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Experts list challenges of real estate crowdfunding

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Crowdfunding has faced couple of challenges in Nigeria’s real estate sector because of lack of trust, transparency, regulations and standardisation. Although seen as a game-changer in real estate investment, crowdfunding seemed not to have reached the expected mileage.
 
Experts say, lack of standardization and regulation has affected the growth of crowdfunding in Nigeria. It has gained ground among developers who could not raise funds from the conventional method such as institutional investors.

Alluding to these challenges, the Managing Director of Tobykemsworth Investment Limited, Mr. Adekunle Raphael said, the time and space to build trust of the individuals in a scheme has become an issue due to several defaults. He also identified lack of fund management policy of the given state and federal government, the deflation and inflation in given economy.

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According to them, the period of time of gathering the reasonable number of persons to aid the crowdfunding also posed great challenge, while inexperience individuals in real estate industries can lead to mismanagement of the crowdfund. Raphael, whose company has created a well-registered cooperative called Total Estate Solution (T.E.S) to aid crowdfund on real estate, said the choice of project part-time might not interest all too.

Also, a real estate developer and the Chief Executive Officer of Realty Point Limited, Debo Adejana, said the phenomenon is a tested means of getting unto the real estate investment ladder, if well operated and regulated.

According to him, crowdfunding will largely be achieved through technology and one of the challenges could be the carelessness and challenges of technology especially knowing that real estate investment is mostly a “contact sport” He also stressed that market volatility and the uncertainty of returns is another challenge.
 
Also, the Managing Director, Property gate Development and Investment Plc, Adetokunbo Ajayi, said crowdfunding is an alternative finance option for raising capital to finance a project or venture which usually entails raising small amounts of money from a large number of people, typically via the internet. Characteristically, it involves a call to the crowd or public for relatively small individual contributions to achieve the big investment goal of a project or venture.

He said: “The fundamental thing we should not lose sight of is that virtually all jurisdictions seek to protect the public, and as such, will be interested when promoters enter the public square to canvass for funds from people.

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“The law does not impose rigorous requirements on promoters who seek funding for their projects and ventures by private arrangements. The problem will arise when invitation to the public is embarked upon without appropriate regulatory approvals. 

“For instance, it will be against the law for a real estate operator embarking on a development project to mount the rostrum in forms of online publications or/and through other public media like the newspapers, radio and television inviting the public by way of crowdfunding to advance or deposit money to a project or venture with a promise to return the money with interest at a given time or to become shareholders (owners) of the properties on completion, with further promise of rental income and operation without regulatory approval.

Such action will be in violation of the Nigerian laws such as Nigerian Investment and Securities Act, Companies and Allied Matters Act, Banks and Other Financial Institutions. As at date, the legal framework for crowdfunding is yet to be enacted.

Mindful of the benefits crowdfunding, the Nigerian Securities and Exchange Commission in a bid to foster economic development and deepen the market released for public consideration in March 2020 a draft regulatory framework for crowdfunding operation in Nigeria. While this is a step in the right direction, the rules, he said, as proposed may not be cheerful to real estate operators.

The maximum fund a promoter may seek, in the case of medium-sized company within a year cannot exceed N100million, this being the maximum. This is paltry for capital-intensive venture like real estate. While clear exemption is made for MSME in digital commodities and those that the Commission may exempt from this limit, it is not clear if real estate projects will enjoy exemption.

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According to him, a perusal of the rules show a real estate operator desirous of leveraging crowdfunding need to comply with very elaborate requirements.

“This may be unattractive considering the small amount of capital that can be sourced, which again has to be over a time frame. “Detailed study of the rules needs to be made to see the benefits they offer to operators.

“It is important to note that the rules are proposals and not yet in force. As at today, a real estate operator bent on funding its project or business by crowdfunding will have to ensure the provisions of relevant laws with respect to invitation to the public and other requirements are complied with. This will unfortunately be crowdfunding without the benefits of the fundamental character of the concept”, he said.
 
Also another developer and the Chief Executive Officer of  Lifepage Group, an Investment Holding Company with devoted interest in real estate, Oladipupo Clement is, trust is the key in crowdfunding as it is with any business. According to him, regulation may mitigate that concern because  it provides respite and sense of comfort to investors.

“Even a certified thief is looking for who to trust.  We need more trust agents who will become pipelines and channels to entrepreneurs on behalf of investors”, he said.

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But the Managing Director of Tobykemsworth Investment Limited, believed that crowdfunding is a power weapon to providing mass housing in a nation and this aid comfort and easy ownership and debt control.

According to Raphael, there are numbers of organisations doing this in Nigeria but have more activities of such with the government agencies like the National Housing fund (NHF) which has really proven the advantage of crowdfunding in Real Estate in providing easy homeownership. He, however, said government is not proactive on these promises. Crowdfunding, he said, creates a commitment within the needed persons who needs a shelter

“It makes it easy for individuals to own a home with been indebted beyond capacity. It gives room to encourage individuals to own a home because the main challenge on individuals in the bulk fund but with crowdfunding that can be achieved. It bring unit of purpose and help to maintain a specific focus
 
It brings a network of like minds and helps the individual make choices of the desired project because crowd funding helps to create various choice projects that the individuals can choose.

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For the President, International Real Estate Federation (FIABCI) Nigeria Chapter, Adeniji Adele, crowd funding is a new phenomenon especially for developers who could not raise funds from the conventional way.He stressed that the phenomenon which can be used against inflation and attract geographical diversification, has faced some couple of challenges in Nigeria because of the issue of transparency, regulations and others.
 
According to him, it is very significant in the built environment but the awareness is still low in terms of accessibility, because there is no security attached to it.

“ So, when you look at the potential that is involved, what, it is quite good. I remembered that a couple of investments that were done in Ikoyi, when federal government were selling their assets, coupled of years ago, a lot of guys in the banks pulled their resources together and buy into those government assets because they found out that the sitting tenants could not afford them.

“The challenges are that there are not platform for it, the platform could be shut down if any of the members has any problem. So, the risk elements is there, if you agreed on quarterly donation and one defaults.

“If you look at the risk elements, it is so easy to say that if you default, there is no security.  “In the industry there are no standard at all, if you look at the space they control, in terms of measure, if I declare that I have a blocks of flat that I want to put at Ikoyi and I know that the cost of land is N200 million, I can tell you that it is N300 million, it is what I make available of you because there is no valuation or methodology, most times that you will take, you will just be following me. You find it difficult as an investor to research into it, because they are just small developers, hardly do you see big investors to come in that programmes. They lack transparency, clarity and sincerity of purpose.  There is likelihood that you can get money but you can’t go far because they lacked regulatory authority “, he added.

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