A real estate fund is frequently rigged as a vehicle for real estate companies to raise public capital and finance developments and/or investments. Structuring a fund is often a time-consuming process and involves high structuring and marketing costs. The regulations that will soon be tightened do not work in favour of fund providers either. And that while in 2017, there is a much easier way to raise capital from the general public, namely through crowdfunding.
Crowdfunding and unlisted real estate funds
The crowdfunding market in the Netherlands has never been bigger than in the year 2016. Last year, a total of 170 million was raised through crowdfunding. Another substantial growth of the crowdfunding phenomenon compared to the previous year. The crowdfunding market has surpassed the market of unlisted real estate funds in terms of volume from the (private) market and the gap is expected to widen.
Regulation of crowdfunding sector
In the Netherlands, crowdfunding platforms that broker loans and shares are subject to regulation. This means that, among other things, its economic and legal structure is approved by the AFM. Depending on the nature of the platform, different regimes underlie this. In any case, through the platform's structure, it has become a lot easier for real estate companies to raise capital from the general public. For example, to expand the portfolio, provided this fits within the platform's guidelines. With a loan form, investors can even get a mortgage right as security. All these activities are not subject to licensing and prospectus requirements or the well-known banner.
How attractive is it to apply crowdfunding within a real estate fund?
A key difference with issuing a real estate fund is that crowdfunding is a lot more accessible and the size per proposition is often smaller. Yet increasingly large-scale projects are being funded, from experienced and even wealthy organisations.
"The '€2.5 million exemption' commonly used in practice is coming to an end."
Currently, a large proportion of fund providers use the '2.5 million exemption' for investment bonds, which does not require them to have a licence and an AFM-approved prospectus. This lowers the threshold to market a fund. However, a recently published bill may throw a spanner in the works for many inspired property entrepreneurs. Indeed, providers of these investment bonds will have to appoint a licensed manager when this bill comes into force. These new supervisory requirements will weigh heavily on relatively small investment bond providers, who were previously able to operate without supervisory fees. Looking ahead, it will be a lot less attractive to issue participations in the same way.
More room for crowdfunding
It can be concluded that the future holds much room for the application of crowdfunding within a real estate fund. The crowdfunding market is maturing and a proposition can easily reach a large group of investors. Not only does this save a lot of costs, the company can also focus more on its core business. These include acquisition, investment, property development and management. Despite the fact that structuring and issuing a fund is familiar territory for the establishment, funding a proposition online via crowdfunding works many times easier.