Crowdfunding: Can it work in Indian real estate?


Crowdfunding is a financial model, where a project is funded through contributions from many people. We analyse if this model of ‘raising funds’ can work for property projects in India

After reading about successful global case studies pertaining to crowdfunding in real estate, Rajeev Minocha wondered why his investment was never labelled as crowdfunding. He, along with some of his school friends, had been casually funding a Pune-based builder with whom they had been friends with, since their school days. For Minocha, the ROI from crowdfunding in the realty business, was much better than any other investment in his portfolio. It also helped the developer to expand his national footprint.

A closer look at the prevailing funding options of various developers suggests that some loose alliances resembling crowdfunding, does exist in the Indian realty market. However, crowdfunding as a practice has not gained ground due to the lack of transparency and institutional teeth.

 

What is crowdfunding?

Crowdfunding refers to a financial model, wherein, a project or venture is funded by raising monetary contributions from a large number of people. However, it needs three parties to take shape as a business model – the developer who proposes his project/idea to the crowd; people who support the idea with financial contribution; and a moderating organisation that brings the parties together.

In the Indian realty market, this third crucial element of the moderating agency, is missing. Often, it is the mutual trust, like in the case of the Pune-based builder, which acts as the moderating agency. However, not all developers in the Indian market, have that kind of goodwill or resources. Developers too, admit that crowdfunding is a double-edged sword and needs to be handled carefully.

 

Needed: A transparent and organised framework

“With proper regulations, crowdfunding could be an answer to developers’ liquidity woes, attracting end-users and others, into the market as investors,” feels David Walker, MD, SARE Homes. “However, regulation through SEBI or a new regulatory authority, is imperative, to ensure it is not misused by any stakeholder. Else, the realty industry will end up with more negative coverage due to the misdemeanours of a few,” he cautions.

See also: Crowdfunding: Is Indian real estate ready for it?

Sandeep Ahuja, CEO of Richa Realty, also does not sound very optimistic about crowdfunding in the present framework and feels that it will take time for the concept to catch on. “I don’t foresee much prospects for crowdfunding in Indian real estate. The reasons are, high investment in real estate projects, low transparency levels, long gestation period of projects, low liquidity, project delays and lack of regulation in the industry. It is very difficult for an investor to evaluate an investment opportunity on a crowdfunding platform, with limited details,” states Ahuja.

While a loose alliance of initial investors funding some developers may give the impression of a crowdfunding model, the concept remains very confusing in the Indian context. A transparent and organised framework that monitors the funds being channelised into projects – something that is missing in the current market, could make crowdfunding a viable option in Indian real estate.

(The writer is CEO, Track2Realty)

 

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