Crowdfunding investor Nico Choruma, who invested in the Petro Fina Building, which will be converted from an office into a condo, in Calgary, on Oct. 6.Todd Korol/The Globe and Mail
Real estate crowdfunding is a relatively new investment approach that, despite a significant degree of complexity, aims to democratize access to real estate investment by streamlining the investing process and removing some of the barriers to entry. But in an increasingly financialized housing market, the risks related to this type of investment could extend beyond those assumed by individual investors.
“For early stage investors, oftentimes crowdfunding can offer them opportunities to experience direct investment themselves,” says Alixe Cormick, founder and principal of Venture Law Corporation, a boutique securities law firm. “It’s exciting for some people.”
In Calgary, two office-to-residential conversion projects, The Cornerstone and the Petro Fina Building, have drawn the interest of more than 1,500 investors from across the country, who for as little as $1 now have a stake in the revitalization of the city’s downtown core.
One of these investors is Nico Choruma, a 28-year-old Calgarian, who found the proposition of the buildings’ owner, PeopleFirst Developments, hard to resist. “I found out by following Maxim Olshevsky [on social media]; he’s a big player in some of these office transformations,” he says, pointing at the developer’s first conversion project, The Cornerstone, whose completion is expected later this year. (Mr. Olshevsky is the managing director of PeopleFirst Developments, as well as CEO of Astra Group, a real estate development and management company.)
On April 27, just seven days after the project launched on Addy, a real estate crowdfunding platform, Mr. Choruma invested $1,500 in the office-to-residential transformation of the Petro Fina Building. “To me, it seemed like a no-brainer, given the intentions to bring more residential units to the area,” he says. “As a resident of the area, the more people that live here, the more vibrancy we’ll have.”
The crowdfunding goal set on the platform for the Petro Fina Building was $500,000, or about 1 per cent of the total cost of the project, which is estimated at roughly $44-million. With an ambitious return-on-investment projection of 78 per cent by the term’s end in 2028, this goal was met within 12 days, and the average investment was $641.20.
But high returns come with high risks.
“You don’t really own rental real estate itself,” explains Ms. Cormick, the securities lawyer, about Addy’s crowdfunding model, which is based on fractional ownership. “You own an interest in a company that owns real estate, and there’s a substantial difference there.”
Depending on the issuing company’s legal structure, crowdfunding investors may not be as protected as secured creditors, who hold a lien on the debtor’s property.
On the flip side, unlike other types of real estate investment, such as mutual funds and trusts, crowdfunding investors can buy a limited partnership unit for as little as $1 or for as much as $10,000, depending on the investor’s suitability, which limits their exposure to risk.
This allows renters such as Mr. Choruma to reap some of the benefits of investing in a bustling real estate market like Calgary’s, while also giving him an opportunity to participate in the revitalization of his own neighbourhood.
Nevertheless, Ms. Cormick suggests investors diversify their portfolio. “Crowdfunding is kind of the angel investor model, they should have a portfolio of 40 to 70 stocks, of which they should expect at least 90 per cent of them will not perform.”
Mr. Choruma acknowledges that any real estate investment is subject to risk, but the success of other office-to-residential conversions in Calgary, as well as the backing of this specific project by the City of Calgary, gave him the confidence to move forward with his first crowdfunding investment.
Constructed in 1959, the Petro Fina Building is one of 10 projects that have received an incentive from the City of Calgary for its conversion, and the second grant of this kind adjudicated to PeopleFirst Developments.
“That definitely eased my mind to an extent,” Mr. Choruma says.
But easing the minds of investors could exacerbate other, more pressing issues.
If the popularity of real estate crowdfunding grows, so will the challenges an increasingly financialized rental housing market poses for affordability – at least on paper.
According to Philip Ashton, an associate professor of urban planning and policy at the University of Illinois Chicago, when crowdfunding platforms start to compete against each other to gain projects and “capital starts to chase projects,” there is a chance this process could “bid up the value of the asset.”
The uptake of real estate crowdfunding hasn’t been as widespread as proponents expected, however. “The promises of democratically generated masses of investment capital just did not turn out,” Mr. Ashton says, pointing at the lack of liquidity and higher risks as some of the reasons lower-end investors haven’t bought into this model.
But this doesn’t mean the disruptive potential of real estate crowdfunding should be disregarded, especially when it comes to protecting the right to housing.
“Having these new, ‘innovative’ crowdfunding applications extends the idea that the purpose of housing should be an investment and that it should be democratized so that people benefit from the spillover effect of owning housing,” says Cloé St-Hilaire, a Ph.D. candidate of urban planning at the University of Waterloo, whose research is focused on financialization and digital technologies in Canada’s rental housing.
“The fact people are turning to fractional ownership to have enough funds to make ends meet is also a reflection of the crumbling welfare provision that we have in Canada,” she adds. “It’s a very nuanced and complicated issue, but it reflects the dynamics of viewing housing as an investment rather than a place where people live.”