Crowdfunding: a real alternative for investing in real estate live
By Nicolas Terrier
Negative interest rates have largely contributed to creating an environment conducive to real estate investment. The SNB has revised its 3-year inflation forecast downwards between December 2018 and March 2019 [i], thereby mitigating the urgent need for a restrictive monetary policy to raise its key interest rate in order to combat inflation.
The fact that pension funds invested around CHF 168 billion directly in Swiss real estate in 2017 (+141% in 15 years) [ii] allows us to assess the current craze for this asset class. The share of real estate in the balance sheet of Swiss pension funds is now 18.8% compared with 14.4% 15 years ago [iii]. These key players are even tending to move out of Switzerland by allocating more real estate investments abroad. According to Wüestpartner, this has risen from CHF 4.0 to 18.8 billion over 15 years [iv].
Faced with this situation, access to real estate for private investors has never been more difficult. On the one hand, institutional investors are seizing the best opportunities with large investment volumes, and on the other hand, the financing conditions of bank providers have become increasingly restrictive.
Direct” and “indirect” investment
By investing directly, the owner’s name is entered in the land register, which gives him or her a real title to the property in question.
On the indirect investment side, the investor will hold shares in a company which itself becomes the owner of the real estate directly. It is therefore the company that is registered in the land register and not the holder of the shares.
Direct investment avoids double taxation that exists in a company. That is taxation on the profit within the company and then again on the payment of dividends to shareholders. In addition, direct investment has a lower administrative cost, since the company has to assume the accounting and preparation of financial statements.
On the other hand, one should be aware of the costs of transferring the land register when a property changes hands. As a buyer, you will, therefore, have to bear these transfer costs, which vary depending on the canton in which the property is located. Whereas when buying shares in the company that owns the property, these costs are non-existent since the owner of the property in the land register remains the company.
Crowdfunding: a new alternative for direct investment
Direct investment holding can take several legal forms.
- The first being the investor who becomes the owner of a plot of land in its entirety. This is known as individual ownership.
- The second being the investor who shares this property with another co-owner. He also shares the risks, management, indebtedness, and decision-making power. This is called simple co-ownership.
- Finally, the investor can also become co-owner of a fraction of a parcel of land on which there is a building divided into “condominium ownership” (PPE). The fraction of the co-owner is then linked to the use of a part, an apartment for example, and a specific management structure is put in place [v]. [v].
Crowdfunding allows several co-owners to invest together in a building with a high return. The real novelty with crowdfunding investment (participative investment) is that the fraction of the co-owner is not linked to a specific part but to the whole building, which offers the following advantages:
1- Dilution of rental risk
An investor who buys an individual apartment will be entitled to rental income if the apartment is rented to a third party. For an equal amount of investment, crowdfunding allows for a share of several apartments in a building, entitling the investor to a portion of the rental income from each of the apartments. Therefore, if a tenant defaults and no longer pays his rent or if an apartment becomes vacant, the impact of this interruption of income is reduced under crowdfunding, since it does not depend on a single tenant. This is the principle that suggests not putting all your eggs in one basket.
2- Alignment of interests
With crowdfunding, all investors have a common goal, which is to generate a return. Decision-making is then simplified since, naturally, all investors should agree more quickly on strategic decisions for the development of the property. When an owner buys an apartment in a building, he has to agree with the other co-owners who do not necessarily want to generate a return but on the contrary, want to live there and therefore possibly add comfort in a common space, such as the cellars for example.
In addition, as managing director of the condominium, Foxstone coordinates efforts on behalf of all investors and proposes a strategy to enhance the building, saving investors the need for professional real estate knowledge and time.
3- Flexibility
This new way of investing also makes it possible to get out of one’s locked-in investment by selling one’s shares without brokerage commissions. Contrary to ordinary investment, crowdfunding offers the possibility to exit a part of the capital immobilized in the building. Indeed, the shares are granular and can be sold separately. For the same amount, in a situation of need for liquidity, an owner of an apartment has no choice but to sell all of it. Crowdfunding, therefore, provides flexibility in the event of unforeseen circumstances.
In the context mentioned at the beginning of the article, crowdfunding brings a new form of investment that brings together private investors so that they can access the real estate market previously reserved for insiders.
Foxstone is part of this new alternative by providing a turnkey service to facilitate all the steps and allow investors to save time while retaining a great deal of flexibility in the allocation of its investments, as an institutional investor would do.
References
- [i] Banque Nationale Suisse. (2019, 05 13). Ensemble de statistiques Données économiques. Récupéré sur Banque nationale suisse: https://data.snb.ch/en/publishingSet/B
- [ii] Wüestpartner. (2019, 03). Immo-Monitoring. édition du printemps.
- [iii] Wüestpartner. (2019, 03). Immo-Monitoring. édition du printemps
- [iv] Wüestpartner. (2019, 03). Immo-Monitoring. édition du printemps.
- [v] Naef. (2018, 02). No35 La copropriété version suisse, comment ça marche ? Récupéré sur Naef: https://www.naef.ch/wp-content/uploads/2018/02/VALEURS-IMMOBILIE%CC%80RES-N%C2%B0-35-light-14-15.pdf
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