Real Estate Crowdfunding versus REIT

Since the Why we do, what we do and the Exclusive beta testing program articles have been posted, we have been receiving a lot of positive comments. On behalf of our team, we appreciate your feedback! We will continue to provide you with tips on real estate investing so that you can reach your investment and saving goal 🙂

There is one question that repeatedly comes up from the comments we get…

Real Estate Crowdfunding versus REIT, what’s the difference?

Real Estate Investment Trusts (“REITs”) are corporations that acquire and manage a portfolio of real estate investments with the mandate to return 90% of their profits back to investors.

>You can watch this YouTube clip to learn more here: https://bit.ly/2PfajlB

Real Estate Crowdfunding (“RECF”) provides investors with the opportunity to acquire a fragmented ownership interest in a particular real estate investment.

>To refresh your memory, we have written a post about RECF here: https://bit.ly/2Qmqknh

While REITs and RECF projects have pros and cons for investors, we want to clear this up once and for all.

In taking a closer look, we can separate them by these following eight traits:

  1. Liquidity
  2. Ownership
  3. Portfolio allocation
  4. Timing
  5. Transparency
  6. Communication
  7. Accounting
  8. Management sustainability

 

[1] Liquidity

RECF: selling your REIT investment means you are divesting your equity interest in all of the Real Estate (“RE”) investments held by the REIT. Whereas with RECF projects, you can decide exactly which project to sell. Therefore, REITs are all or nothing when it comes to liquidity, while a portfolio of RECF projects provides you with greater flexibility.

REITs: buying and selling REITs are conducted on a stock exchange which provides investors with a strong form of liquidity and price visibility, which can be positively or negatively affected by stock market trends and behavior (referred to as beta). Since the RECF industry is relatively new and experiencing rapid development, there is currently no centralized secondary market for RECF investments.

 

[2] Ownership

RECF: investors can decide exactly which individual RECF projects to invest – this provides them greater choice in building a more tailored RE investment portfolio. Whereas for investors in a REIT, they must purchase a fragmented ownership in all RE projects held by the REIT. Furthermore, Investors decide whether to be an equity or debt investor in an individual RECF project, whereas they are confined to being an equity investor in a REIT.

REITs: investors benefit from a REIT manager who manages a larger Assets Under Management (“AUM”), who is able to provide a more competitive (lower) fee structure, as compared with a RECF platform.

 

[3] Portfolio allocation

RECF: given the above point about fragmented ownership, investors can build a more personalized RE investment portfolio through RECF investment that best matches their risk vs. reward profile. Furthermore, should the investor’s risk vs. reward profile change over time, it will be easier to reallocate into individual RECF projects.

REITs: investors are confined to the REIT’s existing portfolio allocation in RE and is confined to accepting the stipulated risk vs. reward profile. This leaves REIT investors somewhat in the dark when it comes to assessing the underlying risk of their REIT investment.

 

[4] Timing

RECF: investors can control the investment horizon of individual RECF investments and build a more tailored portfolio duration to reach a personal saving or investment goal. With this, coupled with greater transparency, investors can decide on individual RECF projects based on key criteria, such as RE asset class, cap rate, levered yield, covenants, fees, etc.

REIT: investors are restricted to buying and selling a single unit trust ownership in the REIT which holds RE portfolio investments that will have a mandated duration profile. The ongoing buying and selling of RE projects by a REIT will mostly be conducted irrespective of the individual investor’s input. This makes REITs more of a one-stop shop.

 

[5] Transparency

RECF: investors access greater information on individual RECF projects and Asset Managers (“AM”), given the more substantial amount of information disclosed (investment memorandum, valuation report, financing agreement, partnership agreement, property condition assessment, and other reports). This gives investors much more confidence to decide exactly which RECF project to invest.

REITs: investors are restricted to the information disclosed through announcements and reports stipulated by stock exchange disclosure requirements, however, the depth of information is limited on individual projects. Further, there may be certain news and developments which the REIT is not required to disclose (by regulation), which would not be the case for RECF projects given the more direct communication channel investors are granted.

 

[6] Communication

RECF: investors have a more direct channel of communication with the AM, whether through phone or email, which can provide investors with greater confidence (assuming the AM can deliver a reasonable response)

REITs: investors are confined to communicating with REIT’s investor relations teams, which may only provide a response based on stock exchange disclosure requirements – this can provide a shield for REITs to dodge certain questions or scrutiny.

 

[7] Accounting

RECF: investors are presented with cash accounting of financials and are able to view where every single dollar is invested, returned and spent. This gives investors a greater understanding of the sources and uses of the RECF project. Greater transparency builds confidence.

REITs: investors are presented with a set of accounts which will leverage on certain non-cash adjustments (depreciation, changes in fair value) that will require a more technical understanding for investors. Further, since REITs hold a portfolio of RE investments, it will be more difficult to assess how the Investor’s investment dollars are put to use, as compared with RECF investment.

 

[8] Management sustainability

RECF: investors can decide to invest in certain AM (the management team) based on their focus in a particular RE asset class and assessing their performance and track record. For example, an investor may decide to invest in a project which the asset manager specializes in logistics, while the other asset manager is more suitable to an office. This means the investors money in a RECF project is being managed by the most suitable team of RE professionals

REITs: investors in a REIT would be confined to a single core team to manage RE investments across all asset classes. This means REITs may not have the most suitable RE professionals managing a particular RE asset class.

 

We hope you find this article helpful. Please let us know what you think. If you have any request, please contact us at hi@denzity.io. We would love to hear from you.

We are currently launching our prototype and would like to invite our readers (Yes, YOU!) to join our exclusive beta testing program.

 

You can read about how the program works here: https://bit.ly/2R4tCLA

Or if you want to apply directly, click here: https://beta.denzity.io/apply

 

Until next time,

Denzity Team

 


 

Posts you might be interested:

Types of Real Estate Investment: https://bit.ly/2OoR4C8

Equity vs. Debt Crowdfunding, which is right for me?: https://bit.ly/2OuxIvr

Introduction to Real Estate Crowdfunding: https://bit.ly/2Qmqknh

Join Denzity’s Exclusive Beta Tester Program Today

We need YOUR help to participate in our exclusive beta testing program.

We are inviting participants to test out Denzity’s dashboard and to share your ideas and feedback to help us develop the best possible product before releasing to the public.

By joining our exclusive beta testing program, you will enjoy the following benefits:

  • Early preview of products and services that we provide before being released to others
  • Early access and enrolment to upcoming events and conferences
  • Recognition as an early adopter on your individual Denzity profiles
  • Conversion to PREMIUM Denzity membership*

*A limited number of beta testers will be automatically converted to complimentary premium membership.

How the beta testing works

As a beta tester, we ask you to browse the dashboard with your Mac/PC and follow certain instructions to test tools and functions that screen investments. Your first visit should take less than five minutes, after that you can spend as long as you’d like!

As a beta tester, we gather your feedback to:

  • Screen for bugs and inconsistencies on our dashboard
  • Improve the Denzity experience by incorporating your comments and suggestions
  • Aggregate beta testing data to revamp our prototype towards Denzity 2.0

Afterward, you will be provided with a questionnaire to share your experience.

That’s it!

As Denzity will constantly improve as a product, we invite you to give us more feedback at a later stage.

How to participate

The registration will only take a few minutes. The Denzity team will review your registration and upon approval, we will provide you access as a beta tester on Denzity.

Join us and let’s get started.

〈 Become a tester 〉

 


Posts you might be interested:

Why we do, what we do: https://bit.ly/2yMUY18 

Equity vs. Debt Crowdfunding, which is right for me?: https://bit.ly/2OuxIvr

Introduction to Real Estate Crowdfunding: https://bit.ly/2Qmqknh

Why we do, What we do

Why we do, what we do…

For centuries, Real estate ownership has been a powerful engine for wealth creation and preservation thanks to properties’ ability to hedge inflation and generate steady cash flow. However, commercial property has always been restrictive because of the large amount of capital required to participate. Traditionally, everyday investors would allocate 5 to 15 years’ savings towards a down payment for one apartment unit. Alternatively, a lack of real estate in one’s investment portfolio would mean that they are confined to riskier investments such as cryptocurrencies or the stock market.

Technological advancement and promulgation of regulations encouraging fragmental ownership have made Real Estate Crowdfunding possible. This is the medium by which everyday Investors can overcome the traditional barriers to enter the real estate market. Starting with US$5,000, everyday investors can now diversify their portfolio and lower risk by allocating capital to professional real estate managers and platforms. By leveraging economies of scale, Real Estate Crowdfunding opens up an equal playground for all investors to materialize real estate investment opportunities.

That being said, the time-consuming and complex nature of real estate investment is one of the major reasons investors shy away from participating. This is why Denzity was born – a marketplace built to drive greater participation in Real Estate Crowdfunding and to overcome the traditional barriers to real estate ownership.

Our three major missions:

  • Denzity lists unique project listings from different platforms around the world and allows investors to easily compare them before committing their capital.
  • Denzity does not compete with platforms. Instead, we partner with them and amplify their efforts.
  • Denzity invites real estate professionals to contribute by providing investors with the tools, resources, and insight to make an informed investment decision.

Denzity’s ecosystem creates a gateway to make real estate ownership more accessible for everyone. Our goal is to create a collaborative community for investors, platforms and real estate professionals to form a virtuous cycle of building communication, confidence, and relationship.

As a Real Estate Crowdfunding Platform, you can rely on us to proliferate the benefits of property investments, so you can focus on sourcing and managing attractive real estate projects. We will connect your projects with the right investors. Direct communication channels and transparency between investors and platforms is key to driving confidence in Real Estate Crowdfunding. Denzity firmly believes the following key benefits can be achieved:

  • Provide investors with a simple, user-friendly dashboard to browse different real estate projects located in various parts of the world.
  • Encourage investors and platforms to participate in gathering knowledge and expertise.
  • Help educate investors on a diverse range of topics and thereby building confidence for investors to participate more.
  • Bring stakeholders from different parts of the world closer together and share the benefits of real estate ownership.

Click here to check out our announcement of our exclusive beta test program here: https://bit.ly/2R4tCLA

Stay tuned!

Denzity Team

 


 

Posts you might be interested:

Real Estate Crowdfunding versus REIT: https://bit.ly/2PoJBqQ

Equity vs. Debt Crowdfunding, which is right for me?: https://bit.ly/2OuxIvr

Introduction to Real Estate Crowdfunding: https://bit.ly/2Qmqknh

RECAS Group, our Community Partner

Denzity is proud to announce a partnership with RECAS Group, a fully integrated real estate firm providing asset management, investment management, and advisory services to the real estate market in Mainland China, Hong Kong, Macau, and other countries. https://www.recas-group.com/

RECAS Group

RECAS Group (formerly Real Estate Capital Asset Services Limited) was founded in 2004 by Ivan Ko, its current chairman, who has over 25 years experience in real estate development and finance experience. The Denzity team first met Ivan at a PropTech event in Hong Kong and discussed the real estate industry’s future and what kinds of innovation will lead to the greatest impact in elevating the global real estate market.

Ivan identifies that PropTech can bring a positive impact to the real estate industry and RECAS Group believes in Denzity’s mission to serve an identified gap in the real estate crowdfunding market by matching everyday investors with the best possible investment opportunities available around the world.

Ivan has actively participated in PropTech hackathons and events, most recently the Asia PropTech Innovathon (pictured below) as one of the judges and where Denzity was fortunate enough to meet Ivan.

Ivan Ko (right) presenting the “Day in the Life of Real Estate Executive Award” as Chairman of the China Real Estate Chamber of Commerce Hong Kong and International Chapter (CRECCHKI) at the Asia PropTech Innovation in Hong Kong, August 2018.

From Ivan’s point of view, innovation and technology services to close gaps in the traditional real estate market, whether unidentified or previously thought impossible. For this reason, PropTech may not receive industry-wide recognition now but is a wave of positive change. From his experience, real estate owners in Hong Kong have generated a decent return by being inefficient in buying and holding a real estate portfolio which has simply experienced tremendous capital appreciation over the recent two decades.

This is why he believes Hong Kong should be at the forefront of PropTech development and tackle key issues like accessibility since Hong Kong is one of the most unaffordable residential markets globally. Ivan recognizes that consistent small improvements in technology and innovation will improve the quality of real estate services provided in the best cost-benefit to corporate users.

To become a leading PropTech hub, Hong Kong provides a strong international environment where access to capital, rule of law (such as IP protection), free flow of information, ease of setting up a business, welcoming attitude to foreign workers and new economic growth companies make Hong Kong a sweet spot for any PropTech firm.

PropTech firms need only bring their innovation to strive in a best practice environment of leading real estate developers and investors. This is a market where “dreams” turn into reality. Ivan supports PropTech firms and Hong Kong as a forward-looking city to become recognized as an industry leader.

As a fully integrated real estate firm, RECAS invites PropTech entrepreneurs from all around the world to build their innovation in Hong Kong. Ivan and his team bring a tremendous amount of experience, connections, and wisdom. As a PropTech firm or investor, you can send Ivan an email here if you would like to seek his advice.

Denzity will keep you up-to-date on upcoming events worth your attention and if you’re not already signed up, make sure to sign up to receive the latest updates!

Denzity on Real Estate Crowdfunding (Part 1 of 3)

Here at Denzity, we are passionate about effecting change in an asset class and primary tool for capital appreciation and wealth preservation maintained through generations. Real Estate Crowdfunding (“RECF”) utilizes technology as a medium by which property ownership can be spread and diversified among a wide demographic of investors from different places.

Real estate has traditionally been an asset class that only available to wealthy individuals. Real estate platforms, such as private equity funds, have therefore only been able to seek investment from accredited investors. Accredited investors are individuals with USD $200,000 annual income or USD $1,000,000 net worth.

RECF is a new medium made possible since 2012 with the introduction of Jumpstart Our Business Startups Act (also known as the JOBS Act). The JOBS Act means real estate platforms can access a wider demographic of potential investors. However, there are several key issues which arise as a result.

In this article, we will highlight the technical knowledge investors need before investing.

Real estate investment requires technical knowledge. This is why Platforms hire real estate and investment professionals to perform due diligence and benchmarking before making an investment. As an investor, you will usually be provided with an information package, primarily containing an investment memorandum (“IM”) and limited partnership agreement (“LPA”).

The investor would read the IM, which contains details on the real estate property and its market (geographic and type), along with cash flow projections based on the platforms forecasts. Platforms will explain what capital expenditures are needed to improve the building’s marketability and the tenancy schedule to achieve a certain return to investors — one of the key metrics used by investors to decide on investment opportunities.

As an investor, you would need to understand the terms and conditions of the LPA, a document which details the legal manner by which you participate in the project. An investor who subscribes for shares in an investment fund, the vehicle used to hold the project, would be subject to certain rights and obligations under the LPA. These obligations can present itself in the form of a legal and commercial obligation.

The point is that understanding these documents require specific knowledge predominantly held by investment professionals who are typically employed by investment funds. These investment professionals accumulated their specific knowledge and skillset having worked in the finance (e.g. banker) and/or legal (e.g. lawyer) fields.

For example, a real estate project purchased for USD $10,000,000 obtains a USD $6,000,000 loan from a bank. The bank provides the loan subject to a facility agreement (“FA”). The FA is a legal document which defines the project’s legal obligations, which are primarily to (i) pay interest to the bank, (ii) repay principal ($6,000,000) to the bank, and (iii) maintain certain metrics referred to as covenants, such as a specified loan-to-value (“LTV”).

As an investor, you should understand the FA which highlights one the key risks associated with the project and your investment. In the event, the project is unable to satisfy the covenants (e.g. unable to repay the bank loan principal), the project would be in default and your investment would become at risk.

Therefore, investors without the technical knowledge stand at a disadvantage to investment funds which hire investment professionals. So what’s the good news?

Denzity is backed by a team of real estate and investment professionals here to guide you along the way of searching and filtering RECF investment opportunities, and here to help you understand the key metrics and provide insights.

We hope these articles provide you with insight into the real estate investment process and journey!

If you’re not already signed up with Denzity, make sure to sign up to receive the latest updates!

Asia PropTech, our Community Partner

Asia PropTech

Denzity is proud to announce a partnership with Asia PropTech, a PropTech ecosystem operator focused on building and connecting PropTech startups in Asia. We would like to introduce Asia PropTech to you as the newest member of Denzity’s community. https://www.asiaprop.tech/

Asia PropTech holds regular events and hackathons to build awareness and participation in Asia’s PropTech developments. Based in Hong Kong, Asia PropTech was founded by Leo Lo, a surveyor turned serial entrepreneur in high demand as a speaker for his thought leadership at real estate conferences in Asia.

Leo Lo, Asia PropTech Founder

Leo is the founder of PropSeed, a Real Estate Crowdfunding Platform, founder of PropBLK, a company providing real estate blockchain solutions, and co-founder of Fonto Real Estate, a boutique real estate advisory firm in Hong Kong. Leo will soon launch a dedicated PropTech accelerator and we are excited to share its ongoing developments with you.

Asia PropTech provides an ecosystem for real estate startups and incumbents, government, and academia to collaborate on achieving technological improvements to their real estate business model. The ecosystem supports PropTech startups with sound business expertise, acceleration methods, and funding with a goal towards value creation in the real estate industry.

Denzity is pleased to announce our partnership with Asia PropTech and will be sharing details of their upcoming events, new ideas and recent developments to help them build the Asia PropTech community.

Propteq Asia 2018 [October 30 2018]

Asia PropTech is holding Propteq Asia 2018 on October 30 2018 at Cyberport, Hong Kong’s incubator of startups. Propteq Asia is where the world’s leading real estate innovators will come together and talk about the challenges and opportunities in PropTech.

You can find more details on Propteq Asia 2018: https://us18.campaign-archive.com/?e=[UNIQID]&u=2a0989df9d93dfc233cdb6e79&id=7cf4ab66a9

What you need to understand about real estate capitalization rate (Part 1 of 4)

Real estate investment is an opportunity to generate regular income and achieve capital appreciation in a stable asset held over a 5–15 year period. Real estate investors typically compare investment opportunities start by using one key metrics: Capitalization Rate, aka Cap rate.

In this article, we highlight how you should understand how to compute the cap rate and how to use cap rate when comparing different real estate crowdfunding investment opportunities.

This is part 1 of 4 articles covering the real estate cap rate:

  1. What is the real estate cap rate?
  2. What you need to understand about the real estate cap rate?
  3. How does the real estate cap rate form part of your investment analysis?
  4. How leverage helps you achieve your investment goal in real estate.

Part 1: What is the real estate cap rate?

Cap rate is the rate of return on a real estate investment property based on the income that the property is expected to generate. It is calculated by dividing the property’s net operating income (“NOI”) by the current market value or acquisition price of a property.

Capitalization rate = Net Operating Income / Current Market Value (Source: Investopedia)

Once an investor knows a property’s cap rate in a specific market, the cap rate can be used to compare with other types of real estate cap rates located in different markets around the world to understand which is more suitable to their investment preference. We have made a quick guide for you below:

Understand the Real Estate Cap Rate

That’s it!

Let’s use an example: an investor (Bill) wants to achieve a 12% annual return over 5 years by investing in real estate.

Bill decides to purchase an office building for $600,000 that generates $60,000 of net operating income (NOI), which represents a 10% cap rate. This means the property value would need to increase by at least 2% per year to meet Bill’s goal of 12% annual return.

Bill decides to achieve his investment goal by being more dependent on the cash flow (net operating income) generated as rent by the office building’s tenants, rather than a strong capital appreciation.

In this example, Bill is characterised as a defensive, income-based real estate investor seeking real estate investments that require minimal out of pocket expenses (e.g. refurbishments). In case you are wondering: yes, we will cover different investing style and types of investment play in future blog posts.

In Bill’s case, the cap rate is a key metric to begin his initial screen to compare real estate investment opportunities. For example, a shopping mall being sold at an 8% cap rate means that Bill would rely on (i) strong capital appreciation and/or (ii) leverage in order to achieve Bill’s goal of 12% annual return.

Cap rates are an important way to screen investments and narrow down a list of investment opportunities which suit your individual preference. Once you’ve decided on which investment opportunity to pursue, you will need to gain a better understanding of the real estate’s location and market conditions to form your investment analysis.

An important aspect here is timing — something which Denzity wants to clarify with ‘cap rate compression’, explained below.

What will we cover in Part 2?

We have just scratched the surface when it comes to cap rates! There are more metrics you should take into account when making an investment decision.

In our next article, we will discuss how you should understand and compare the cap rates of different types of real estate located in different places around the world to decide on which best suits your investment preference.

We at Denzity are here to help you understand the key metrics and provide insights. We hope these articles provide you with insight into the real estate investment process and journey!

If you’re not already signed up with Denzity, make sure to sign up to receive the latest updates!