent a single retail investor from investing more than a certain amount which could be $5000 to $10000 a year. However the amount that can be raised would not exceed 2 Million.

ASIC will come back with the framework in a few months and then a new class of licenses called crowdfunding platform licenses would start getting issued. Expect this process and the first true retail equity crowdfunding offers to take about 6 to 12 months.

Equity crowdfunding for all its fancy connotations is essentially an investment. The only difference is the delivery and service vehicle is online. So the same factors which you keep in mind when making an investment such as duration, return, and risk would still be paramount. Just the fact that it is online wouldn’t make you pick an investment which offers significantly lower returns. In fact because the process is online you would probably want to see a higher return and a stronger level of security behind the deal presented.

While 2 Million is a significant amount for an early stage startup in terms of its funding, it is not a large amount for a real estate projects. The second issue is we are in an era of unprecedented liquidity. One prominent Melbourne area developer aptly told me, “We have money coming out of our bums!”. The only developers who are scrounging for small amounts are those who don’t have the credibility to secure these funds. The classic “Lemons” problem of Economics. You dont want non quality projects listed on the platform, if the first few projects go belly up it will destroy crowdfunding platforms for good in Australia.

So if we are going to make crowdfunding real estate happen the projects that are listed have to be from quality developers. These are in turn larger projects which have the advantage of securing quality project managers, auditors etc which give it a better chance of success. The size of the project also means that there is more return on offer which would make it more attractive to potential investors.

The equity portion of these investment offers is going to be significantly larger than 2 Million. Which is why even if crowdfunding deregulates and ends up including real estate investments we at estatebaron.com believe that doing a full retail public disclosure is still the way to go.

One other thing that we missed in the last article was a crucial piece. When Australians start investing in property, leverage is a key factor in the path to creating a Real Estate Empire. Most people start with a home, then after paying down the mortgage for a few years and once sufficient Equity has been accumulated they draw down a portion of it by taking a loan against it and then invest in putting a deposit against the next property. Most banks think property is a safe asset and are willing to loan upto 80-90% of its value.

The big idea of Fractional Property investment and even Real Estate Investment Trusts looses out of steam because it is a financial investment and most banks dont view it the same as owning a house. Which means that leverage is out of the picture. With the option of drawing down equity out of the window the premise of potentially negative cash flows and very low rental returns suddenly seem like a dead duck in the water.

Which is why we at www.estatebaron.comwe also allow the option to invest in Development projects themselves. There are essentially two ways to invest in a Development project. One is Debt and the other Equity.

Most Development projects get a large portion of their project funded by banks and the remainder is funded by private money or second mortgage capital. If a crowdfunding site provides funding in place of a second mortgage then the returns after the platforms fees are going to be 6% to 12% per annum. This is a decent return for retail investors but second mortgage has little security. An early stage crowdfunding platform may not always have the capability to litigate for rights for years in case a project goes bust.

So if you are going to take a risk, why not get the commensurate returns for it in the form of an Equity position where you get rights to share in profits. However the risk is that profits are what is left from revenues after expenses. You can always have a shady Developer/Builder claim thousand dollar door knobs and leave nothing in profits to be shared. It will take only one bad actor to destroy the credibility of the platform.

In addition most Developers want certainty in funding. They put deposit and then they want to know that they will receive funding else its their neck on the line come settlement. While in the US projects get filled in hours, the depth of market in Australia or awareness of the concept is minimal. Guaranteeing funding is not possible in the early days of a crowdfunding platform.

So what is the solution to all of this? Well, we will finally have an answer in the next article!

A Real Estate Equity Crowdfunding platform like estatebaron.com has all the challenges of a market place, along with the issues in crowdfunding combined with a healthy dose of legal issues which if you get wrong can land you in jail. Having said that the rewards at the end of the tunnel can be immense. The era of crowdfunding real estate is finally coming down under and in the next few months we will see a number of crowdfunding platforms pop up. Some will wither away, there will be some consolidation, but the leading platform will occupy just over half of the total market share.

When you account for the fact that Real Estate Equity Crowdfunding is the fastest growing sector among crowdfunding segments and that it is projected to be a 250 Billion US Dollar industry by 2020 (less than 5 years now) along with the fact that Australian Residential property wealth is 5.7 Trillion the numbers start veering in to Facebook territory. The leading crowdfunding real estate platform in Australia will be worth around 20 to 30 Billion Dollars within 5 years. Australia is the last great frontier and we are currently in the Wild West era where the rules are still being written.

Along with the promise of great riches, there are great dangers as well. Legals primarily. The regulatory regime is still being crystallized. While estatebaron.com has already staked out the position that it has to be a full retail license others are waiting for the deregulation to come. But beyond that getting a market place going is terribly hard. Initially there are no buyers nor there are sellers. The sellers wont come to an empty market place and the buyers wont come if the choice is limited.

The way you break through this is by securing the best possible deals for your investors. The two deals which we have currently on estatebaron.com (Frankston and Caulfield) offer return to retail investors which even wholesale investors don’t get. We had to pull a lot of strings and sacrifice some of our profits but once the market is educated it will be worth it.

And we have no shortage of developers knocking on our doors seeking funding, even at this early stage of the estatebaron.com story. We have made the decision that in this 2 sided market place our customer is the investor and we will always focus on securing the investors best interest first. The one with the money wins. We are not worried about loosing out on the best deals. When you are backed by the people who put together Eureka towers and Australia 108 you can be assured that deal flow wont be a problem.

And our focus does not extend beyond Melbourne at this stage. We are not even running any ads beyond Melbourne. Our investors are local and so are our Developers. The investors in our mind should have the ability to visit the project they are investing in. In this early stage of the game, people in Perth are not going to go click, click, click and invest 10K in a project in Brisbane. Property is loved by Aussies primarily due to its tangible nature. An online approach will only be accepted gradually.

Estate Baron has been fortunate to have the backing of all the right players. And we are going to place the investors interest above the Developers. The Golden rule is … those with the Gold make the rules. Plain and Simple.