Real estate crowdfunding has become established as an investment alternative within the real estate sector in recent years.
What is real estate crowdfunding?
The basic idea behind crowdfunding could not be simpler: many people collaborating to bring a project forward. The concept is based on collective financing, where multiple investors contribute capital to the same project.
Real estate crowdfunding can therefore be defined as a collective financing model that allows a diverse group of people — investors — to finance real estate projects through digital platforms, such as Urbanitae. These platforms connect real estate developers seeking financing for their projects with investors looking to diversify their portfolio without committing large sums of money.
How it works
It is increasingly common for real estate developers to turn to alternative sources of financing outside banks. There are several reasons for this. Since the 2008 crisis, banks have limited their exposure to the real estate sector, and land financing has become almost off limits for them. In addition, due to the new mortgage law of 2019, financing new-build housing is no longer as profitable for them, as they do not automatically retain the buyers’ mortgages.
As a result, real estate crowdfunding platforms are an efficient and reliable alternative for financing projects of up to five million euros — the maximum amount authorised by law. In the case of Urbanitae, the capital we raise is usually used to finance the purchase of the land on which the project will be developed or the start of construction work until the developer loan is obtained. We also offer our own developer loan model.
On many real estate crowdfunding platforms, most projects are residential in scope — although we are open to any segment with good opportunities. We select projects based on several criteria, but above all we look at the developer’s capacity and track record, the project’s commercial progress and the status of the building permit. In addition, we submit the decision to an investment committee with external experts.
There are two main types of projects: loan or debt projects — real estate crowdlending — and capital gains projects — equity crowdfunding. In the first case, investors group together to lend money to the developer, generally in the form of a fixed-rate loan. Once the term has ended, the developer repays the money and investors recover their investment with the corresponding return.
In equity projects, investors enter into partnership with the developer, sharing both the project’s risks and the return generated, usually around 15% per year. Here there is no fixed term, but rather an estimate, as delays may occur in commercialisation, the granting of the permit or increases in construction costs. At Urbanitae, the majority of projects are capital gains projects.
Who regulates real estate crowdfunding?
Real estate crowdfunding platforms in Spain had been regulated since 2015 by Title V of Law 5/2015. In October 2020, the European Union approved a regulation to unify, at European level, the rules applicable to crowdfunding platforms: Regulation (EU) 2020/1503. This regulation has applied in Spain since 10 November 2021, although platforms had until 10 November 2023 to adapt to it. In Spain, Law 18/2022 adapts Spanish legislation to the legal framework established at European level.
In addition, crowdfunding platforms are supervised by the Spanish National Securities Market Commission and, at European level, by the European Securities and Markets Authority — ESMA.
Why invest: advantages and disadvantages
We have already discussed the advantages of investing in real estate crowdfunding on the blog. The first is that it allows access to very attractive investment opportunities from small amounts of money, such as 500 euros. For that same reason, it helps many investors diversify their portfolio by incorporating a stable sector that is resilient to inflation, such as real estate, without having to worry about management tasks or buying properties. In some cases, it can offer higher returns than other alternatives, although these depend on the type of project and the market context. In the case of Urbanitae, this may vary depending on the project, the term and the risk.
Among the main disadvantages, it should be noted that it is an illiquid investment, meaning that we cannot exit it until the project ends. Another possible disadvantage is the term, which usually averages 24 months. It should also be mentioned that, like any investment, real estate crowdfunding is not risk-free: despite all precautions, the investor could lose capital. It is therefore important to analyse each project and not assume that all of them offer the same level of return or risk.
Who is real estate crowdfunding for?
This type of investment is usually a good fit for investors looking to diversify their portfolio and access the real estate sector without having to buy an entire asset, and who are willing to accept lower liquidity in exchange for potential returns.
Conclusion
In short, real estate crowdfunding has revolutionised the way people invest in real estate, democratising access to quality investment opportunities. Although it has advantages and disadvantages, its continued growth shows that it is a trend that is here to stay — and is growing. Before investing, it is worth analysing each opportunity, understanding the risks and assessing whether it fits within a diversified investment strategy.
