March 1, 2017
Crowdfunding as an industry is poised to reach a value of over $300 billion by 2025, and with its real estate segment hitting roughly $3.5 billion in 2016, it should come as no surprise that online real estate marketplaces will continue to experience explosive growth. One trend that will likely play a major role in the refining and shaping of this investment sector in the year ahead is the focus on institutional capital and investors.
Up until this point, due in large part to regulatory restrictions, real estate crowdfunding has generally focused on obtaining accredited individual investors. This has been quite attractive for investors with less money to spend, or for those who simply want to invest smaller amounts. With a requirement of generally only $50,000 to $100,000, individuals face a low barrier to entry, but deals require many participants to achieve full funding. In comparison, an institutional investor which can offer $50-$100 million in funding is a logical choice in many cases. For real estate crowdfunding platforms seeking accelerated growth, it is time to begin paying more attention to the supply side of things.
We have already seen similar developments with marketplace lending platforms such as Prosper, SoFi, and Lending Club, which quickly moved to institutions after starting out in the retail arena. The scaling capabilities and enhanced liquidity afforded by institutional capital sources are attractive to platforms looking to make this transition.
While diversification will be the key to success for real estate crowdfunding platforms in 2017 and in the future, it isn’t a step to be taken lightly. Prosper, for example, was a crowdfunding platform that derived 90% of its capital from institutions until mid-2016 when loan values dramatically dropped due to a reduction in investments from the institutions. Prosper had no alternative but to put efforts into attracting retail investors in order to survive this unexpected turn of events.