Crowdfunding, a largely western concept, is slowly mushrooming in the Indian realty set-up. The small amount of money involved is one of the major advantages of this investment tool.
Diffusing your investment portfolio towards real estate can be a bit taxing owing to the heavy capital involved. When you are facing a crunch or you decide to invest a limited amount in real estate, opting for alternate routes of investments come handy. One such method is ‘crowdfunding’ which involves raising capital from multiple individuals/parties. Small contributions from various stakeholders are collectively used to invest in real estate which further reaps returns to the buyers.
Though the concept is at a very nascent stage in the Indian realty market, it holds the potential to transform the state of the economy and real estate. The key feature of crowdfunding is that it involves small-money from individual investors, hence can be extremely popular in India. Although the concept is prevalent only for commercial properties, it has its pros and cons which an investor must weigh before opting for this investment route.
Pros of crowdfunding in India
- The small shares of capital involved dilutes the risk for all stakeholders including the developers, the promotors and the investors. “The very nature of having diverse investors makes crowdfunding less risky in comparison to other tools of investment,” says Dipakk Vadehra, Co-founder, Connexions Abroad.
- When you invest via a crowdfunding campaign, you are essentially investing in a single property of your choice. This is unlike Real Estate Investment Trusts (REITS), wherein you buy shares of a geographically diverse amount of properties. Thus, through the crowdfunding route, an investor can select which property they want to keep in their portfolio.
- Since crowdfunded properties are not publically traded, their valuation does not change on a minute to minute basis. As a result, there are lesser fluctuations in the value of such properties.
- You can avoid the burden of managing a property. Becoming a shareholder of a property via the crowdfunding campaign allows you to enjoy the gains reaped out of disposing the property or the rent earned through it or both. The onus of managing the property vests with the crowdfunding company or the promoter.
Cons of crowdfunding in India
“Crowdfunding may seem to be a boon in a cash-crunched market of India. However, the biggest disadvantage of this investment tool is that it does not have a real estate specific legal framework and thus could be a risky investment tool,” adds Vadehra.
Moreover, if you are proactive about managing your realty holdings, crowdfunding will not be a good idea for you since investors have very little control over the crowdfunded properties and have to trust the developer for management of the same.
Furthermore, such investments are illiquid and not traded, which means that in case of an emergency, you might not be able to cash out on the investment before the property is disposed.
Overall, crowdfunding is a transformative concept for real estate investments in India. However, it may not be beneficial for every investor. Since there are not many crowdfunding companies listed in the country, it is advised that buyers do a thorough due diligence of any such schemes offered in the market and rely on the reputation of the builder for making a sound investment choice.