The weird and scary world of property crowdfunding

Property investors are turning to SA’s nascent property crowdfunding market, which is still fraught with regulation uncertainty.
Picture: Shutterstock

Property entrepreneur Slaven Gajovic has brave ambitions of making SA’s high-flying world of commercial property investments – usually dominated by well-heeled investors – accessible to mere mortals.

The Serbia-born computer programmer-come-property-entrepreneur has an unusual sales pitch to investors: from as little as R1 000 you can own an equity stake in an industrial, retail or office building and receive sustained dividends.

“My dream is to make every man or woman on the street able to invest in property. SA’s commercial property sector has been out of sight for small investors,” said Gajovic, the founder and CEO of property company Maximum Group.

Gajovic, who has been involved in SA’s real estate industry since 1993, is turning to the nascent crowdfunding industry to turn his dream into a reality.

Crowdfunding, which entails the use of the internet to bring together strangers with ideas and people with money who like those ideas, is increasingly going mainstream in SA with novice investors.

After all, South Africans have an entrenched tradition of using models similar to crowdfunding that rely on cooperative and trust-based savings schemes such as stokvels and burial societies.

Crowdfunding in sub-Saharan Africa was estimated to be worth $126.9 million (R1.6 billion at the time of writing) in 2015, according to a report by crowdfunding platform Afrikstart, with 57 active crowdfunding platforms operating in the region of which 21 are in SA. The World Bank expects crowdfunding to mushroom to $2.5 billion (R32.2 billion) by 2025.

One of the long-established crowdfunding companies is Wealth Migrate, which has offered SA-based investors access to properties in offshore markets over the past seven years via this platform.

Investors participate in Wealth Migrate’s crowdfunding platform with a view to buying a stake in properties in markets such as the US, Australia and others and receive dividends from this investment.

Scott Picken, the Durban-born CEO and co-founder of Wealth Migrate said over the past three years, the company has received more than $30 million (R390 million) in investments from South Africans with an appetite for offshore property markets.

In March, Wealth Migrate launched its first SA-based property on its global crowdfunding platform that local and offshore investors could invest in.  The Cape Town-based property is called Zero-2-One, a retail and residential property development that is expected to be the tallest building in the city at 148 meters upon completion in 2020.

Wealth Migrate has also pitched its minimum investment from R1 000. “Previously the best real estate opportunities were only available to the top 1% and thanks to technology disruptions, investors can invest in the same opportunities as the ultra-wealthy,” said Picken.  

At first, real estate doesn’t seem like an obvious fit for crowdfunding as it’s a capital intensive asset class. However, Gajovic said technology can bring costs down, which is what Maximum Group’s crowdfunding platform is promising when it goes live in September.

Property developers would list their existing property or ongoing developments on Maximum Group’s crowdfunding platform at an administration cost of R3 000 to R4 000. Potential investors would then make their contributions from R1 000 and receive equity in the listed property.

Essentially Maximum Group provides a platform that connects property developers and potential investors.

The big question is how do investor returns (or dividends) stack up in the crowdfunding space. Naturally, the returns would be paid from the main source of a property’s income stream – the rental income. Gajovic said depending on the type of property and its location, a net yield (the rate of return after subtracting all expenses, such as maintenance, costs of purchase, and taxes) of between 9% to 15% could be achieved.

To put this into perspective, the yield is higher than the total return that can be achieved in property stocks on the JSE, which have delivered total returns (income and capital growth) of 2.82% over the past 12 months.

Regulation in limbo

But property stocks trump real estate crowdfunding regarding regulation and protection for investors. Underscoring this is that SA has not yet crafted a regulatory system for crowdfunding platforms. 

David de Waal, CEO of low commission estate agency Steeple, said crowdfunding schemes and their participants could be governed by a spread of commercial legislation such as the Consumer Protection Act and Collective Investment Schemes Control Act.

“South African law places a high premium on the rights of consumers, and crowdfunding projects would need to operate with this in mind… Frequent changes in South Africa’s regulatory environment have been a long-standing grievance for business people and crowd funders,” said De Waal.

Commercial legislation may not protect investors as their mandate is making sure that crowdfunding platforms are compliant when it comes to tax and company registration requirements. There is a lack of recourse for investors from a watchdog such as the Financial Services Board (FSB) if investments go bust.

The FSB’s head of department for the Financial Advisory and Intermediary Services (FAIS) Supervision Felicity Mabaso said crowdfunding platforms are currently not regulated by the FSB. 

Mabaso added that such platforms are not necessarily operating illegally except if they are in contravention with current regulations such as the FAIS Act, which aims to protect investors by prescribing how advice or services should be rendered to investors.

“[The illegality of crowdfunding platforms] would depend on the exact nature of the activities performed by the platform. If the platform issues a ‘financial product’ as defined in the FAIS Act, and the person provides intermediary services relating to that product, they must be licensed as financial services providers,” she told The Moneyweb Investor.

“Some of the activities performed by these platforms may fall within the regulatory ambit of the FSB. The nature of the activities of the crowdfunding platforms would determine whether the regulatory framework of the FSB would be applicable or not,” said Mabaso.

The FSB is engaging with various crowdfunding platforms to get information relating to different crowdfunding models.

The industry has accused the FSB of dragging its feet in providing regulatory certainty, increasing the trust deficit between investors and purveyors of crowdfunding platforms.

Picken quipped: “Financial institutions and regulators see us as a bunch of lone nuts. We are not these raving evangelists that are trying to create a new Ponzi scheme to get rich.”

Arguably, investor concerns about crowdfunding are justified given the headline grabbing property scams that have left investors with tears rather than inflation-beating returns.

Asked about how can investors protect themselves, Gajovic said potential investors must do their own due diligence.

“There are still ways to cheat people out of their money. Investors must try to find out how long a company has been around. Just do a basic check. You don’t want to give people who you don’t know a lot of money and just hope to get a return.”

Dollar to rand: R12.98, July 24, 11:49.

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