The property prices in China’s major cities has surged in recent months, first in Shenzhen, then Shanghai and Beijing. The rapid appreciation of property is drawing people’s attention back to the concept of real estate crowdfunding.
Four types of real estate crowdfunding
Real estate crowdfunding was first launched in US, and then introduced to China in 2014. By 2015, there were about 15 real estate crowdfunding platforms in China (e.g. Fangbaobao and Haofang Crowdfunding).
In terms of fundraising purpose, China’s real estate crowdfunding activities could fall into four major categories:
Development & Purchase
Compared with traditional a funding channel (e.g. bank or trust), crowdfunding helps reduce the total cost. Crowdfunding is used by developers that could not get easier access to capital, but it also attracts certain groups of consumers before the construction starts.
Individuals crowdfunding for this category of project have a rigid demand for housing. They will get a 20% to 30% discount, but usually have to pay the discounted price in full when they purchase the property.
It may be regarded as an innovation of real estate development, yet it may risk violating the present regulations regarding the real estate approval process.
Development & Investment
Real estate products, especially in major cities like Beijing and Shanghai, are seen as highly profitable. Developers initiate REITs crowdfunding campaigns to realize the value of real-estate projects which is usually high in total price and raise the funds for developing the project.
Crowdfunders treat this category of project as an investment opportunity. Asset management companies generate the profits for the crowdfunders from property rental or property management fees. One example is the “Wenzhuan No.1” from Wanda Group.
Marketing & Purchase
In this circumstance, consumers with rigid housing demand crowdfund for existing housing projects. This model works typically well for certain developers who are under pressure to reduce inventory, which is usually regarded as an innovative marketing method.
Marketing & Investment
This is a typical type of REITs product. Developers scarify some profits to de-inventory and raise brand awareness, while the crowdfunders invest with the hope to benefit from value-added income. One example is the crowdfunding projects co-initiated by Fangbaobao and Zhongxin Palace Garden.
Regulators suspend P2P down payment loans
Among the different sections of fintech, crowdfunding and peer to peer lending are the most talked about in China. Since real estate has already got a connection with crowdfunding, it is not strange to see related P2P lending products emerge.
It is estimated that there are at least 660 P2P lending platforms providing real estate lending services now, most of which are down payment lending, redemption lending and decoration lending.
Down payment lending lowers the house purchasing threshold, but it also raises the house-purchase leverage. For instance, speculators can buy real estate at a relative low price and sell it shortly to gain a profit of 10 thousand yuan. That’s why the product is so popular. Yet for house buyers with rigid demand, they will not only suffer from the present pressure, but may be forced to give up or put off the purchasing plan due to the rocketing price driven by speculators.
In fact, people cannot borrow for a down payment loan according to China’s present regulation. The percentage of down payments for individual housing is set by POBC. Down payment lending goes against the real estate legislation and may introduce policy risk.
At present, the risk is still under control. However, nobody knows whether a dramatic price would lead to a systematic crisis.
Updated
Chinese government has already responded to and started investigating down payment loans. Shenzhen Municipal Financial Services Office took the first step, requiring investigation towards all P2P and micro-finance companies involved in real estate crowdfunding, down payment loan and other leveraged mortgages. Meanwhile, Beijing Municipal Bureau of Financial Work guided Beijing P2P Association to go through an investigation among the member platforms. According to an anonymous source, Beijing Municipal Commission of Housing and Urban-Rural Development has also held an urgent talk with some real estate agencies which have been involved in the down payment loan issues. As the investigation goes on, major agencies like HomeLink and 5i5j.com have ceased down payment loans.
WeiyangX is the most influential website focusing on internet finance in China. The site covers the latest in fintech news, industry data analysis, business practices, and in-depth fintech cases. WeiyangX is part of the Fintech Lab, founded in 2012, and part of Tsinghua University’s PBC School of Finance. Fintech Lab. Fintech Lab is the first and top research entity dedicated to leading best practices, promoting interdisciplinary innovation, and encouraging entrepreneurship in the field of internet finance through scientific research and innovative project incubation.