Viability of crowdfunding in the South African commercial real estate market .
Date
2016
Authors
Zwick, Elan
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Abstract
Crowdfunding can be defined as an open call for funding over the internet. This is
done with the aid of an online portal which connects the investing crowd with the
entrepreneur/deal sponsor in order to fund a project.
The rapid growth and adoption of crowdfunding in the United States and Europe,
combined with the relaxing of financial regulations in these countries, has given
rise to equity-based crowdfunding, whereby an investor can contribute money in
exchange for an equal portion of equity in a given project. Equity-based
crowdfunding laid the foundation for commercial real estate crowdfunding which
allows a large number of people to contribute small amounts of capital in
exchange for an equity stake in a commercial property.
Equity based crowdfunding and commercial real estate crowdfunding does not yet
exist in the South African marketplace.
A survey on the notion of commercial real estate crowdfunding was conducted to
gain insight from commercial property professionals in the investment and
development market in South Africa. An in-depth interview was also conducted
with a financial and legal expert from Java Capital to provide understanding into
the commercial property regulatory and securities environment in South Africa and
where real estate crowdfunding could potentially fit into a South African context.
The key findings of the survey suggest that both investors and developers of
commercial real estate: (1) experience difficulty in raising bank finance and
sourcing qualified investors, hence losing out on otherwise viable investment and
development opportunities; (2) prefer different property types and attributes when
purchasing or developing commercial real estate; (3) view the internet and its
various online portals as an important asset when procuring new business.
A key finding of the interview is that equity-based crowdfunding and commercial
real estate crowdfunding has a long road to travel from a crowdfunding
regulatory/legal framework to come into existence in South Africa. No legal
framework exists yet for this type of investment platform. The closest connection
to real estate crowdfunding would be the Collective Investment Schemes Act, Act
45 of 2002. This Act is governed by the auspices of the Financial Services Board
and has the most stringent set of regulations compared to other Acts that govern
the exchange of securities in the commercial property marketplace.
Evidence from my research suggests that commercial real estate crowdfunding
poses a big opportunity for the South African commercial real estate market.
Although equity-based crowdfunding legislation is a long way from fruition in
South Africa, government, together with the FSB must take the necessary steps to
allow for such an investment platform to coexist alongside other investment
vehicles.
If crowdfunding, in all its various forms discussed in this research paper, is
implemented and executed well, the benefits to South Africa are enormous. The
main benefits include: stimulation of the economy and driving economic growth;
providing entrepreneurs with an alternate access to capital; and ultimately creating
jobs for the millions of unemployed people in the country.
Description
MBA Thesis
Keywords
Crowd funding,Online social networks -- Economic aspects,Real estate business -- South Africa -- Finance.