The revitalization of the American real estate industry in recent times after it suffered a major setback in the aftermath of the subprime mortgage crisis has caught the attention of foreign investors. These real estate savvy investors have been attracted to the vast and high yielding investment opportunities that abound in the United States. While the U.S. real estate marketplace has witnessed the influx of investors from different nations of the world, top Canadian investors in recent years have led the pack. The total foreign capital inflows into the fast growing US property market in 2013 stood at $38.7 billion, of which a third of this amount came from Canadian investors. In addition, according to the Royal Bank of Canada, the investment of Canadians in the US commercial property market in the past five years is an average of between $15 and $19 billion.
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Canadian developers and investors have been attracted to the high returns on investment (ROI) in the US realty market as a result of the attractive prices and abundant supply of properties available. Their line of investments over the years include office buildings, industrial properties and retail buildings.
In a monumental transaction, Canada’s Brookfield Property Partners purchased Industrial Development International in a deal that closed for $1.1 billion with as much as 62 million square feet of operating assets.
In another deal, a massive $15 billion exchanged hands between Oxford Properties (a real estate investor for the Ontario Municipal Retirement System) and Related companies for a residential and commercial project in New York.
This ongoing trend presents vast opportunities for US crowdfunding platforms as they take advantage of funds flowing in from institutional and accredited Canadian investors. This is because only foreigners classified as “accredited investors” are allowed to participate in crowdfunded deals according to the provisions of Regulation D – Rule 506 of the US SEC regulations. Since it was passed into law in 1982, foreign investors have leveraged on this regulation to participate in real estate transactions.
Moreover, while the passing into law of the equity crowdfunding provisions of the JOBS Act that allows participation from non-accredited investors has been advocated by the public, foreign investors do not still stand to benefit from this as it is limited only to US resident issuers. Against this backdrop, only real estate crowdfunding platforms open to high-investing accredited investors (those that put in huge amounts online to fund projects) and big institutional investors will benefit from this opportunity to grow and expand their businesses.
Already, platforms specifically established to cater solely for accredited and institutional investors are appearing in the real estate crowdfunding industry. The Carlton Group, a real estate investment banking firm based in California was the first institutional investor to launch a real estate crowdfunding platform by allowing accredited investors with a minimum of $1 million invest in project offerings worth about $1 billion in value.
Crowd Alliance is also a new entrant in the institutional crowdfunding realty niche. According to Bruce Lipnick, its founder and CEO, “We are now seeing the disintermediation of crowdfunding and syndication through the web. In 2013, there were 8.6 million accredited investors, including angels that invested a total of $24.8 billion. In 2012, a mere 4 percent of that number, 265,000 business angels, invested $22.5 billion. I see this freedom to advertise private offerings under the Reg D 506c Act, passed 23 September 2013, as the future of opportunities.”
Other institutional players are also signifying their interest of entering into the institutional crowdfunding market place (crowdfunding solely for institutional and top notch investors).
The impact of this trend on the US real estate crowdfunding industry will be far reaching as more traditional platforms go after institutional capital while also seeking higher investments from accredited investors. Initially set up with a mandate of democratizing the investment landscape to allow mostly average individual investors participate in funding real estate projects, these platforms are now setting their sights on big capital as more institutional investors, accredited investors and high net worth individuals are turning to crowdfunding as a veritable means of investing their monies.
Realty Mogul and Fundrise are examples of real estate platforms that have opened their platforms to institutional players and high profile investors. Fundrise recently raised more than $31 million from a consortium of investors led by Renren Inc, a Chinese leading social networking platform while realty mogul raised $9 million from Canaan partners, a firm involved in peer-to-peer lending.
By registering on a crowdfunding platform, investors can be connected to high yielding real estate deals with minimal risk across various states in the country. This means that investors are not only limited to investing in areas that have been identified as the hotspot for property investment but can also take advantage of viable deals in other places. While the present activities of Canadian investors reveals that Tampa Bay, Chicago, Phoenix and Arizona are the hotspot for their property investments; through crowdfunding, other markets could be explored and investors can be connected with high profile real estate firms across the nation that offer better deals. In addition, by connecting Canadian investors to the best of deals available in the US property market, crowdfunding platforms help them save time and cost cut that would have otherwise been incurred if they had gone they traditional way of employing the services of intermediaries such as financial advisors and broker dealers.
Aside from this, the diversification of a portfolio in order to mitigate risk is made more possible through crowdfunded deals. Crowdfunding affords individuals regardless of their social class or nationality the opportunity of making investment choices from a wide array of properties. Thus, accredited Canadian investors can diversify their portfolios by spreading their investments across different classes of properties in the US.
Canadian startup developers can also be directly connected to top notch investors in the US who are interested in investing in foreign properties by registering with crowdfunding platforms. They can also raise low cost capital by cutting away intermediaries who charge high fees and commissions to establish connections with investors.
The US commercial property market is currently estimated to be about $11 trillion. This presents great opportunities for Canadian startup developers and investors looking to take advantage of the high returns on investment in a market with abundant supply of properties. However, to make the best of this opportunity, Canadian investors should leverage on the benefits crowdfunding provides which includes: access to wide spectrum of deals with greater levels of transparency, diversification of portfolios and time and cost savings by cutting away intermediaries.
The impact of this on the US crowdfunding marketplace will be enormous. With investment from Canadians placed at about $12 billion and with funds raised through online crowdfunding platforms projected to reach $10 billion in 2014, the prospect of growth is great as US real estate crowdfunding platforms begin to attract funds from top Canadian real estate firms and investors.
David Drake is an early-stage equity expert and the founder and chairman of Victoria Global, LDJ Capital, a New York City-based family office and private equity advisory, and The Soho Loft Media Group, a global financial media company with divisions in Corporate Communications, Publications and Conferences. You can reach him directly at David@LDJCapital.com.