European real estate crowdfunding is a relatively new investment form that has become increasingly popular in recent years. Via real estate investment platforms, developers and real estate professionals pair with private investors. Investors don’t have to face owning, financing or managing properties, but they can still get their healthy share in the real estate market.
The global real estate crowdfunding market is expected to grow a CAGR of 33.4% between 2020 and 2028. The EU REC market size is currently at approximately EUR 7 billion, and with that growth rate the EU market would be EUR 93.65 billion in 2028. In Europe, markets are concentrated in the United Kingdom, Germany, France, Italy, and Spain. The highest share in the European market of 41.5% in the year 2019 is registered in the U.K. but the other nations catch up quickly.
Some of the reasons for the growing popularity of real estate crowdfunding include; the ability to invest small amounts of money across several projects to create a diversified portfolio, and the short-term investment periods which stop investors from being wedded to one project. Its rapid growth now needs to be matched by a set of regulations which harmonize the industry. For better or worse, real estate crowdfunding is a young industry without a unified set of regulations in many countries. Some countries have rules and crowdfunding regulations in place, some are partially regulated, and others have no regulations at all.
On October 7th last year, the EU parliament passed Regulation (EU) 2020/1503 for all European Crowdfunding Service Providers (ECSPs), which will come into force in November 2021. It is designed to formalize service provisions for crowdfunding across the EU market, while widening the pool of potential investors. As things stand, crowdfunding regulations are largely at the discretion of each member state. For example, in Germany, crowdfunding and peer-to-peer (P2P) platforms are a part of the Gray Capital Market, meaning they are not under the control or supervision of the BaFin (Federal Supervisor of the Financial Sector). However, in the United Kingdom, the FCA (Financial Conduct Authority) plays a very active role in the regulation of crowdfunding investments, and platforms are forced to be registered and in compliance in order to operate.
The fragmentation of rules amongst the EU countries and a lack of clarification on passport rights have made cross-border crowdfunding difficult and costly to do. However, the new legislation should give new and old investors confidence in real estate crowdfunding. With platforms in different countries all operating under the same rules, expectations for the future are high. What are the key changes this legislation brings, and what do they mean for the industry as a whole?
How the new rules are outlined
Previously, the EU set out the Markets in Financial Instruments Directive (II) in January 2018 to improve the legislative framework and strengthen investor protection for ECSPs, but the newly amended legislation sets additional obligations on ECSPs to act in the best interest of investors. There are five fundamental changes of the new legislation that real estate crowdfunding platforms and prospective investors need to be aware of:
- Real estate crowdfunding project owners must provide investors with a key investment information sheet for each crowdfunding offer.
- Those interested in investing need to complete a suitability and appropriateness test, assessing their ability to bear potential losses.
- ECSPs must have detailed conduct business obligations which include a duty to avoid and prevent conflicts of interest.
- The new rules apply to all real estate crowdfunding platforms for projects raising up to €5 million, calculated over a 12-month period.
- For all real estate crowdfunding platforms in the EU27, there will be a uniform authorization and passporting process.
Are the changes to real estate crowdfunding positive?
The COVID-19 pandemic has stopped the operations of many businesses in their tracks. As the global economy begins to recover, these new rules will come into effect and make it easier for crowdfunding platforms to secure funding for more projects.
Both crowdfunding platforms and investors will benefit from the new additional protections due to increased transparency and trust in the industry. This is a critical step, as real estate crowdfunding has had a somewhat rocky history because of some untrustworthy platforms and projects not completing their projects. Now that real estate crowdfunding platforms have to follow a standardised level of due diligence on all projects and adhere to a universal criteria, investors can trust that their investments are secure against fraud or false promises.
What the rules mean for the real estate industry as a whole
These changes will likely lead to an increase in real estate developments, due to the influx of investors who are now comfortable investing in alternative investments such as real estate crowdfunding. Furthermore, in the context of the COVID-19 pandemic, the new rules could be crucial in persuading investors who are potentially working with tighter budgets and might need further trust and understanding to invest in a particular project.
The single set of rules for real estate crowdfunding platforms is poised to greatly impact the industry by giving investors more yield-generating opportunities and providing assurances to both parties that the investments are safe. The threshold of €5 million means that most projects will be easily covered by the regulations, and real estate crowdfunding platforms will be able to work seamlessly with developers in other countries. While the real estate market continues to recover from the effects of the pandemic in 2021, expectations are for robust growth in the real estate crowdfunding market across the EU thanks to these new rules. When investors can be assured that this is a safe and regulated market, liquidity will follow.