Last month crowdsourcing business model developer Massolution released a 150-plus page report on the current state of global real estate crowdfunding. Its research revealed:
Real estate crowdfunding passed the $1 billion milestone in 2014 on the shoulders of 156% growth;
Top campaigns were in excess of $25 million;
North America (56%) and Europe (42%) dominated global market share.
Talk to Scott Picken for a few moments and you will be left with the impression the next few years will make the above numbers look quaint.
Mr. Picken is one of the people behind real estate crowdfunding’s impressive growth. The South African-born CEO and founder of global real estate investment marketplace Wealth Migrate bought his first international property at 22. At 24 he was investing in London real estate and at 26 was heading his own firm, International Property Solutions.
During the recession Mr. Picken saw the pairing of undervalued property and the growing crowdfunding movement as a perfect combination for providing investors with access to previously unavailable, wealth building opportunities in real estate.
I spoke with Mr. Picken shortly after his panel appearance at MIPIM, a four-day conference which attracted 21,400 international real estate players to Paris.
“Real estate is an industry that moves slow in terms of adopting new technology,” Mr. Picken said.
“When you consider it is getting front and center attention at the oldest and biggest real estate event in the world it is quite a significant milestone in terms of (real estate crowdfunding’s) development into the mainstream.”
Mr. Picken was struck by how legislation is changing around the world in such places as Spain, Portugal, Czechoslovakia, Germany and China. Real estate crowdfunding is indeed becoming a global movement.
“This isn’t just an American thing. It’s happening around the world with or without legislation.”
While real estate crowdfunding got a seat at the table, a lot of the other guests still seem wary of the new arrival, with many doubting it will be there for long.
“The majority of people still just see us as an early adopter, a bunch of young kids who are not going to influence real estate in any way.”
“It was like being at a taxi conference and talking about Uber.”
One surprisingly vibrant area Mr. Picken discovered was France. With an economy still in recovery, a high tax rate, and little mention at international events, he was not expecting much potential from that market.
Then he landed in Paris and participated in a panel discussion with a representative from WiSeed, a French equity crowdfunding platform
“They went embraced real estate about six months ago and they’ve done about €8 million worth of equity into real estate on their platform,” Mr. Picken said. “Those are big numbers. If you compare that to dollar terms by American status that puts them as one of the major players globally.”
WiSeed’s growth is currently limited by what Mr. Picken described as “myopic legislation” where only the French can exist in French properties. No foreign investment is allowed. Portugal has the same system, he was told.
“It was interesting because on this one side you have all these people wanting to get involved and on the other, you think of Europe as this open place.”
Last year’s 156 percent growth rate was fostered by tighter post-recessionary lending conditions, Mr. Picken explained. Bank landing is constrained to the point even better developers and investors are struggling with funding gaps they did not have less than a decade before. There will still good opportunities, but with a nearly invisible banking system, they were almost inaccessible. The necessity led to technology solving the access issue, Mr. Picken explained.
“Seven or eight years ago they wouldn’t have wanted some flighty IT site to come up and give out equity portions because they could have just raised the money themselves,” Mr. Picken said. “So it has allowed crowdfunding to have access to some good quality opportunities. Almost without fail if you look around the world you’ll find the markets where there is the most demand are the markets where there is there has been the most opportunity.”
That opportunity is what helped create crowdfunding’s momentum in the United States, South Africa and through much of Europe. Mr. Picken spends much time in London, and a sign of how crowdfunding is moving into the mainstream hit him the moment he ventured into the subway system.
Moving to mainstream
“On the tube every second or third panel would be an advert for OurCrowd,” Mr. Picken recalled. “Then you go into the station there were these big panels advertising in the station. Equity crowdfunding has gone from the central power of Kickstarter doing a few cool things to in your face, high exposure marketing in London, one of the financial capitals of the world.”
“We are moving from early adoption to the mainstream.”
Even if crowdfunding is still being treated as a curiosity by the real estate industry, banks are taking notice to the point that it is causing competition in traditional banking.
Mr. Picken said there are two arguments on this point. The first is banks recognize opportunities provided by crowdfunding platforms are competing to get in to the best opportunities with each other. Once in, they work with those platforms to maximize those opportunities. Wealth Migrate provides the equity crowdfunding component but they still work with banks and institutional investors.
“The institutional space is actually coming into the crowdfunding space,” Mr. Picken said. Companies in that scenario have to ask themselves if they are becoming a crowdfunding space or are they just providing a technology platform for the institutional money to get easy access, he said.
The second argument is that crowdfunding will crush banks. Mr. Picken attended a panel discussion at MIPIM featuring the heads of Lloyds of London and LendInvest.
“The growth they’ve (LendInvest) achieved in the market’s been significant, around £100 million to £360 million pounds in 12 months,” Mr. Picken said. “That will have a big impact on the traditional banking space because people can get access to quick decisions and be able to get access to opportunities. In a simple space where technology is easy to adapt the crowdfunding platforms around the world are starting to have an impact.”
“Hughes from Realty Mogul said we are doing a billion dollars but that is in the context of a $2-trillion market.”
Current quantitative easing measures in Europe will have a significant effect on real estate, Mr. Picken said. Global rates for real estate are at all-time lows he said, so the concern comes when rates rise and those who bought at such low income yields struggle to realize growth.
“They are quite highly exposed from a risk perspective,” Mr. Picken said. “So whether it’s QE, or really anything which leads to inflationary pressure and causes interest rates to go up, it will obviously have an effect on real estate.”
Another trend Mr. Picken is watching is the wall of money coming mostly from China, where investors are no longer getting the returns they once did. There are literally trillions of dollars looking to move into the North American, European and Australian markets and invest in primary and secondary markets, he said. As these investors participate, cap rates keep falling. This factor is having the biggest influence on real estate right now, he believes.
As interest in crowdfunding increases, investors have to prepare for regulation. Given the latent demand Mr. Picken believes that legislation needs to be proactive to account for that demand’s eventual release.
“Twenty-four million Chinese people already own overseas properties worth $1 million or more,” Mr. Picken said. “Considering there are 400 million in the middle class and 100 million want to invest overseas but it isn’t easy (to currently do).”
“Imagine if it was suddenly easy like Uber is for catching a taxi. It will cause prices in primary markets to rise dramatically and could cause a bubble effect.”
Legislature always reactive, hence, slow-moving
The problem with legislation, Mr. Picken says, is it is always reacting to a problem and doesn’t have the foresight to address what the next challenge is going to be. Perhaps this desire to understand the unknown is behind the slow pace of legislation in places like the United States and Australia which Mr. Picken said are taking a cautious approach. He cited Italy as one country who acted quickly by opening their market up within six months.
Better the legislation comes during these heady days than after some people start losing money, which Mr. Picken believes is inevitable, whether from bad operators, a market turn or a combination of both. Such legislation tends to be tougher after a period of loss, he cautioned.
“The legislation will come in and I see it being much similar to the dotcom boom/bust of 1999-2000, where a couple were involved through the process, like the eBays, Amazons and Googles. The legislation will be tougher but hopefully it will also be more proactive and address what the real challenges are at the moment.”
The current debate on which opportunities should be available to unaccredited investors is fascinating to Mr. Picken.
“Twenty-six to 30 percent of investors around the world are moving into alternative investments with at least 10 percent of them participating in real estate. Yet the unaccredited investors aren’t allowed to do that, they have to keep their money in the place where the wealthy don’t want to put their money anymore. I find it fascinating, the debate on who gets to decide where people get to invest their money.”
“The legislation is there to do the right thing and not to protect those who have ulterior motives that are not in the interests of investors.”
The Massolution report said there are currently 86 real estate crowdfunding portals with as many as 30 more on the way. It is inevitable the market will settle, but how will things look when it does?
Mr. Picken sees people becoming specialists with specific verticals appearing in real estate, including sectors like medical, which is Wealth Migrate’s specialty. Even a year ago that was not as obvious as it seems now.
Mr. Picken also believes we cannot look at the available pie as having a set size. Currently only around 13 percent of people have access to real estate, meaning there is roughly six billion people who are not able to participate. As the barriers to entry lower and technology, action and attitudes improve, he sees the market size increasing exponentially.
“It’s not going to be a case of cutting up the pie and seeing who’s going to win or lose, it’s going to be a case of the pie increasing exponentially.”
Legislation needed, losses inevitable
In order for the markets to flourish players, especially the younger ones, will have to accept both legislation and the fact there will be times when many people lose money.
“Twenty-year-olds can have great ideas and program fantastically, but I’ve learned the hard way. I’ve been through one pretty good real estate crash like most people my age and I’m only 38. The guys who really know what they’re doing have been through two or three crashes, and its the crashes which really separate the men from the boys.”
Mr. Picken again returns to the dotcom era, where people failed to exercise prudence when it came to the internet. Websites were popping up like weeds and venture capital flowed freely. The implosion hit and the sector stabilized.
Those who survived that implosion were not focused on competing nationally, they were thinking globally. Those intent on surviving are wise to follow that pattern, Mr. Picken said.
“I don’t think anybody in the first world can even conceptualize how big the rest of the market is,” Mr. Picken said.
“Alibaba has 234 million active users. Not people signed up, but active users. There’s only 300 million americans in total.”
“A lot of people don’t know Chinese don’t have access to wealth. You’re not allowed to own land in China. There’s a billion people who have access to technology.”
“You just have to use common sense and ask ‘What is the big picture here?’ What will happen when a person can invest one dollar each? It becomes a blue ocean.”
Those companies better be transparent too, as investors want to have complete clarity on where their money is going and what cut the platform takes.
“The more transparent it is the more people will want to have access to it. I love Uber and everyone is talking about them. My colleague recently caught an Uber taxi to the airport and they charged three to four times times the normal rate because they were busy.”
“Immediately he became not so happy with Uber because they lost that trust and transparency. People don’t want to be screwed any more. Everyone wants people to make money.”
Mobile technology key
Mr. Picken sees mobile technology playing a key role in lifting people up from poverty. From his home in South Africa he can see squatter camps, an ever-present reminder of exclusion.
“This is very real to us. In the first world crowdfunding is nice to have. Where I am coming from it is a necessity. There aren’t a lot of options. They’re given nothing.”
“In the past you would use money grams and they would charge you 10-20 percent. In Kenya they’ve developed a system where I can send money from my phone to your phone. I’m not talking about internet banking.”
“Some of the biggest networks are going in there. For me that is a classic example of the unbanked where tens of millions of people don’t have access to banking, don’t have the identification and all the things banks require.”
“But they all have a cell phone. Two things will happen. The first is access education. I can go to Stanford University and learn from some of the best professors in the world from my internet access.
There are existing crowdfunding campaigns with the goal of giving every child in sub-Saharan Africa a tablet. Organizers believe they can bring people from illiteracy to literacy in 18 months.
After education comes the want or the need to create wealth for the middle class and that is where Mr. Picken sees crowdfunding having a great impact.
“This is our opportunity to create a better and sustainable planet for all,” he said.
Because of the high level of need in Africa, look for much of the innovation to happen there, not in the first world, Mr. Picken said. Already American cell phones are way behind African ones, because we have always had land lines. In Africa, no one has a land line so they can skip 30 years of technology and go straight ton advanced technology with which they can bank, invest and communicate.
“Where I come from people will pay their mobile account before they pay their doctors fees,” Mr. Picken said. “There’s only one way to do that and it is through technology.”
“Investment will allow people to join the middle class. Those poorest with access to investment products are getting the worst products with the most fees. That’s why the majority of the world stays poor.”