Crowdfunding In Real Estate Sector
September 2017

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In a layman’s language, crowdfunding refers to a financial model in which funds are raised from a large number of people for a given project or venture. The funds are primarily raised online via social media and crowdfunding platforms. Besides raising funds, crowdfunding is also a way to spread awareness about a project and hence is an effective marketing tool.

Buying properties jointly has always existed in our country, especially under the joint family system. A closer look at the existing funding options of various developers’ show that some loose alliances similar to crowdfunding, already exist in the Indian realty market. So, the concept of crowdfunding is not entirely new for us. For crowdfunding in real estate, there are generally three parties involved - the developer, the financial contributors and a moderating organization which brings both of them together. In the Indian real estate sector, moderators are missing and the crowdfunding is done solely on the mutual trust between the developer and the financial contributors.

Today, a lot of Indians have access to the Internet. India is the second largest Internet market with more than 342 million mobile users and numerous online payments options which make it easier to give money. There are mainly three types of crowdfunding - donation and reward based model, lending model and equity based model. Out of these, equity based crowdfunding is illegal in India. The entire crowdfunding process can be easily done online however, eliminating middle men and other such complexities.

In India, most of the investors in a crowdfunded real-estate project are either professionals or small business owners. Real Estate crowdfunding offers the opportunity to these people to participate in the ownership of projects. A real estate project which is funded with a combination of funds from the real-estate company itself, investments from both crowdfunded investors and non-crowdfunded investors as well as bank loan is becoming quite common these days. Through syndicated debt crowdfunding, some or all of the existing real-estate loan, secured by a deed on the underlying property, is syndicated to a network of individual investors at a fixed rate of return. Likewise, there are many other types of crowdfunding models being followed in India.

The global crowd-funding industry generated about USD 34.4 billion in 2015. In India, the transaction value in the “Crowdfunding” segment amounted to a meagre USD 6 million in 2017. Crowdfunding has not been able to gain ground in the real estate sector in India due to the lack of transparency and institutional teeth. Besides low transparency levels, high investments in real estate projects, delays in project completion, low liquidity and lack of perceived regulation in the industry makes smalltime investors vary of investing in it.

Looking at the positive side, through crowdfunding, even small investors are now able to own properties. Crowdfunding has definitely made room for many to turn their ideas into reality. The population of 1.2 billion with a rising middle class segment is expected to power real estate crowdfunding in the future. With proper regulations and framework, crowdfunding could be the answer to developers’ liquidity woes, attracting end-users, professionals, small-time businessmen and others, into the market as investors.