Real Estate Crowdfunding versus REIT

Since the Why we do, what we do and the Exclusive beta testing program articles have been posted, we have been receiving a lot of positive comments. On behalf of our team, we appreciate your feedback! We will continue to provide you with tips on real estate investing so that you can reach your investment and saving goal 🙂

There is one question that repeatedly comes up from the comments we get…

Real Estate Crowdfunding versus REIT, what’s the difference?

Real Estate Investment Trusts (“REITs”) are corporations that acquire and manage a portfolio of real estate investments with the mandate to return 90% of their profits back to investors.

>You can watch this YouTube clip to learn more here: https://bit.ly/2PfajlB

Real Estate Crowdfunding (“RECF”) provides investors with the opportunity to acquire a fragmented ownership interest in a particular real estate investment.

>To refresh your memory, we have written a post about RECF here: https://bit.ly/2Qmqknh

While REITs and RECF projects have pros and cons for investors, we want to clear this up once and for all.

In taking a closer look, we can separate them by these following eight traits:

  1. Liquidity
  2. Ownership
  3. Portfolio allocation
  4. Timing
  5. Transparency
  6. Communication
  7. Accounting
  8. Management sustainability

 

[1] Liquidity

RECF: selling your REIT investment means you are divesting your equity interest in all of the Real Estate (“RE”) investments held by the REIT. Whereas with RECF projects, you can decide exactly which project to sell. Therefore, REITs are all or nothing when it comes to liquidity, while a portfolio of RECF projects provides you with greater flexibility.

REITs: buying and selling REITs are conducted on a stock exchange which provides investors with a strong form of liquidity and price visibility, which can be positively or negatively affected by stock market trends and behavior (referred to as beta). Since the RECF industry is relatively new and experiencing rapid development, there is currently no centralized secondary market for RECF investments.

 

[2] Ownership

RECF: investors can decide exactly which individual RECF projects to invest – this provides them greater choice in building a more tailored RE investment portfolio. Whereas for investors in a REIT, they must purchase a fragmented ownership in all RE projects held by the REIT. Furthermore, Investors decide whether to be an equity or debt investor in an individual RECF project, whereas they are confined to being an equity investor in a REIT.

REITs: investors benefit from a REIT manager who manages a larger Assets Under Management (“AUM”), who is able to provide a more competitive (lower) fee structure, as compared with a RECF platform.

 

[3] Portfolio allocation

RECF: given the above point about fragmented ownership, investors can build a more personalized RE investment portfolio through RECF investment that best matches their risk vs. reward profile. Furthermore, should the investor’s risk vs. reward profile change over time, it will be easier to reallocate into individual RECF projects.

REITs: investors are confined to the REIT’s existing portfolio allocation in RE and is confined to accepting the stipulated risk vs. reward profile. This leaves REIT investors somewhat in the dark when it comes to assessing the underlying risk of their REIT investment.

 

[4] Timing

RECF: investors can control the investment horizon of individual RECF investments and build a more tailored portfolio duration to reach a personal saving or investment goal. With this, coupled with greater transparency, investors can decide on individual RECF projects based on key criteria, such as RE asset class, cap rate, levered yield, covenants, fees, etc.

REIT: investors are restricted to buying and selling a single unit trust ownership in the REIT which holds RE portfolio investments that will have a mandated duration profile. The ongoing buying and selling of RE projects by a REIT will mostly be conducted irrespective of the individual investor’s input. This makes REITs more of a one-stop shop.

 

[5] Transparency

RECF: investors access greater information on individual RECF projects and Asset Managers (“AM”), given the more substantial amount of information disclosed (investment memorandum, valuation report, financing agreement, partnership agreement, property condition assessment, and other reports). This gives investors much more confidence to decide exactly which RECF project to invest.

REITs: investors are restricted to the information disclosed through announcements and reports stipulated by stock exchange disclosure requirements, however, the depth of information is limited on individual projects. Further, there may be certain news and developments which the REIT is not required to disclose (by regulation), which would not be the case for RECF projects given the more direct communication channel investors are granted.

 

[6] Communication

RECF: investors have a more direct channel of communication with the AM, whether through phone or email, which can provide investors with greater confidence (assuming the AM can deliver a reasonable response)

REITs: investors are confined to communicating with REIT’s investor relations teams, which may only provide a response based on stock exchange disclosure requirements – this can provide a shield for REITs to dodge certain questions or scrutiny.

 

[7] Accounting

RECF: investors are presented with cash accounting of financials and are able to view where every single dollar is invested, returned and spent. This gives investors a greater understanding of the sources and uses of the RECF project. Greater transparency builds confidence.

REITs: investors are presented with a set of accounts which will leverage on certain non-cash adjustments (depreciation, changes in fair value) that will require a more technical understanding for investors. Further, since REITs hold a portfolio of RE investments, it will be more difficult to assess how the Investor’s investment dollars are put to use, as compared with RECF investment.

 

[8] Management sustainability

RECF: investors can decide to invest in certain AM (the management team) based on their focus in a particular RE asset class and assessing their performance and track record. For example, an investor may decide to invest in a project which the asset manager specializes in logistics, while the other asset manager is more suitable to an office. This means the investors money in a RECF project is being managed by the most suitable team of RE professionals

REITs: investors in a REIT would be confined to a single core team to manage RE investments across all asset classes. This means REITs may not have the most suitable RE professionals managing a particular RE asset class.

 

We hope you find this article helpful. Please let us know what you think. If you have any request, please contact us at [email protected]. We would love to hear from you.

We are currently launching our prototype and would like to invite our readers (Yes, YOU!) to join our exclusive beta testing program.

 

You can read about how the program works here: https://bit.ly/2R4tCLA

Or if you want to apply directly, click here: https://beta.denzity.io/apply

 

Until next time,

Denzity Team

 


 

Posts you might be interested:

Types of Real Estate Investment: https://bit.ly/2OoR4C8

Equity vs. Debt Crowdfunding, which is right for me?: https://bit.ly/2OuxIvr

Introduction to Real Estate Crowdfunding: https://bit.ly/2Qmqknh

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