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 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.