Monday, 23 November 2015

Real estate crowdfunding in Malaysia


CROWDFUNDING – the practice of funding a project or venture by raising small amounts of money from a large number of people typically using an online platform – has gained popularity due to the massive demand and supply in today’s competitive market.

In one way, it benefits start-ups and entities that require funds to either commence or expand their business portfolio.

Investors have the opportunity to participate in any potential investment that they are comfortable with and which corresponds to their personal investment portfolio via a simple click online. It is a chance to participate early in something potentially very big.

The Securities Commission has approved six equity crowdfunding platforms for issuers to offer share subscriptions to interested investors. This comes with strict compliance and regulations imposed on the platforms providing such equity crowdfunding services. The good news for investors is that these platforms, which represent another type of investment option, are expected to be launched very soon.

Rising property prices have increased the investment cost for real estate investors. Consequently, real estate investment trusts, which offer liquid stakes in real estate complemented by constant dividend yields, have become fashionable. Alternatively, real estate investors may also leverage on the informal real estate investors club that attracts a lower acquisition cost with bulk purchasing arrangements with developers.

We can draw one conclusion from these real estate investment options – that property investment is no longer an individual game but a team sport that thrives on leverage and collective bargaining.

There are even suggestions that political parties raise funds via crowdfunding in a bid to promote transparency and efficiency. This makes it easier to comprehend the call for crowdfunding in a sector like property. So, how does real estate crowdfunding work?

Online platform

The basic concept of crowdfunding is an online platform operated by an approved operator and regulated by a certain ministry that provides services to matchmake the issuer and the investor. The obligation of the operator is to conduct sufficient due diligence on the issuer and its product prior to allowing the issuer to campaign for fund-raising on its online platform.

To promote independence, there should not be any relationship between the operator and the issuer, and the operator should not personally join the fund-raising campaign by the issuer. Besides this, the operator has to approach private financial institutions or trust companies to set up trust accounts for the investment funds to capture, as trustee, those investors who are willing to invest in the issuer.

Similarly, to remain independent, the operator should not be related to the private trustees or financial institutions.

In this investment option, the utmost requirement for the issuer is that they shall be either a developer, a real estate agency or a land owner who owns the property slated for development and who is seeking to raise funds for that purpose. The operator may perform due diligence on the land background and require the issuer to show proof of ownership of the said land and also the proposed development plan. These are to be advertised on its platform as convincing tools to attract investors.

Nonetheless, contrary to conventional real estate investment where you would get the key to the property and may use it as a tangible asset for further financing in the future, any investment into the real estate crowdfunding platform does not give you ownership of an immovable property, unless it is agreed upon and offered by the issuer based on its fund-raising campaign.

The upper hand here is that the expected term for your return on investment (ROI) may be fixed and shorter. Investors may receive the expected ROI upon completion of the development. The investment amount is also within an affordable limit, and information is easily accessible via the Internet. Crowdfunding also promotes transparency in one’s investment and with collective investors, the bargaining power with the issuer is also greater as compared to individual investors.

Real estate crowdfunding might still be a new concept and some might have never heard of it until now, but with real estate investment running the risk of remaining merely a dream for the mid-range salary earner, it might be a good alternative to maximise returns on your hard-earned money without a hefty price tag.

However, as with all forms of investment, there are risks involved here despite the due diligence performed by the operators. Smart investors, nonetheless, always walk the extra mile to conduct their personal due diligence on the accuracy of the information made available on the crowdfunding platform.

The current regulatory framework only permits equity crowdfunding for the real estate business and is not yet a direct crowdfunding avenue into the acquisition of real estate.

By Chris Tan Real legal viewpoint

Chris Tan is the founder and managing partner of Chur Associates.

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