Real estate crowdfunding continues to be a dynamic and ever-evolving industry, growing to an estimated $3.5 billion in 2016. By 2025, the crowdfunding industry as a whole is anticipated to be valued at more than $300 billion and online real estate marketplaces are primed to capitalize on that explosive growth.
As we look ahead to the new year, it’s an appropriate time to consider which trends will play a part in shaping and refining this investment sector. I’ve identified three trends that real estate crowdfunding platforms should be keeping a close eye on in 2017.
Institutional capital takes center stage
Throughout real estate crowdfunding’s various growth cycles, the focus has frequently been directed towards accredited investors due to regulatory restrictions. These accredited investors hold approximately 70 percent of all private wealth in the U.S., but account for only around 8.25 percent of all households.
The low barrier to entry associated with real estate crowdfunding has been attractive for investors that want to invest in properties with smaller amounts. Unfortunately, however, this requires many participants to fund deals. When comparing an individual investor, who may have $50,000 or $100,000 to invest to an institutional investor that may be bringing $50 or $100 million to the table, it becomes apparent what makes institutional capital an attractive choice. Making the shift to institutional capital makes sense for real estate crowdfunding platforms that have a desire to accelerate growth by better servicing the supply side of the equation.
This is similar to what we’ve already seen develop with marketplace lending platforms like Lending Club, Prosper and SoFi. These platforms made their initial start in the retail arena but quickly moved into institutions, owing to the enhanced liquidity and scaling capabilities afforded by institutional capital sources. For crowdfunding platforms that are interested in making this transition from working exclusively with retail to the inclusion of institutional investors, their success hinges in part on their track record and past performance. Going forward, I believe the platforms that are destined to be the most successful in 2017 and beyond are the ones that have the ability to diversify their capital base to include institutional capital.
That being said, the move towards institutional capital is one that must be approached carefully. Take Prosper, for instance. Ninety percent of Prosper’s capital came from institutions. When those institutions began pulling back on their investments mid-way through 2016, loan volumes dropped dramatically. The company was then forced to pivot, launching a renewed effort to attract retail investors to the platform.
The message for real estate crowdfunding platforms is simple and it’s one we’re following at RealtyShares. Create a solid base of individual investors while implementing strong underwriting standards to ensure deal quality. Then, move forward with adding institutional capital so the end result is a diversified, stable capital base.