CROWD FUNDING IN REAL ESTATE FINANCING


By the Habitat for Humanity report, 2018, Kenya had a deficit of about 200,000 houses per year. The World Bank issue of 2017 approximates the same to a 2 Million housing deficit. The role of bridging this deficit had largely been left to the private sector who contribute to about 90 % of the houses need with the government contributing a meagre 10 % through the National Housing Corporation.

Recently the government introduced the Big 4 agenda with provision of affordable housing as one of its pillars. It is projected that the government, under this programme the government will provide one (1) Million houses to Kenyans over its life span. This translates to about 50 % of the current house deficit which deficit grows every year. Since the government cannot satisfy the need, we cannot be naïve to ignore the role of the private sector in bridging the deficit.

Unlike the government which will rely on taxes and the funds to be contributed by employees and employers under the National Housing Fund, the private sector relies on equity and debt to finance their developments. Historically, the private sector has largely relied on the banks to provide the much-needed debt as the main source of financing.

Through the Banking (Amendment) Act, 2016, the Government introduced a ceiling on the interest rates charged on credit facilities offered by banks to 4% above the Central Bank of Kenya base rate (rate at which it offers loans to domestic banks), which rate currently stands at 9.5%. While this was a move to lower the cost of credit to the various class of borrowers, it had the negative effect of making banks credit-shy. Banks tightened their credit requirements, effectively locking out the larger class of those who could not meet these standards. Banks also chose to invest money in less risky ventures such as treasury bill and bonds which presently attract a competitive interest rate of between 9% and 13 %. The overall effect has been the lowered availability of funds for lending.

One of the greatly affected sectors is the real estate sector as the sector is historically highly dependent on bank financing. The result has been a slowing down of construction that are debt based and a reluctance in the market to put up new developments as developers are unsure of getting sufficient funding. With the added risk that the interest capping being lifted, there is a real risk that the interest rates will rise.

In the world over, the relative inaccessibility of credit has led to the emergence or reinforcement of alternative real estate financing avenues for both developers and buyers. One of these emergent alternatives is crowd funding. This option of financing has proved a success because it is a viable investment options for all: high net worth investors, institutional investors and small-scale investors. Here in Kenya, though it has not been adopted, the current socioeconomic situation heralds lucrative prospects for crowd funding.

Crowdfunding is, in the simplest terms, soliciting for money from the general public (the crowd), which is used to fund a particular activity or venture. Given the need for wide reach to potential funders, crowdfunding is almost entirely done online through social media and other platforms created for this purpose.

Crowdfunding takes four forms: (a) reward-based crowdfunding: where lenders fund borrowers for projects in return for a non-monetary token; (b) donation-based crowdfunding: where lenders give to borrowers for a charitable cause; (c) debt-based crowdfunding (peer-to-peer lending): where lenders fund borrowers in expectation of repayment of the loan with interest; and (d) equity-based crowdfunding: where lenders become investors in ventures/businesses in exchange for ownership in the business. Reward- and donation-based crowdfunding have seen the most success since the advent of crowdfunding.

In Kenya, we have seen examples of these through platforms like M-Changa and social media fundraising appeals (donation-based crowd funding) and chama/merry go round (peer to peer lending). Debt and equity-based crowdfunding has also been seen in a macro level and it has mostly been used to prop up family-based start-ups and small businesses but it is slowly gaining traction especially for the technology-based start-ups.

In countries like the United States, and the United Kingdom, they have been using crowdfunding to tap into the potential of debt- and equity-based crowdfunding in financing real estate development. Various platforms work to match lenders/investors with projects that they invest in after a rigorous vetting and compliance processes to reduce the risk involved. The appeal that these opportunities have for investors is the diversification of their investment portfolios while creating easy access to and multiple streams of funds necessary for developers’ projects.

Crowdfunding is not legislated/regulated in Kenya. Nevertheless, some legislation can be interpreted as applicable, especially for debt- and equity-based options. Under the Capital Markets Act, a crowdfunding platform/business involving the sale of debt or equity can easily be caught under the CMA regulation where the entity is a regulated entity. Units of debt and ownership in a company (such as a development company) are securities if offered to the public and tradable between lenders/investors. Where the entity offering is regulated, licensing will be required under the Act

Crowd financing opportunities are often targeted at the general public online. Accordingly, offers to take part in crowdfunding activities can be construed as public offers, for which the offeror must first submit a prospectus to the Capital Markets Authority which in turn gives the necessary approval.

The National Payments System and the Money Remittance Regulations under the Central Bank of Kenya Act are also likely to be relevant when dealing with crowd financing platforms as the platforms act as a conduit for money between the borrowers and the lenders/investors. These Acts would apply uniquely depending on the set up of each platform.

The other way crowd funding for real estate that would work is a Real Estate Investment Trust (“Reit”) based crowd funding. For this to happen though, the Capital Market Authority would need to rethink the rules and regulations governing Reits and seriously consider reducing the minimum investments allowed.

As crowdfunding gathers traction in Kenya, it is anticipated that it will be regulated and later, even legislated. There is room for exponential growth because crowdfunding is not only limited to local funders, but it has international appeal for funders looking for new economies and sectors to grow their wealth. This will be a major boom for the real estate sector, sparing developers the agony of dangerous and bureaucratic traditional credit facilities.





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