Crowd funding real estate in Sri Lanka; pros and cons

In real estate, debt-based crowd funding is gaining attention, and quickly becoming a popular method of investment. While the stock exchange can be volatile, crowd funding offers investors the chance to purchase a stake in the project, gaining recognition and return on investment if the project is successful. Crowd funding is a means of raising money to fund a project by requesting small amounts of money from a large group of people, in return for equity of the project or monetary gains. It is a fairly new term to the Sri Lankan real estate market; traditionally, most developments around the country have been funded by large multinational corporations. Crowd funding real estate projects in Sri Lanka offer a unique investment platform, which reduces the risk of money loss should a project fail. In the case of failure, if a large group of investors are giving small amounts of money, the loss would be minimal to each individual. Once a successful project is developed through crowd funding and sold, investors receive their share of the property’s return on investment (ROI). Hugh van der Kolff, managing director of online real estate portal Lamudi Sri Lanka, commented: “With the nation’s real estate sector booming, crowd funding developments provide an attractive opportunity for investors, both amateur and professional, to become involved in the growing market.” Crowd funding is a means of investment for all, inclusive of newcomers, however it can be challenging to invest in a property with a lack of knowledge, particular with regard to demand and supply in the relevant area. Real Estate Investment Trusts (REITs) offer an alternative to crowd funding; from an investor’s perspective, a REIT provides the opportunity to invest in a company with experience managing multiple real estate investments. For many, this is a more reassuring option when considering how to invest in the property market. Ravi Abeysuriya, Group Director of Candor Group of Companies, recently identified REITs as the best form of investment for newcomers. Using a REIT, individuals can invest in properties, in a similar way to investing in stocks. Since a REIT is tradable, it is easier to see the return on investment, instead of physically purchasing and selling the property. The investor in this case has control over when to sell the shares in a property or a portfolio of properties. REITs are more commonly used to invest in larger scale projects, while crowd funding works for smaller developments, where the investor has more knowledge of the property in which he is investing. Following the proposal of the 2016 budget, industry experts forecast the creation of the REIT in the near future, to encourage local and international investments. “Crowd funding real estate creates an opportunity for developers to raise large sums of money for upcoming projects; however, thorough audits of the number of investors and their funds must be maintained. Taxes and regulations imposed by the government to set crowd funding in motion can be tricky; therefore, it is vital that professional real estate developers work with reliable lawyers to assess the situation,” concluded van der Kolff. With the growth of the real estate sector in Sri Lanka, crowd funding offers an opportunity for smaller and mid-range developers to expand the scale of upcoming projects within a short amount of time, by providing access to a network of investors.