Crowdfunding gaining traction as fintechs put down roots

That 'crowdinvesting' for real estate projects has been slow to take off in Germany will come as no surprise to anyone familiar with the bureaucratic hurdles associated with the introduction of any new financial instrument that might expose the pampered German consumer to any form of risk.

Nonetheless, true to form - in considerably lagging other developed financial markets before gaining public acceptance - the business of crowdinvesting as a means of raising subordinated capital is now definitely gaining momentum, as highlighted in a recent report by Berlin-based capital structuring consultancy FAP Flatow Advisory Partners, "Real Estate Crowdinvesting".

As a measure of the traction now being gained by the industry, the FAP report shows that in 2015, eight separate platforms achieved a combined investment volume of €22.7m with 16 completed deals. €17.5m (about 77%) of this was arranged via only 3 platforms.

By contrast, the capital invested across seven crowdinvesting platforms in 2016 to date totals about €19.1m with 28 completed deals. Again, €15.3m of this (about 80%) was arranged via only 3 platforms. The average crowd capital volume per deal to date is about €0.6m, with the median being just above €1m. These included deals where participants can invest as little as €10 to get familiar with the funding method, although a more common minimum is €250.

FAP predicts a full 12-month investment volume for 2016 of €28m, underpinning estimated market value volume of €335m.

According to Jörg Scheidler, joint managing director at FAP, ”Being a young, fast growing market segment, crowdinvesting is an exciting alternative. This new form of investment is going to evolve as an independent market for subordinated capital.”

So far crowdfunding platforms have focused on the German residential sector, but the report shows how this is changing to accommodate offices, retail, logistics, nursing homes and student/microapartments. Preferred risk classes, says the report, are development projects, modernisations, refurbishments and value-add scenarios.

At a recent press briefing in Berlin to present the FAP Crowdinvesting Report, Tim Bütecke, the CEO and founder of Hamburg-based Exporo, the market- leading German real estate crowdfunding platform, told how his company has co-financed 24 projects since its founding in 2014 and raised over €25m.

After five closings, Exporo has already paid back €6m to investors, who generally have to invest a minimum of €500. On a recent project Globus Villa, investors received their money back earlier than expected, having been promised 5.5% annual return for an 18-month period. The project developer EBV Grundbesitz found itself ahead of schedule, and repaid finance providers, giving the Exporo investor an actual annual return of 11%.

Mark Heydenreich, CEO of Fortis Wohnwert Group which raises capital for investment in Berlin residential, told how his company has now also completed its fourth crowdfunding project. "Even small amounts of money should be able to be well invested, and people are looking for uncomplicated investment vehicles. Our projects are understandable to the layman who wants to invest small sums. With the increasing digitalisation of the real estate world we see this form of investment as certain to increase."

Although changes are afoot, the segment is still tiny in Germany as a proportion of money raised for real estate financing, and losses are limited for investors by a provision that forbids raising more than €2.5m for a project from crowdfinancing without a much more detailed prospectus on the planned project than currently typical. Still the growth trend is obviously established, and a wave of consolidation among crowdfunding platforms is likely down the line, says FAP.

Another crowdfunding veteran, Michael Ullmann, CEO of Kapitalfreunde in Munich and a pioneer of the segment in Germany (REFIRE was present for the launch of his very first real estate crowdfunding project, the refurbishment of an architect's atelier in Sachsenhausen in Frankfurt some years ago), believes that in the near future, capital-strapped banks will themselves become the initiator of crowdfunding projects, not dissimilar to the way in which they bundled together clients to buy tranches of those CMBS products of old. So, plenty of scope for change and consolidation ahead.