French real estate developers badly need private equity and French savers have a strong, yet until recently unsatisfied, appetite for investing in real estate development. Crowdfunding comes to the rescue.
Two leading French equity crowdfunding sites Anaxago and WiSeed have recently launched a division dedicated to real estate crowdfunding and have strong ambitions for it. This first interview is with Joachim Dupont, president and co-founder of Anaxago about real estate equity crowdfunding. The second interview is with Souleymane Galadima, Managing Director of WiSeed Immobilier about real estate debt crowdfunding.
2014 was a pretty bad year for the French real estate market. For the third year in a row, the number of building permits and the number of construction starts decreased. Real estate development fell short by 150 000 units of producing the new housing needed to cover the natural increase in the number of households.
In this context, real estate crowdfunding that enables French savers to participate in financing real estate development with as little as 1,000 or 2,000 euros is most welcome. We spoke with Joachim Dupont, President and co-founder of equity crowdfunding site Anaxago about his company’s real estate venture, Anaxago Immobilier.
Founded in 2012, Anaxago is an up and coming equity crowdfunding platform. It attracts ambitious and innovative startups and SMBs, who in turn attract affluent and qualified investors. In less than three years, more than 40,000 Anaxago members have funded 35 projects to the tune of 14 million euros. In 2014, Anaxago launched Anaxago Real Estate.
Joachim: Anaxago is an equity crowdfunding platform that focuses on innovative projects and companies. It is a collaborative form of venture capital.
We did not seek real estate business, but real estate developers reached out to us. One entrepreneur in particular, the CEO of Kalelithos, convinced us to launch our first real estate campaign. Kalelithos is a real estate developer specialized in environmentally friendly, affordable housing such as buildings with a wood frame structure. We found in this developer and his team the entrepreneurial spirit that is characteristic of the high-growth companies we’re used to supporting in other sectors such as high-tech. We were impressed by the quality of the company’s management and of its ecosystem. In short, this encounter defeated all our preconceptions about real estate. It proved to us that real estate can be innovative, too.
This led us to ponder about the benefits that a real estate offering could bring to our investors. Firstly, it brings them diversification in form of a new asset class, with a different risk and liquidity profile from that of start-up funding. Secondly, it has a shorter horizon of one to three years, compared to the five-plus year horizon of start-ups. Thirdly, and most importantly, at 8% to 12%, the average annual rate of return is quite good and much less uncertain than the ROI of startup funding.
Last but not least, the real estate crowdfunding investment goes through a special purpose vehicle which can be considered for tax purposes as a small business, hence benefits from various forms of tax relief. It can even be exempted from income tax after five years if put into a fiscal wrapper called PEA, for Plan Epargne Action.
Joachim: Our first real estate crowdfunding campaign enabled Kalelithos to raise 1.8 million euros in less than six weeks.
Encouraged by this early success, we decided to create a dedicated business unit, Anaxago Immobilier (Anaxago Real Estate), together with real estate specialists. Christophe Chevallier, a real estate developer and asset manager, became the managing director of Anaxago Immobilier. We partnered with SFS assurance, an insurance broker and agent specialized in construction insurance. SFS brings to us an unparalleled expertise in appraising the technical and financial risks of building projects. This allows us to submit the candidate projects to a most rigorous selection process.
We have created an online space dedicated to real estate crowdfunding. But, as we want to demystify real estate and demonstrate that these projects can be as innovative as any others, we also present them side-by-side with the other crowdfunding investment opportunities.
Therese: Who are the real estate developers who turn to you and why?
Joachim: Small and medium-size real estate developers account for a third of the French construction market. We focus on mid size developers who are building condominiums and commercial properties rather than single family homes. These companies find it very difficult to secure bank loans. Since the financial crisis, banks are themselves under pressure from the regulator. They have doubled the capital requirements they impose on developers before granting them a loan from 5%-10% of project value before, to 15%-20% now.
But housing sales are sluggish. The crisis has created a climate of distrust which was then aggravated by a rapid succession of regulatory and fiscal changes. It takes developers much longer than before to sell off their programs and, consequently, they can’t free enough cash to invest into their new projects.
Crowdfunding rapidly brings developers the liquidity they badly need. In addition, developers gain small shareholders who can be as many ambassadors of their programs and brand.
Therese: How do you minimize the risk for investors?
Joachim: We work hard at selecting the right projects upstream.
Firstly, we keep cool. We let neither the large numbers of developers asking for funding, nor the large numbers of investors wanting to invest in real estate impress us. The last thing we want to do is to create a real estate crowdfunding bubble! Therefore, we are very selective. We work with well-known developers and architects. We favor quality over quantity.
For example, we require that the projects meet conditions such as: a building permit cleared of any recourse; a presales threshold of 30% to 50% of the total sales value; and valid construction insurance. Our insurance partner SFS plays a big part in the financial analysis during the vetting process.
Potential delays are the main risk factor for investors. Our term sheets with the building project company include a three month safety margin for the delivery of the construction and special terms in case of a delay of less than 6 months. Anything beyond that will negatively affect the investor’s average annual rate of return.
Real estate crowdfunding has a lower risk of capital loss than startup crowdfunding because it has tangible underlying assets and relies on a value chain of operators from architects to builders who are all liable and insured for their liability.
Therese: Who are the active investors?
Joachim: Anaxago members invest on average € 8,000 on the platform. We require from members a minimum investment of 2000 euros to participate in real estate crowdfunding. This means that investors will generally have an above-average disposable income. Their business understanding is also clearly above average. We’re not targeting the mass market.
We see three major investor segments:
- A large number of young professionals who want to grow their business skills by investing in high-growth companies. They general invest smaller tickets of 1 000 euros to 4 000 euros.
- Senior executives who have an intimate knowledge of particular sectors in which they want to invest.
- Independent professionals and retired people who want to stay in touch with business.
Surveys have shown that, next to profitability, the desire to be part of the entrepreneurial experience is the second most important motivation of crowdfunding investors. Crowdfunding has huge educational value. A professor has even created a small investment portfolio on Anaxago as a learning tool for his students! To meet this demand, we have developed Anaxago University, a set of online resources about startups and innovation.
Institutional investors such as public housing companies who co-invest with crowdfunders on projects do not do so through the platform. This leaves more room for individual investors as the recent French crowdfunding regulation caps investment at 1 million euros per project.
Therese: How do you see Anaxago Immobilier evolving?
Joachim: We had not anticipated such a strong demand from real estate developers. We currently receive around five applications for equity crowdfunding per week. The sector’s financing needs are just humongous and, accordingly, we have great ambitions for Anaxago Immobilier.
However, we want to remain true to our development strategy: to not favor quantity at the cost of quality, to remain selective and to continue to be profitable as we’ve always been ‒ which makes us quite unique in the crowdfunding landscape.
Our model is to filter the dealflow as upstream as possible. We turn down a lot of requests.
We forecast that real estate equity which represented 20% of our business in 2014 will continue to grow faster and make up 40% in 2015, possibly even 50%.
Thank you, Joachim Dupont!
Therese Torris is an entrepreneur and consultant in eFinance and eCommerce based in Paris. She has covered crowdfunding and P2P lending since the early days when Zopa was created in the United Kingdom. She was a director of research and consulting at Gartner Group Europe, Senior VP at Forrester Research and Content VP at Twenga. She publishes a French personal finance blog, Le Blog Finance Pratique and curates crowdfunding news on Scoop.It.