Tag Archives: Crowdfunding laws

Is this time for crowdfunding in Indian real estate?

Posted on by Track2Realty
Track2Realty Exclusive

Bottom Line: While crowdfunding is a recognised model for real estate finance in many parts of the world, there are several practices in the Indian market which loosely resemble the same. Ravi Sinha takes a look.

Crowdfunding, Crowdfunding in India, Crowdfunding in Indian real estate, Debt Crowdfunding, Equity Crowdfunding, Crowdfunding laws, Regulations for crowdfunding, India real estate news, Indian property market news, Investment in Indian property, NRI investment in Indian propertyCrowdfunding in the property market, the world over, is mostly associated with the commercial real estate segment. The most common forms of crowdfunding in the developed property markets are debt and equity.

In debt crowdfunding, developers pre-sell a project, to launch a business concept, without incurring debt or sacrificing equity/shares. In equity crowdfunding, a group of lenders receive shares of a company, usually in its early stages, in exchange for pledged money. The company’s success is determined by how it demonstrates its viability.

Debt crowdfunding may sound similar to pre-launches in India’s housing market. After all, the risk elements are pretty much the same. Investors can take a hit, if their project goes into default, or if the value of the property decreases. There are no guarantees and investments are not insured by any regulating agency.

If we look at the matured property markets, like the United States for example, what we find is that even there regulators at the Securities and Exchange Commission find it very hard to strike a balance that could ensure that while the developers could raise funds from investors but the investors are not left unprotected.

However, in India, crowdfunding is neither officially allowed, nor will any developer go on record, admitting that pre-launches are their way of attracting crowdfunding.

Investing in start-up projects and early stage businesses, whether one calls it crowdfunding or pre-launches, involves considerable risk, such as illiquidity, lack of dividends, loss of investment and dilution. Diversion of funds have also been reported, with many pre-launch schemes, thus hurting the execution of the project.

The developers, on their part, maintain that pre-launches are not crowdfunding. Sandeep Ahuja, CEO of Richa Realty, believes that in a pre-launch, an investor or a buyer puts money on apartment, which may come at a discounted price and has the option to exit the project at any time thereafter, by selling the apartment.

“In case of crowdfunding, the investor is typically investing a very small amount and does not get any specific apartment earmarked/allotted to him. The investor makes money, once the project is completed and the profits are declared, or the property is leased out,” Ahuja explains.

Abhay Kumar, CMD of Grih Pravesh Buildteck, makes a strong pitch for crowdfunding in the housing market. The concept already exists in the Indian market, in the form of loose alliances, he says. “In the commercial segment, crowdfunding can provide assured returns, while in the housing market, pre-launches serve the purpose to some extent. The moot question, is whether we can institutionalise it, to address the liquidity concerns of developers and also safeguard the interest of investors,” wonders Kumar.

 

Transparency & institutional teeth needed for crowdfunding

Posted on by Track2Realty
Track2Realty Exclusive

Bottom Line: A loose alliance of pre-launch investors in the Indian real estate operates on the lines of crowdfunding but it needs transparency & institutional teeth to make it an alternative fuding model.

Home Buyers Crowd, Public Perception, Public Opinion, Home Buyers' Survey, India real estate news, Indian realty market, India property market, Track2RealtyAfter reading in newspapers some of the successful global case studies about crowdfunding in the real estate, Rajeev Minocha is wondering why his investment was never labelled as crowdfunding. After all, he along with some of his school friends has been loosely funding this Pune-based builder even to buy the land and all of them have made money in the process. The developer has been product of the same school from where his crowd of financers belong to. The friendship goes years back and so does the level of trust.

In terms of the crowdfunding in the realty business, beyond the mutual trust the ROI has been much better than any other investment in his portfolio and in a span of nearly two decades now it has also helped the developer grow with his national footprint.

A closer look at the prevailing funding options of various developers suggests that some loose alliances of the nature of crowdfunding are always there in the Indian realty market. However, crowdfunding as a practice has not gained ground in this market primarily due to lack of transparency and institutional teeth.

Crowdfunding is the financial modelling of funding a project or venture by raising monetary contributions from a large number of people. However, this model needs three parties to take shape as a business model– the developer who proposes his project/idea to the crowd, people who support the idea with financial contribution and a moderating organisation that brings the parties together to take it on ground.

In the context of Indian real estate, this third crucial element of moderating agency is missing and often it is the mutual trust, like in the case of this Pune-based builder, that acts as the moderating agency.

Not all the developers in the Indian market have that kind of goodwill or resources. The developers themselves admit that this is a double-edged sword of funding in the Indian market and needs to be handled carefully. David Walker, MD, SARE Homes feels if properly regulated, the potential for crowdfunding could be tremendous. Without regulations, however, such a revenue-generation avenue could end up giving the real estate industry more of a bad name, since it may be misused by unscrupulous elements.

“With proper regulations, crowdfunding could be an answer to developers’ liquidity woes, attracting end-users and others into the market as investors. But regulation through SEBI or a new regulatory authority is imperative to ensure it is not misused by any stakeholder. Else, it will be the realty industry that ends up with more negative coverage due to the misdemeanours of a few,” says Walker.

Sandeep Ahuja, CEO of Richa Realty also does not sound very optimistic about crowdfunding in the present framework. He says it won’t be feasible in the immediate future. It will take some time for the concept to develop. Besides, the lack of regulator will dissuade the investors to invest in projects or developers not known to them personally.

“I don’t see much prospect of crowdfunding in Indian real estate. The reasons are high investment in real estate projects, low transparency levels, long gestation period of projects, low liquidity, project delays and lack of regulation in the industry. It is very difficult for an investor to evaluate an investment opportunity on a crowdfunding platform with limited details,” says Ahuja.

In a nutshell, while a loose alliance of initial investors might be behind some of the developers, often giving impression of crowdfunding to be a viable model of funding in the Indian real estate market, the concept itself is very confusing in the Indian context.

If only there is transparency with organised framework that acts as a moderating and regulating agency to monitor the funds being channelized for the given projects exclusively, crowdfunding can be one of the viable options of Indian real estate. That framework is nevertheless missing in the current market.

By: Ravi Sinha