Crowdfunding platforms are increasingly becoming competition for established fund companies. Blockchain technology is proving to be the driver here.
Experts had long predicted that there would be consolidation in the market for real estate crowdinvesting platforms. Last October, the market leader Exporo and the number two on the German market, the Zinsland platform, joined forces to show just how right they were. As of mid-2019, the two providers had a combined market share of no less than 82 percent, according to the Crowdinvest real estate report.
The merger shows that crowdinvesting has become a serious part of the real estate financing world. It doesn't change the fact that the volume of debt raised on digital platforms by retail investors is still relatively small. According to the latest available figures, this volume amounted to around 155 million euros in the first half of 2019. To show the relations: According to real estate consultancy JLL, commercial and residential real estate for 91 billion euros was transacted on the professional German investment market in the full year 2019.
Investing via crowdfunding: competing with or complementing fund companies?
Nevertheless, the expectations of digital platforms are high. This is evidenced by the fact that major players in the "old" real estate and financing world are approaching the young platforms. In spring 2019, for example, Commerz Real, the subsidiary of Commerzbank, took a 24.9 percent stake in the Berlin-based platform Bergfurst. And in October 2019, Dr. Peters Group, an initiator with a track record of 54 real estate funds, announced to enter with 25.1 percent in the platform Zinsbaustein.
Simon Brunke, CEO of Exporo, also describes cooperations with established fund companies as "conceivable". At the same time, he makes no secret of the fact that his company now aspires to play in a league with the major fund providers. In fact, the long-established players should take the young competitors seriously, recommends Thomas Heinatz, Managing Director at the management consultancy Accenture. "Crowdfunding platforms," says the capital markets expert, "are already taking business away from established asset managers, as their customers are definitely no longer buying shares in open-ended real estate funds."
The view is different from Prof. Dr. Steffen Sebastian, Chair of Real Estate Finance at IREBS, University of Regensburg. In his eyes, the platforms are not competitors, but "in case of doubt, a cooperation partner" of the fund companies. Michael Schneider, Managing Director of INTREAL Kapitalverwaltungsgesellschaft mbH, also believes that in the future there will be both sales channels – digital and face-to-face. Real estate investments are a product that requires a lot of consulting, argues Michael Schneider, which is why not all customers opt for the digital route.
New crowdinvesting providers all the time
The fact that the crowdinvesting platforms do not offer an all-round carefree package should have got around among investors by now. Several providers – Bergfurst, Zinsland and most recently Exporo – had to deal with the insolvency of a project developer who had raised capital on their platform. In such cases, the repayment of the paid-in capital is highly at risk, as investors have often invested in (relatively poorly protected) subordinated loans.
What is striking is that despite the constant warnings from consumer advocates and despite the consolidation tendencies on the crowdinvesting market, new platforms keep coming on the scene. For example, Deutsche Kreditbank AG recently launched the DKB-Crowd platform. However, in mid-February, this did not find a single current investment offer. Just as disappointed were investors willing to invest with Mezzany, Bergfurst, ReaCapital, Engel & Volkers Capital and Zinsbaustein. At least two projects were found at Home Rocket and one at iFunded.
Important impetus for crowdinvesting from the blockchain
Even if these numbers are small, the professional world looks with interest at the developments in the crowdinvesting sector. This is due not least to a new technology. Indeed, the platforms offer enormous potential for blockchain technology, which is currently the subject of much discussion. Michael Stephan, Managing Director of iEstate GmbH, which is behind the iFunded platform, is convinced of this at any rate.
"The blockchain has several advantages for platforms in particular," says Michael Stephan. "It offers higher security and leads to a reduction in transaction costs, as intermediaries are eliminated." Another advantage, he said, is that security tokens – blockchain-based tradable assets – open up the possibility of being traded on the stock exchange. "And finally, blockchain technology is a truly global technology that makes it possible to address investors worldwide."
iFunded initially made it possible for investors to invest in cryptocurrencies (Bitcoin and Ethereum) in two projects – two apartment buildings in Erfurt and a new apartment building in Elsestrabe in Berlin. However, the application of blockchain technology does not necessarily mean that payment must be made with cryptocurrencies. Exporo, for example, also issued a fully digital, real estate-backed security on the blockchain in 2019, accepting payments in euros only. Meanwhile, Exporo brokers all new inventory properties as regulated, token-based bonds.
Blockchain is also being relied upon by another new market player, Hamburg-based PropTech KlickOwn, which launched a crowdinvesting platform for digital investments in real estate at the end of 2019 in cooperation with blockchain specialist Bitbond. At the same time, the minimum investment amount is only ten euros. At Exporo, you can now even get in with a single euro. This extremely low investment threshold is possible because blockchain can reduce costs.
For iFunded CEO Michael Stephan, therefore, it's not a question of whether blockchain technology will catch on in real estate investing, but merely when it will do so. Martina Hertwig, partner at Baker Tilly GmbH & Co. KG Wirtschaftsprufungsgesellschaft, has a clear opinion on this: "In five years, at least ten percent of all securities transactions will be blockchain-based."