Property crowdfunding (PCF) is an offshoot of the concept of crowdfunding. For those trying to understand what PCF means, they ought to realise that the world over, crowdfunding has taken off in a big way.
In essence, crowdfunding is when a project or a business gets funded by a multitude of individuals, each forking out a small sum of money for a person or project that they like and one which they think will give them good returns.
In Malaysia, the crowdfunding concept has already helped more than 800 SMEs to raise some RM300 in debt on the six legalised peer-to-peer (P2P) platforms that were launched just three years ago.
The demand from investors on these platforms far outstrip the number of deals on offer. The main reason for this, though, is the high interest rates the funding deals offer, which range from 8% to 15% a year, although the investment periods are short, ranging from six months to a year.
Now, the crowdfunding concept is being married with property purchases and some quarters are decrying this, predicting the creation of a sub-prime crisis and all sorts of other untoward outcomes.
What is true though is that PCF has the potential to be disruptive.
It could wean out the need for traditional property agents and replace the need for mortgages from banks. It could create a new investment asset class that could be more attractive than buying your own investment properties or investing in REITS or putting your money in fixed deposits.
But for that to happen, a few elements will need to pan out. In the ideal situation under Malaysia’s PCF rules, the PCF platform facilitates the matching of a genuine first time house buyer of a below RM500,000 property with retail investors keen to fund that purchase.
The hope is that the same property will be worth more after the tenure stipulated by the platform, say 5 years for example. Not only must the property appreciate in price, there ought to be a buyer willing to pay that price for the property after the five-year period.
So there are many “ifs” taking place and in each scenario, that is the risk element involved. The house buyer and his investors could suffer a loss after the tenure is over. Just like how many of us are today sitting on properties we purchased during the boom times, that we can’t sell at a profit or even lease out at rates that sufficiently cover our monthly mortgage payments.
Real estate is a risky business. But what the PCF platforms are unlikely to breed is unbridled speculation. For one, speculators don’t like to be locked down into fixed tenures. Sure there could be secondary trading of investors’ PCF investment notes on the platforms, but again, selling those notes into the secondary market may not be so easy if there are no takers.
To the concern that investors will leverage up to participate in PCF platforms thereby creating a false demand for real estate which artificially increases prices, good luck to these investors trying to service their personal loans considering they have to wait out the tenure before any capital or profits are accrued.
What should be more of a concern is if there is any lackadaisical loan approval process on the part of traditional financial institutions flooding the market with personal loans that will be used in less safer investments. Think money game schemes. Also, investments into the PCF scheme products are asset backed, which make them pretty safe. Finally, the guidelines imposed by the Securities Commission ensure that the scheme is pretty safe from being used for untoward purposes.
In a nutshell, the only first time buyers can participate, all properties being sold my be free from encumbrances and buyers must occupy the property during the tenure of the investment.
Platform providers are also required to have significant shareholders funds at all times.
