Crowdfunding versus REIT: Crucial differencesThursday, January 12, 2017
Investors in India are today exposed to what is happening in the global market. This holds true for financial planning and investment in Indian real estate, as well. Consequently, they are curious to explore what has been a tried-and-tested format in other mature markets – crowdfunding.
Crowdfunding, the world over, has been about peer-to-peer funding. However, there are many challenges in the Indian real estate market, such as the absence of an organised trust/agency, which make crowdfunding a non-starter. So, what makes crowdfunding different from a Real Estate Investment Trust (REIT)?
REIT is an investment option where investors can put their money in large-scale properties and is open to everyone for buying stocks, says Rattan Hawelia, chairman of Hawelia Group. With REITs, investors only know the portfolio and not the properties. However, in crowdfunding, individuals can single out a particular building or builder to invest in, he explains.
“Crowdfunding has more flexible underwriting norms than probably what REITs can offer. That makes it a high-risk and high-return proposition. REIT properties are established income producing assets, while crowdfunded projects are mostly newly-launched and start-ups that need early stages of funding,” says Hawelia.
David Walker, MD of SARE Homes, points out that REIT has already gained official sanction, while crowdfunding is still not officially recognised in India, unlike in the developed nations. “Once approved and regulated, crowdfunding has the potential to become more popular than REIT and other organised investments. The latter are cumbersome for retail investors, who prefer customer-friendly investment avenues, like crowdfunding happens to be in the west,” he adds.
In REIT, usually many properties are pooled together and the investment is listed and can be transacted, explains Sandeep Ahuja, CEO of Richa Realty. Crowdfunding is mostly done on a single project. It is also not traded on any exchanges and thus, not as liquid as a REIT investment, he elaborates.
Requesting anonymity, a developer who successfully formed a loose alliance of initial investors to get crowdfunding, feels that in a market like India, where legitimate funding options are increasingly drying up, there is absolutely no harm in getting crowdfunding as long it does not violate any law.
“While there may not be a regulating agency for crowdfunding in India akin to that for REIT, yet, it is a legitimate business transaction between the willing parties concerned. Many private deals, both, debt and equity, happen without the regulator coming into the picture,” points out the developer, adding that investors are largely aware of their consumer rights.
To sum up, crowdfunding is very different from REIT in terms of operational methodology, nature of investable properties, legal framework and the alliance between the concerned parties. Moreover, in the absence of guidelines, crowdfunding (if at all they can be called crowdfunding in the conventional sense of the term) in Indian real estate, is generally covert, rather than overt.
(The writer is CEO, Track2Realty)