TheUrbanDeveloper.com caught up with Moresh J. Kokane, co-founder of Melbourne-based crowdfunder Estate Baron, to learn more about the world of crowdfunding for property developments and the company's plans here in Australia.
What is Estate Baron and how can developers utilise the platform?
Estate Baron is a Crowdfunding platform focused on financing Property Development projects. We can be considered very similar to a property funds management company or an online market place for property development syndication.
We are unique in the sense that we are the first and the only platform in Australia which is open to everyone including retail investors and not just wholesale investors. We can help developers fund first mortgages, second mortgages, preferred or ordinary equity. However, we have found that preferred equity is our sweet spot.
Another advantage is we also have a number of buyers, so we can also have investors becoming end purchasers of the property being built.
Tell us about your projects to date?
It is early days for us. We have done three projects for a total of $2 million. All of them locally in Melbourne including Frankston, Caulfield, and Mount Waverley. The important thing is we have done one project under a retail license structure, which is a first in Australia. What that means is we can promote an investment offer openly to everyone (given that it works under a Product Disclosure Statement, Registered MIS and Retail AFSL).
Using the example of a shopping mall, early on it is hard to get it going as there are neither enough shops nor enough visitors. And it continues to be so as no one wants to visit a mall with no shops and the shops won’t come without the visitors. So it is hard to get it going, a ‘chicken and egg’ problem. But on the flip side once you get it going people will visit the mall with the most shops and more shops will come to the mall with the highest traffic. The market place benefits from scale.
We have already crossed the tipping point by closing three deals and over one hundred investors and 1200+ people on our platform. From herein given both our compliance and tech capabilities, as well as strong distribution, we will see a change and spike in investor interest.
What sort of return are these investors looking for?
It’s very dependent on the structure of the offer and the deal. Whether it is a 1st, 2nd mortgage or preferential equity. It is hard for us to compete at 1st and 2nd mortgage right now but preferential equity works best. We look for lower returns than what regular equity returns are given to wholesale investors.
You have a highly credentialed team of backers - tell us about them.
Absolutely. Benni Aroni was the lead developer’s representative in Eureka towers and the lead of the syndicate that sold the Australia 108 project. He founded Watersun homes. Adrian Stone is a leading Melbourne tech angel investor. Mark and Luke are successful entrepreneurs in their own right. Shuang Li helps in opening up the Chinese market and I have a couple of start-ups under my belt in the US where I worked for the better part of last decade.
We have already walked away from acquisition offers from some of the biggest property developers.
How big is the crowdfunding market for property development in Australia?
PWC projects real estate equity crowdfunding to be a US$250 billion industry by 2020. Australians are per capita the highest invested in property worldwide. An Australian is three times likely to be invested in property than an American. There are a number of existing property funds management companies already and the Aussie market for this should be around $50 billion by 2020. The market place leader can be in position to be an AUD $10-20 billion company by 2020.
What sort of regulatory hurdles did you have to overcome?
More than overcoming, understanding it was the first step. Once you understand a problem you can start solving it. It took us some time to understand the exact legal structure that would be compliant and acceptable to developers as well as investors. It is very easy to make costly mistakes here. Once we had it sorted out the next step was to either build it up from scratch or find an existing structure which we can piggy back on. We were fortunate enough to find an exact match and we then went about the next step of putting an offer in place and getting the investors for it.
What do developers need to know about the platform's costs?
Developers should not be worried about our costs. We offer a net rate which should be competitive with the market for equity funding. We are in the process of putting together a consortium of developers who can invest in the growth of the platform and get preferential rights for fundraising as well as discount on fees. We’re happy to talk to property developers who want to get access to a new funding source in this era where banks are becoming more reluctant to lend to property development.
The model is similar to Fundrise and Realty Mogul in the US - how are they going?
The industry is fairly mature in the US. Fundrise and Realty Mogul both have raised hundreds of millions and continue to rack up high numbers. There are almost 100 ‘me too’ platforms in the US now but that is a much larger market and the compliance is much easier. The equity crowdfunding proposed deregulation is not going to work out in Australia and we have taken the stance that we want to work within the existing compliance regime. That is our USP, a capability to raise as much funds we want without any limits on how many investors can participate or how much each person invests. It is the start of a revolution in property development finance.
What's next for Estate Baron?
Step 1 is to acquire the license holding company, that will chop off a lot of costs. As mentioned earlier we are putting together a consortium of developers for this and these seed investors can get a lot of preferential treatment in fund raising.
We can work within our existing rented license, but I would very much like to be in control of our destiny. And it is a matter of recurring costs as well.
Step 2 is get a few more deals done and scale the model.
Step 3 is where we get out of the position of being gatekeepers and put together a more democratic model where the community can both submit and select the projects which are selected for fundraising.
Step 4 - Blockchain implementation. This is going to be a pretty big deal but I will leave it to a future conversation to discuss these implications.
For more information check our the Estate Baron website.