Is crowd funding the answer for developers left without financing from the banks?

The concept of syndicate investment and indirect investment in commercial property through vehicles such as investment funds and REITs is firmly established.

Investors, who may not otherwise have the expertise or financial wherewithal to purchase commercial real estate in their own right, essentially pool their resources and purchase property as part of a larger group. Considering the extent to which technology is advancing and new concepts are emerging, it is conceivable that a new phenomenon may reach us before long - that is the concept of "crowdfunding", which is becoming increasingly popular in real estate in the US and gaining traction in Europe and Asia.

Crowdfunding or peer-to-peer lending is described as "the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet".

There are now several well-established crowdfunding platforms including Kickstarter, Indiegogo, Rockethub, and Crowdcube, among others. Most of these are US platforms that have been expanding overseas into Europe and elsewhere. These platforms enable start-up businesses and entrepreneurs to launch and promote their business ideas online and give investors an opportunity to invest in this idea, often for a relatively small outlay.

It goes without saying that investing in start-ups and early stage businesses, whether through crowdfunding or otherwise, involves considerable risks, including illiquidity, lack of dividends, loss of investment and dilution. Crowdfunding should therefore only be undertaken as part of a diversified investment portfolio.

Property crowdfunding is the fastest growing segment of the market today. Following some regulation changes in the US in 2012, commercial real estate sponsors obtained the ability to broadly solicit and advertise to the public. This opened the door for real estate developers and owners to capitalize on modern digital marketing tools and leverage the reach of the Internet to reach a wider potential investor base. A study from Massolution reported that $2.5bn of crowdfunding occurred in the real estate sector in 2014 and this continues to rise.

A number of specialist real estate platforms are now in operation in the US including RealCrowd, Crowdstreet, Fundrise and Prodigy Network. In fact, the largest crowdfunding campaign ever was a real estate crowdfunding project organised by Prodigy Network. Its founder Rodrigo Niño has predicted that "Crowdfunding will disrupt the status quo of traditional equity investment in real estate."

In 2009, Niño helped build the first skyscraper in Bogota, Colombia, in 40 years. He financed much of the project by attracting small investors who invested $20,000 at a time. By 2013, he had raised over $190m for the BD Bacata project - a world record in crowdfunding. Many of the investors in this project, which has recently been completed, made returns of more than 40pc since purchasing shares. Prodigy Network has since moved on to other successful projects in New York including AKA Wall Street, 17 John and AKA United Nations. Another real estate crowdfunding vehicle Fundrise is currently offering approved investors an opportunity to invest in 3 World Trade Centre in New York.

These specialist real estate crowdfunding entities are targeting up to 10 million accredited investors in the United States who are looking for solid returns on tangible assets that can generate private equity type returns. Accredited individual investors can research the best private real estate operating companies, view current offerings, submit offers, fund investments and manage their commercial real estate portfolios from their personal crowdfunding accounts. The portfolio valuation of the largest real estate crowdfunding platform Prodigy Network's now stands at over $600m. They claim to have over 5,200 accredited investors on their books. Interestingly, they are now reportedly looking for institutional quality investment opportunities in Europe.

However, crowdfunding isn't yet an option for all interested in investing in commercial property. Although the core principle of crowdfunding is affording small investors the opportunity to invest in particular projects for relatively little outlay, many of the well-established real estate crowdfunding platforms in the US have high thresholds for accredited investors. To become an accredited investor and to be able to browse open investments on certain real estate crowdfunding platforms, in some cases you are required to have a net worth of at least $1m and to prove that you have a minimum annual income of $200,000 over a number of years in order to be accredited.

If you meet these criteria, you undoubtedly already have access to direct real estate investment opportunities and may prefer to invest in real estate in this way as opposed to pooling resources with many other investors on a crowdfunding platform in order to achieve a similar rate of return. However, as time goes on, these thresholds are likely to reduce giving a greater pool of potential investor's opportunities to invest in commercial property through crowd funding.

In a European context, Spain, Germany and the UK are expected to follow the lead of Italy, which recently became the first country to implement a law on equity crowdfunding.

The property industry is now fully au fait with syndication and REITs and the concept of collectively investing in large and diversified portfolios of commercial real estate across different geographies and jurisdictions. However, the likelihood is that technology will alter current models and streamline investment processes over the next few years with accredited investors increasingly evaluating the merits of investing in particular funds or schemes via highly supportive data rooms and websites in the first instance and making their actual investment via transparent crowdfunding type platforms. Over the last few years, technology has eliminated middle men and increased efficiencies in a plethora of different industries and it has the potential to do likewise in the real estate industry. Real estate crowdfunding has seen exponential growth over the last few years and is likely to continue to grow over the course of the next few years, particularly as the regulatory framework becomes more developed in many jurisdictions.

Asian Investment Seizes a Tenth of Russia's Commercial Real Estate Market

Investors from Asia and the Near East sprang from nowhere to make up 10 percent of investments in Russian commercial real estate in 2014, according to a study by real estate consultancy Cushman & Wakefield.

The numbers show "a trend of capital from Western Europe and the U.S. gradually leaving as players from the East enter," the report said, adding that Asian investors didn't close any investment deals in the Russian commercial real estate market in 2013.

As Asian investors made their entrance, European capital froze up, spooked by slowing economic growth and Western sanctions over Russia's support for separatists in eastern Ukraine.

European capital accounted for just 9 percent of total investment last year, down from 29 percent in 2013. Meanwhile Russian investors' share rose from 71 percent in 2013 to 81 percent in 2014.

Widespread concern over the state of Russia's economy dealt a harsh blow to the total volume of investment in commercial real estate, which fell to $4.2 billion in 2014, according to Cushman & Wakefield.

The market had seen $8.1 billion in investment in 2013 and $8.8 billion in 2012, according to consultancy Jones Lang LaSalle.

Cushman & Wakefield forecasts that investment will fall further to $2.5 billion in 2015, with some projects under significantly more pressure than others.

"Deals denominated in foreign currency have suffered to a greater extent from the current situation," said Irina Ushakova, head of capital markets at Cushman & Wakefield. The Russian ruble fell about 40 percent against the U.S. dollar last year and is still viewed as volatile, adding significant uncertainty to any projects using foreign currencies.

Projects with ruble-denominated investment and cash flows have a higher chance of reaching closure, Ushakova said

Moody's Publishes Request for Comment on CMBS Methodology Update

Summary: Moody's is soliciting feedback on a proposed updated approach to rating CMBS in Europe, the Middle East and Africa.  The proposed change will include the assessment of a minimum yield in analyzing the underlying collateral, to allow for greater stability of Moody's property values throughout the market cycles.  While vague, Moody's also aims to align global default correlation assumptions with those used in the synthetic corporate synthetic CDO methodology.  Moody's projects that the proposed changes will have no impact on current ratings.  The report can be viewed via the link below.

Frankfurt --(Moody's Investor Services)--
Moody's Investors Service has today published a Request for Comment (RFC) seeking market participants' feedback on a proposed update to its approach for rating commercial mortgage-backed securities (CMBS) in Europe, the Middle East and Africa (EMEA).

The report, "Moody's Updated Approach to Rating EMEA CMBS Transactions", is now available on www.moodys.com and can be accessed via the link provided at the end of this press release.

The first part of the report outlines the proposed changes to the methodology, while the second summarises  the complete EMEA CMBS methodology and consolidates the existing methodology reports.

Under Moody's proposed approach, the rating agency will introduce minimum yields into its property value analysis. The minimum yields allow for greater stability of Moody's property values throughout market cycles to mitigate the market value volatility associated with commercial real estate (CRE) prices. Minimum yields will effectively cap Moody's value assessment for a given property cash flow, during peak market situations with low property yields.

Moody's intends to amend the property value stresses implied in its model to consider the increased value buffer that it expects as a consequence of the minimum yield application in peak market situations. The rating agency also seeks to align its global default correlations to assumptions used in its corporate synthetic collateralised debt obligation methodology.

If adopted as proposed, Moody's expects that the implementation of the outlined changes to its methodology will have no rating impact on currently outstanding ratings.

We invite market participants to provide feedback on (1) the proposed use of minimum yields in our approach and (2) the levels of minimum yields that we suggest to use, and make other suggestions for consideration by sending comments before 14 November 2013. Comments should be sent to RFC@moodys.com using the RFC Response Form available on the Request for Comment Topic Page on www.moodys.com.

https://www.moodys.com/research/Moodys-Publishes-Request-for-Comment-on-CMBS-Methodology-Update--PR_284281?WT.mc_id=NLTITLE_YYYYMMDD_PR_284281%3C%2fp%3E

Foreign buyers boost commercial real estate investment

Summary:  Canadian, European, and Middle Eastern investors, ushered by the hospitable lending environment, are looking to make real estate investments in the U.S.  The new wave of foreign investors have focused on the East and West Coasts. but are projected to move inland toward Dallas and Houston, which have the attractive job growth and population growth foreign real estate investors find attractive.  The asset class is itself an attractive alternative to volatile securities markets.  Foreign investment is expected to reach $350 billion this year, up 30% from last year, though still below the 2007 record of $570 billion.  It is a sellers market as commercial real estate supply is low.

Dallas --(U.S. Dallas News)--
The commercial real estate market is quickly making up ground lost in the recession.

And so far higher interest rates haven’t rained on the parade of investors looking to take advantage of the market.

A surge in foreign investment in this county’s property markets is also underway.

“The amount of capital that is coming from foreign investors in the U.S. is going to accelerate pretty dramatically,” Mark Gibson, executive managing director of HFF LP, told real estate executives meeting in Dallas on Friday.

Gibson said most of the offshore investors looking to boost their U.S. real estate holdings are coming from Canada, Europe and the Middle East.

Increasingly these buyers are spreading out from the large East and West Coast markets to buy in other cities, including Houston and Dallas.

Commercial property investors are focused on locations with the best long-term growth prospects, Gibson told members of the Commercial Real Estate Women Network at the Omni Dallas Hotel.

“They are looking at markets with job and population growth,” he said. “And they are looking for the infrastructure that is going to support jobs and population growth.”

Dallas-Fort Worth and Houston are near the top of the list of the country’s fastest employment growth markets. All of Texas’ major markets are seeing huge population increases — due in part to migration of people and business from other states.

“There are more corporate headquarters moves happening in the U.S. now than we’ve seen ever,” Gibson said. “A stunning amount of corporate America is relocating out of California to other places.”

Gibson said HFF — one of the country’s largest commercial real estate investment banking and property marketing firms — is forecasting about $350 billion in commercial real estate investment in the U.S. this year.

That’s up about 30 percent from last year, but it’s still well below the record $570 billion in 2007.

Gibson said many of the commercial property problems created by the recession have been solved. “Distressed asset problems — that’s yesterday,” he said.

Most of the big bank lenders “have worked through all their [problem properties] for the most part,” Gibson said. “They are on offense instead of defense — they are deploying capital into real estate.”

Even with this year’s higher interest rates, investors are pumping billions into commercial property, Gibson said.

“They are very tired of volatility in the public securities market,” he said. “They think it’s been hijacked by traders.”

Gibson doesn’t see any of the commercial property pricing and construction excesses that were apparent before the recession.

“There is discipline in the market, which there wasn’t in 2007,” he said. “Commercial real estate supply is still modest.”

In fact, he said, “It’s the lowest percentage supply of commercial real estate as a percentage of GDP in U.S. history.”

http://www.dallasnews.com/business/commercial-real-estate/headlines/20131011-foreign-buyers-boost-commercial-real-estate-investment.ece