In April of this year, Smart Crowd became the first regulated financial digital investment platform in MENA and remains the only one to date. Here’s how its investment model allows people to build a diversified real estate portfolio, with just a small capital pool
Historically, real estate has been inaccessible to many, due to costly gatekeepers’ dynamics. The large amount of minimum investment required meant real estate has remained primarily the domain of wealthy individuals and institutions. Estimated at USD 217 trillion, real estate is the largest asset class in the world and yet only 12 percent of the global population has access to it. Smart Crowd caters to the remaining 88 percent who are struggling to get on the property ladder and build a diversified portfolio, helping them to unlock their wealth potential.
How does crowdfunding work for hotels?
The same way as crowdfunding works for any other asset class. Instead of crowdfunding equity or a single unit, we will be crowdfunding a hotel room or an entire hotel. Depending on the platform, you can crowdfund a single room in a hotel or equity in a hotel development.
It’s a great opportunity for individuals to obtain access to an asset class that would have presented challenges in the past, since it is quite capital extensive. In addition, investors in hotels can be offered incentives, such as VIP guest perks and discounts on room rates. There is also the aspect of owning a brand that hotels provide. Crowdfunding enables you to distribute the costs and the associated investment risks. It has evolved as a concept to the extent that it now focuses on ownership, rather than just offering a ‘piece of the pie’. You are able to reap real returns on investment (ROI), whether on hotel units or regular real estate properties.
What are the different investment models in practice and equity in operational hotels?
One of the most established models in this space involves an equity-based investment made by issuing shares in a special purpose vehicle (SPV) limited company. This particular model facilitates the investment to protect investors. Smart Crowd is based on a variation of this model. To give an example of how it works, the parent company provides a digital platform to connect potential investors who are looking for alternative real estate investments in the market rather than seeking to invest directly in one asset. Using a crowdfunding platform enables investors to diversify their portfolio. Having a ringfenced secure platform in place means investors are essentially buying into shares of the SPV that ‘owns’ the property. In other words, the SPV is essentially a separate company, with an asset/liability structure, whose sole purpose is to secure its assets, even if the Smart Crowd goes bankrupt. In return, investors receive ROIs through rental yields. Having a structure in place to secure investors’ funds is a regulated requirement here in the Middle East – and that’s what sets Smart Crowd apart.
What makes crowdfunding a viable alternative to traditional ways of sourcing investment and what is its primary advantage, given that supply is outpacing demand in markets like Dubai?
Crowdfunding has changed the way investing is done, largely because the entry barrier has been lowered. Historically, the real estate asset class has been restricted to wealthy individual and institutions due to the large minimum investment needed. Ownership of real estate in Dubai requires a significant cash deposit that is generally unattainable for most residents. Add to that costs such as agent’s fees, and the ambiguity about which properties might deliver significant ROIs, and the entire process becomes a major challenge for most people. Crowdfunding essentially caters to the masses, those who have limited or no access to this asset class, offering an alternative to traditional forms of direct investments, which generally signal high fees, low levels of transparency and no control over investment decisions. Smart Crowd is different from the traditional models; we offer more transparency, control over the investment decision and asset, and higher returns, thanks to our more efficient cost structures, which open up the market to the wider population, so it is no longer reserved for wealthy clientele. This model brings new demand to the market from those that are currently priced out of it.
What are your success stories to date?
In April of this year, Smart Crowd became the first and only financial regulated digital investment platform in MENA. Being regulated ensures that we structure potential opportunities in a manner that prioritizes investors’ interests, providing them with transparency and security about their investments. On June 21, 2018, we completed our first transaction, crowdfunding a small studio in Remraam, offering our investors an opportunity to participate in an investment that provided them with 10.8 percent gross yield and 8.68 percent net yield. Over a five-year term, investors can make 54.69 percent return on investment, translating into an annualized return of 9.74 percent. This is a major milestone for Smart Crowd in validating the model we have been working so hard on with the regulators.
Smart Crowd has been recognized for its innovative business model by being accepted into the region’s only fintech accelerator, Dubai International Financial Centre’s Fintech Hive, and has won numerous awards including: Accenture Innovation Award (GITEX 2017); Sharjah Entrepreneurship Festival Pitch Competition; and, most recently, the Smart Dubai’s Global Blockchain Challenge. Smart Crowd is working hard with the regulators to prove its model and expects to be live for the public later this year.