Crowd investment in real estate has picked up speed in recent years. The principle: a real estate project or an existing building or plot of land is financed by a large number of private or institutional investors via an online platform. Specialized platforms advertise with high returns for comparatively low capital investment.
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The latest published figures in Germany
In 2018, more than $1.19 billion (€1.1 billion) could be brokered nationwide via platforms for alternative financing, such as crowdfunding, crowd investing, and peer-to-peer lending, according to a recent survey by the University of Cambridge. Compared to the previous year, the market registered an impressive increase of 89%.
This puts Germany in sixth place among the largest markets worldwide. A fact that may come as a surprise, as investors in this country are not necessarily known for their risk affinity – and crowd investing is a rather risky business. This was true even before the Corona crisis, but since the uncertainty has gripped the markets, the need for stability among private investors has only grown. Does this mean a collapse of the crowd investing market in 2020?
Karsten Wenzlaff, Managing Director of the Federal Association for Crowdfunding, does not expect demand to fall this year. It is true that the brokered assets and securities are “subject to the regulatory authorities’ requirements for risk investments with a total loss risk” and are also labelled as such. In practice, however, he said they are also interesting for risk-averse investors, depending on the object.
Long-term investment as a plus in Corona times?
Wenzlaff therefore sees an increasing importance in times of crisis, especially in contrast to other investments: “We tend to experience a higher demand, as other asset classes have become much less attractive.” The platforms organized in the association stated that the readiness for investments is also present during the Corona pandemic and hardly flattens out. The reason for this was the long-term perspective, which could, for example, absorb the losses in short-term oriented equity portfolios.
Steffen Sebastian, holder of the chair for real estate financing at the University of Regensburg, has a different perspective on the market. “The current uncertainty is generally a bad time for financial decisions.” Most private investors would hold back their capital for now. And what happens when they want to get back in? “Then they will look for security rather than high-yield investments,” Sebastian added. “The current climate is making people reluctant to take risks.” Therefore, he expects crowdfunding volumes to decline this year.
“Not every investor understands what they’re doing”
Although the alternative financing market is now of a serious magnitude, crowdfunding is still a niche in the real estate investment sector, according to the expert.
Sebastian believes that the fact that more and more private investors have been persuaded by the principle in recent years is partly due to simple ignorance: “Not everyone understands what they are doing: many private investors trust in an apparent security because they know the real estate project from the local area, or the regional Volksbank has a 90% share in it.” This could be deceptive, because: “Crowdfunding remains a high-risk investment – in most cases it is about project developments and then also in the subordinate sector.” Two investments have fallen through in recent years and more could follow.
Private investors must be aware of this risk. “My advice is to enter this market only with play money and to examine each individual project to see whether the risk and return are in proportion to each other.” However, this involves a lot of effort. In addition, given the fact that private investors can only expect interest rates of five to six percent despite the high risk, this does not always pay off.
Stable market for residential real estate
Even in the current uncertain times, residential real estate is a comparatively safe investment, as recently confirmed by a study conducted by the IW Cologne. However, ongoing construction projects are being made more difficult by the crisis situation. Many construction sites in the country are experiencing delays due to corona, because materials are not delivered or there is a lack of craftsmen.
This will lead to higher real estate costs in the foreseeable future. According to Karsten Wenzlaff, however, there are no consequences for investors in this sector: “We have heard from our real estate platforms that construction projects here are progressing largely undisturbed,” said the Managing Director of the Crowdfunding Association.
It remains to be seen whether crowd investments will continue to prosper or whether the pandemic will dent the previous growth curve. However, the fact that private investors should inform themselves thoroughly before making such a risky investment and that intensive advice is advisable applies in good times as well as in times of crisis.
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First published in PROCONTRA online, a third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.
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