A new entrant in German online real estate lending, iFunded wants to address the market of larger property development projects that lie beyond the scope of real estate crowdfunding. Partnering with umbrella investment bank NFS Netfonds Financial Service, the platform is launching its first €10 million real estate bond issue, to be listed on the open market of the Frankfurt Stock Exchange. With this, iFunded leads, for the real estate online funding segment, the Fintech startup trend that consists in moving from exemption/sandbox status to a fully regulated financial environment.
Compared to the UK, the German real estate crowdlending market was a late bloomer. But since the regulatory uncertainty about whether real estate could benefit from the prospectus exemption of crowdfunding was removed, the market is now booming. According to Crowdfunding.de, in the first half of 2017, German online real estate crowdlending platforms raised €58 million, 45% more than in the entire year of 2016. Crowdfunding.de tracks 10 crowdfunding platforms specialized in real estate, with leader Exporo significantly ahead of competitors Zinsland, Bergfürst, and Zinsbaustein with more than 50% of cumulated market share.
iFunded by iEstate
The iFunded platform is a more recent entrant among German real estate ventures. iEstate, the company which runs the platform, was founded in 2015, by Michael Stephan, a serial entrepreneur with successful Internet startup exits under his belt. He co-founded iEstate with Einar Skjerven, the CEO of property development, investment management, and asset management firm Skjerven Group, who brings 25 years of experience in real estate and notably an in-depth knowledge of the residential property market in Berlin. The platform opened for business in June 2016 with a mix of real estate crowdfunding and real estate brokerage. Since then, it has launched four real estate crowdfunding campaigns of average €800K size, all dedicated to the short-term funding of the rehabilitation of residential buildings in the city of Berlin. The largest one of this renovation projects, a €1 million building renovation in Central Berlin was repaid 6 months ahead of time with a 6% interest rate.
Now to accelerate its growth in the face of quite entrenched competition, iFunded is shifting gear and turning to public bond offerings. We spoke with Michael Stephan, the co-founder and CEO of iEstate about the rationale behind this move and his development plans.
In July 2017, iFunded launched its first public bond offering, what motivated you as a company to add the classical fundraising channel to your online real estate platform?
Real estate crowdfunding in Germany has grown very significantly recently and will reach between €100 and €120 million by the end of 2017. However, it still is small. We believe that online real estate funding has a much bigger potential, in particular in the segment of short- to mid-term financing of building renovations that we specialize in.
Our residential renovation projects are very attractive because they have a lower risk profile. Every project is based on an existing property purchased by the developers. As it is usually 50% occupied by tenants, it immediately generates cash flow, which enables us to pay interest every six months. The vacant flats are refurbished and sold off.
We started by offering investors shareholder loans, as prescribed by the equity crowdfunding regulation, the Kleinanlegerschutzgesetz (KASG). But this regulation is too restrictive. It limits the overall size of the offering to €2.5 million and the total crowdfunding investment per retail investor per year to €10,000. In addition, shareholder loans are junior debt and institutional investors prefer senior debt. These constraints restrict the market to smaller projects by smaller real estate developers.
Our objective is to grow faster by sourcing larger projects from larger developers and attracting, next to retail investors, institutional investors, family offices, foundations and professional investors to fund them. For these large projects, investors, as well as borrowers, need a fully regulated environment. Therefore, we decided to launch a fully regulated public bond offering.
Our first project Eisenzahnstrasse Berlin is a €10 million bond issue (ISIN: DE000A2E4FQ5) with a 3.5-year maturity and 5.5% interest rate. It is destined to transform an existing property into 281 flats, including a penthouse, and 2,400 sqm commercial space. The total estimated budget is €49.6 million and the expected income €67 million.
Your company iEstate is regulated as a broker and marketplace lender, how did you set up to launch public bond offering?
We are the first one to target both retail and institutional investors with real estate crowdfunding and bonds. To trade in bonds, we had the choice to apply for a banking license, which is a costly and long process. We decided instead to partner with NFS Netfonds Financial Service in Hamburg, a banking service provider which offers a liability umbrella and enables us to conduct public bond offerings. Our status in that partnership is that of a tied agent.
The bond issuance remains an expensive process that only large projects in the double-digit range can justify. Being fully regulated, without prospectus exemption, has a sizeable cost beyond the cost of the prospectus itself. The issue must go through the existing infrastructure of loan administration and securities clearing and settlement. However, our experience in banking enables us to slim down the regulatory cost as much as possible. We also save money on distribution costs because we are all digital.
Being fully regulated significantly widens our scope of action. We can raise up to €50 million, which gives us much more leverage. For example, due diligence costs are nearly the same whether the project is big or small. It also is much easier to reach a wide distribution with a more familiar, fully regulated product like bonds. Lastly, bonds are much more convenient to handle for our foreign investors from France, the UK and Scandinavia because they can buy listed securities and hold them in their existing securities account.
A platform like ours, that offers several, complementary modes of real estate financing, crowdfunding shareholder loans and bonds, has not existed before. That is why there is a certain gray area. However, the regulator is first and foremost concerned with whether we comply with all the regulatory requirements of both crowdfunding and bond issues: the Know Your Customer (KYC), the Anti-Money Laundering (AML) etc. –which we do. For example, our customers must pass through the online identification process Postident. For crowdfunding projects, we collect money through a payment service provider, Lemonway, for bond issues we must use a deposit bank, such as BNP Paribas. We start the shareholder loans at €500 and the bonds at €1,000.
What are your development plans for iEstate/iFunded?
Historically, we have been quite focused on Berlin which currently presents the fastest evolving and most profitable real estate opportunities. Berlin has experienced a significant price increase of 30% in the past 4 years. But there is no bubble. Berlin remains cheap for a capital city. There is a very low vacancy rate, and the city gains 50,000 new inhabitants per year. In the future, we want to expand into other tier-one and tier-two cities such as Munich, Dresden, Leipzig or Cologne who present lots of opportunity for both residential housing and office space and will offer a diversification to our investors.
We might also go to complete construction projects.
In terms of our regulatory status, we believe it is possible to continue with crowdfunding and bond issues depending on the nature and size of the project, but we are looking into all regulatory possibilities to expand our business. We believe that working in a fully regulated environment, without exemption or sandbox will become the norm, especially for larger transactions.
Therese Torris, PhD, is a Senior Contributing Editor to Crowdfund Insider. She 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.
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