New investment strategy makes owning property easy

Over the past few years, real estate crowdfunding has emerged as a new investment strategy. While the trend is relatively new in South Africa, its popularity is rising.

Zak Omarjee, CEO of local real estate investment platform Crowdprop, told Daily Investor that real estate crowdfunding is a “relatively new concept that leverages technology to enable multiple individuals to collectively invest in real estate projects”. 

“It brings together investors and real estate developers or property owners on an online platform, allowing individuals to pool their funds and invest in a wide range of real estate opportunities.”

He said crowdfunding, in general, has been used as a fundraising tactic by many industries in South Africa, including creative projects, social causes, start-ups, and small businesses. 

Crowdfunding – the practice of collecting small donations from a large number of donors – rose in popularity during the Covid-19 pandemic.

The global crowdfunding market size was $17.51 billion in 2021, and it is expected to reach a value of $42.93 billion by 2028.

Omarjee said crowdfunding provides an alternative financing avenue for entrepreneurs and individuals who may have difficulty accessing traditional funding sources.

In the real estate sector, crowdfunding platforms have also emerged and offer investment opportunities in property developments or real estate projects. 

The concept has gained traction globally, but its popularity in South Africa remains relatively limited compared to more traditional forms of real estate investment.

“While the popularity of real estate crowdfunding amongst the general public is not as widespread as in some other countries, there is a growing interest in exploring this new investment avenue,” said Omarjee.

“We believe that the availability and simplicity of real estate crowdfunding platforms as well as the education around this topic in the public space will continue to drive interest and adoption rates.”

While several local real estate crowdfunding platforms like Crowdprop, EasyProperties, and RealEstateCrowdfunding.co.za, have emerged over the past few years, the market is still in its early stages, and awareness of real estate crowdfunding among the general public is relatively low.

However, Omarjee said it is worth noting that the popularity and adoption of real estate crowdfunding is evolving. 

“The general population is becoming more aware of alternative investment opportunities, and platforms like Crowdprop act as a trusted partner allowing them to explore and invest, with minimal risk.”

Usually, real estate crowdfunding works as follows:

1. Connection

Investors and real estate projects are connected through a marketplace, typically an online platform. The platform provides information about investment opportunities, including property details, financial projections, and potential returns.

2. Project Selection

Real estate developers submit their projects to the platform for consideration. Omarjee said Crowdprop typically screens these projects based on various criteria, such as location, viability, and potential returns, before making them available to investors.

3. Investor Participation

Investors can browse through the available projects on the platform and select the ones that align with their investment preferences and risk appetite. On Crowdprop and other platforms, investors can invest with relatively small amounts, starting from around R10,000.

4. Fundraising

Once investors select a project, they contribute funds to the investment through the crowdfunding platform. The platform aggregates the investments from multiple individuals and channels them towards a specific real estate project.

5. Project Execution

The pooled funds are used to carry out the project. This can involve purchasing a property or developing new construction. Once acquired, the property is leased out on a long-term basis to provide rental returns.

6. Returns and Exit

As the project progresses, investors receive updates on its performance. If the project generates rental income or is sold, the returns are distributed to the investors based on their proportional investments. Omarjee said Crowdprop may also facilitate the exit process by allowing investors to sell their shares to other investors on the platform.

Omarjee listed the following benefits of investing in property through real estate crowdfunding.

• It allows individuals with limited capital to access the real estate market
• Investors can diversify their investments
• They can potentially earn passive income or capital appreciation
• It also provides real estate developers with an alternative source of funding, bypassing traditional financing channels.

However, because real estate crowdfunding is still a relatively new investment strategy in South Africa, investors should also be aware of the following potential downsides.

• Depending on the platform, fees could apply to the investments.
• Real estate is an illiquid asset, which complicates selling and buying
• Some platforms allow only accredited investors
• Newer platforms do not necessarily have a lengthy track record of success
• Taxes still apply on the income received from the investment