Exclusive: Crowdfund the dream home everyone said you can’t afford
Work for years, make some savings, only to see that whatever you put aside is not nearly enough to make any meaningful investment when opportunity comes knocking.
Three so-called crowdfunding ‘Musketeers’ are already changing that.
Smart Crowd Co-founders, CEO Siddiq Farid, Chief Operating Officer, Abdul Kadir Faizal, and Chief Digital Officer Musfique Ahmed, want you on board their newest real estate platform to start building your portfolio.
AMEinfo held an interview with Farid, asking about Smart Crowd the idea and how his team plans to plow ahead with providing access to masses which previously had faced insurmountable barriers to investing in the real estate sector.
This will be a global project, but team Smart Crowd needs to walk before it can run, focusing on income generating UAE properties for UAE residents as a start, and soon after that opening up the platform to international investors, and shortly thereafter, list international real estate opportunities.
“The idea is anyone, from anywhere can invest anywhere and easily get into the investment game,” says Farid.
Smart Crowd successfully completed its seed funding round of $600,000, with major financing from Shorooq Investments, along with backing from cutting-edge DLT firm Abaxx Technologies; early-stage venture fund and seed accelerator, 500 Start-ups, and other high-level strategic individual investors.
Says Mahmoud Adi, Shorooq’s Founding Partner: “By enabling clients to invest in a property for as low as AED5,000 ($1,362), Smart Crowd is fulfilling people’s dreams of investing in homes and encouraging everyone to start saving now versus waiting to get a huge amount of capital which can take decades.”
Farid says: “We are on a rapid and exciting growth journey of democratizing real estate ownership.”
Smart Crowd currently operates under an Innovation Testing License (ITL) from Dubai’s Financial Services Authority (DFSA) but plans to pursue a full license.
In April 2018 Smart Crowd became the first and only financially-regulated digital investment platform in MENA.
Farid conceived the idea in the summer of 2016 at the height of Brexit anxiety, looking to take advantage of potential price pressures on UK’s real estate, aiming to “pick them (properties) on the cheap and think long term.”
“When I started looking, I couldn’t find anything I could afford, so the idea of crowdfunding began percolating, knowing that after 10 years of professional experience, I still couldn’t get on the property ladder and build a portfolio that provides me passive income,” Farid starts.
The crowdfunding real estate industry is quite nascent, with the first company engaging in such activity going back to 2012.
“There is a huge gap that we can fill in the market, especially in Dubai but while I am a corporate finance guy, I needed partners that can compliment my skills,” says Farid.
Musfique Ahmed, a former colleague of Farid at Ernst and Young, and who worked on prominent projects from a tech perspective, was sold and quickly came into the fold.
“Then I needed a real estate person. I was introduced to Abdul Kadir Faizal, himself a real estate entrepreneur, having set up his own brokerage firm in 2010, ERE Homes with 80 consultants, and becoming a top 5 real estate brokerage in Dubai before exiting to global brokerage firm Gulf Sotheby’s International Realty,” added Farid, explaining how the 3 Musketeers, as they are called, were born.
How does Smart Crowd work?
Let’s say there is a $1 million apartment for sale. “This will be a screened opportunity, as not anything that comes our way makes it. We have a very stringent propriety 100 data points screening criteria and due diligence process to qualify the property before it goes onto the platform,” begins Farid.
“We will provide a digital prospectus, and so you come in, are shown a nice video that walks you through the property, the area, and we provide you with all the financials, legal docs, registry, independent market valuation, and other independent data to allow you to make an investment decision, using an online platform, and in 5 clicks anyone can become a property owner.”
After it is marketed to an investor base, the listed property has a 30-day window to receive the funding and if there are enough people or cash to aggregate the $1m to buy that property, Smart Crowd will transact on it.
“If we don’t reach our target, people will get refunded and we go back to the seller, perhaps renegotiate the prices, or drop it, whatever the market dictates at the time,” continues Farid.
“But if we have the funding, we set up a special purpose vehicle (SPV), register the property to that vehicle, and investors will be shareholders in that SPV.”
Risk and rewards
Like any business, real estate comes with high risks and rewards. Unless investors have a good understanding of the data being presented, it will be too late for them to back out once the investment is made.
“Education is a big part of our marketing and we provide a lot of content where we highlight the challenges, risks, and rewards, and we don’t encourage people to put all their eggs in one basket here,” Farid warns.
What’s even more fascinating is that Smart Crowd does its ‘KYC’ on individuals, tracking where people work, how much they earn and establish limits on how much they can invest based on their income.
Retail investors, Farid explains, can’t invest more than $50,000 a year, whereas institutional and professional investors have no limits but they still have to provide further documentation proving at least a million dollar worth of net assets, excluding their place of residence.
“We closely monitor the risks of retail investors, like someone in a mid-management role and wanting to make a $100k to 200k investment and which could prompt us to pick up the phone and inquire if they were absolutely sure of their decision, knowing that real estate is an illiquid asset, not easy to get out from,” Farid explains.
What if you want out?
Smart Crowd is creating a secondary market for people to exit and sell their shares.
“The more desperate you get, the more people will take advantage of those situations, to maximize returns,” Farid warns.
But he goes on to say that stakeholders in a property who want to exit can use the platform, list their shares based on estimated market values and on third-party data, which sellers can price below or above such values.
If the shares receive bidders, then the sale can go through.
“The challenge is that local land regulations make this unfeasible due to many charges associated with a change of ownership, like transfer fees, or notification fees, and where the economics don’t yet justify having a readily available secondary market,” clarifies Farid.
The other option investors can overcome the inability to sell prior to a property holding period that ranges anywhere from 2-7 years, is when investors can call for a vote, at any point in time, as market conditions dictate, and if the majority agrees to sell, then Smart Crowd exits the property.
“We don’t make decisions on investors’ behalf,” assures Farid, but “We act on their behalf and exit the property.”
“We make our money by charging a structuring fee based on the value of the property, and set it in 2 tranches: The first is a charge of 1.5% at the time of investment and 2.5% at the time of the exit.”
During the first years of operation, the company makes most of its money in the first tranche, and from rent income.
“We charge an admin fee up to 5% of the rent being earned on the property proportionate to investors’ share in the project and which allows us to manage the SPV, provide reporting to investors and give access to the dashboard,” details Farid.
Why not tokenize the operation?
People’s investments with Smart Crowd are separated from the assets and liabilities of the company, providing them with protection from any operational risk of Smart Crowd and the platform.
As well, the real estate-backed investments will be ring-fenced and backed by the hard asset of which they have direct proportionate economic ownership.
These are the very same reasons why Smart Crowd is not on the Blockchain, yet.
“We studied this quite a bit, along with the ICO (Initial Coin Offering) model. All it came down to is this: It’s too early,” says Farid.
“There are lots of benefits to the tech, and as we build our POC (Proof of Concept), we are putting some of the platform elements, like smart contracts, on the blockchain, but at this point, local authorities don’t recognize tokens as a form of asset ownership.”
He additionally asks: “What happens when an investor using a blockchain real estate platform passes away? What exchange will be used to liquidate the asset and how do you price the token? What happens if the company behind the blockchain goes under; is the investment then gone?
“Most likely it is, Farid answers, adding, “In contrast, here you have a share certificate as part of the SPV, and anyone can go to the DIFC registrar, or go online https://www.difc.ae/public-register and ask for a title deed and see his name there.
“The only risk we expose you to here is real estate risk.”
Smart Crowd is not yet live to the public but has already performed 2 transactions with 11 investors.
“Our next set of transactions are going to go live in 2 weeks’ time (around 1st of November). We want to give 100 people access to our platform for our next 3 properties,” says Farid and urges: “So get on that waiting list and begin taking advantage of a referral system that earns you points, and moves up the ladder.”