Crowd Realty is a platform that matches fundraisers and investors like a peer-to-peer (P2P) investment bank. Offering a service combining real estate securitization and crowdfunding, it is unique in that it breaks with the received wisdom of high-entry-barrier public offering fundraising and allows organizations and even individuals to become project proposers and raise amounts ranging from small to comparable to J-REITs (Japanese real estate investment trusts). Could Crowd Realty represent a new fundraising model for the coming decentralized society?
In Part 1, we ask Crowd Realty CEO Takeshi Kito about the company’s founding and business model.
New mechanism for cheap, easy funding and investing
— What led to you establish Crowd Realty?
Prior to establishing Crowd Realty, I was a coverage banker for Merrill Lynch’s Investment Banking group in the real estate sector. I helped raise funds for real estate companies and J-REITs, gathering over 800 billion yen [$7.12 billion] in public offerings as team leader – 1 trillion yen [$8.9 billion] including syndicate* funding. Because I was concurrently part of the real estate investment banking division, I also participated in actual real estate securitization.
*An underwriting group formed by multiple securities companies and registered financial institutions to distribute underwriting liability for issued securities when raising funds.
At that time, I felt strongly that the number of people who could gather risk money such as equity finance** from public markets was limited. They had to be listed companies, listed REITs, or other entities that had cleared the high hurdle of listing.
**Like issuing new shares, fundraising that leads to an increase in equity (shareholder capital), with the basic effect of strengthening financial structure as fundraising without a stipulated repayment date.
Believing that we needed a new mechanism through which anyone could raise funds more easily and at lower cost, I set up Crowd Realty in December 2014. It provides an opportunity for people who previously could not access the market to both raise funds and invest.
I began to form the concept in 2013, but crowdfunding business models involving securities were already appearing overseas. At that time, Kickstarter and others like it were drawing attention as more general models, but I thought that at their core they were very similar to investment banks handling capital market business.
What is Crowd Realty?
A P2P investment bank platform specializing in real estate, it combines real estate securitization and crowdfunding to realize diverse real estate projects by enabling fundraising from a wide range of individual investors through public offering.
— What kinds of methods and standards are applied to project real estate?
In many cases, fundraisers bring it as project proposers. Crowd Realty is merely in the position of an investment bank platform, so we do not find properties ourselves and say, “We want to do business with this, so will somebody please manage it?” If there are people wanting to gather funding, our position is only to support that.
Essentially, Crowd Realty is a P2P model rather than a B2C investment fund. It’s easier to imagine it as something like AirBnB. Anyone can be a host (proposer) or guest (investor), and we simply match them. Our goal is to create a market, not enter into it ourselves and generate profit as a player.
— In the real estate finance world, the P2P model seems to be brand new.
As far as sharing economy services go, P2P model platforms are very common, whether it’s AirBnB, Uber, or Mercari in Japan. There are also other services for exchanging skills and sharing space, but in real estate finance, it probably is quite new. The securitization scheme that Crowd Realty uses is actually not a legal scheme but something we developed ourselves to offer the service.
Drawing attention to unconventional real estate
— What are the challenges associated with enabling anyone to fundraise or invest at low cost in the current real estate finance market?
Conventional fundraising frameworks and conditions are those decided by specific financial institutions, governments, regulatory agencies, and industry organizations. However, looking at the world more broadly, there are many cases that fall outside of these frameworks but still require funding.
For example, in the real estate industry, the Building Standards Act was revised in 1981 and earthquake resistance criteria changed. Since then, many properties that do not pass the new earthquake standards have been excluded from investment. In the case of income properties there are classifications, and depending on the issuer, various lines are drawn, such as only investing in Class A buildings in Tokyo.
But the number of real estate assets across the world is innumerable. Many were built before 1981 or are located outside of Tokyo. Some are owned by public sector actors such as municipal organizations rather than private businesses, so we want to get rid of the uniform framework to include more diverse real estate.
— Are you also opening the door to people previously unconnected to real estate becoming investors?
Exactly. We want to capture as much of the market as possible. Saying it like that may seem to give it social significance or make it sound sentimental, and of course there are those aspects, but our goal is to create a completely inclusive, universal capital market.
I think that having a universal market in which all people can participate is extremely important. I want all real estate to have access to funding via the capital market and for it to be easy for anyone to invest in it.
— Who decides how to manage the real estate, and how do they decide?
The businesses handle the actual management. One easy-to-understand example is Hoshino Resorts. Hoshino Resorts manages accommodation facilities but it’s actually not the owner of the properties. The owner is Hoshino Resorts REIT, behind which are individual and institutional investors outside of Hoshino Resorts. These parties hold the properties indirectly through the public market and Hoshino Resorts manages them under its brand as HOSHINOYA. The market that Crowd Realty is creating has the same structure; we receive requests from businesses and support something like the formation of a public REIT.
— In the case of shares, there are general meetings where shareholders can voice their opinions to the companies. Is there a similar function with Crowd Realty?
As a form of communication from the proposers to the investors, we issue quarterly reports on each project. We also hold meet-ups offline to connect proposers and investors. Both are a form of IR by the proposers, but in the future we’d like to optimize these elements by incorporating them into the system.
Regulatory impact and uncertainty risk unique to the finance business
— What makes investment-type crowdfunding targeting real estate unique?
Compared to rewards crowdfunding, the project uncertainty is high whether it is real estate or business. Of course we explain the risks and take measures such as covering it with insurance, but because it is real estate, there’s the possibility that a building will be damaged by fire or other disaster.
Our Kyoto projects include accommodation facilities, but revenue from the accommodation business involves uncertainty. For example, changes in the legal system, such as the new private lodging law enacted on June 15, can have an impact.
— Fundraising means stepping into the finance sector. Did you face a lot of difficulties when you began as a startup and launched the service?
Finance can be particularly harsh territory, and it’s even tougher when trying to raise funds globally. We have to check the blue sky laws of each country or territory in which we are attempting to fundraise, and then implement in accordance with them. Currently we only have a Japanese license, but we want to acquire foreign licenses as soon as possible to conduct global offerings.
But even before all that, creating a financial institution from scratch was no easy task. We had to negotiate with the Financial Services Agency, the Ministry of Land, Infrastructure, Transport and Tourism, and the Kanto Local Finance Bureau numerous times to confirm our plans and acquire the financial instruments trading license. We had to build Crowd Realty’s easy, low-cost real estate securitization and electronic public offering mechanism into a system, and, more than anything, because there were few who had experience fundraising through public offering, it was hard to get people to understand the concept.
Nevertheless, the word “Fintech” began to circulate around 2014, and people began to launch services and companies in areas such as robo-advisors and asset management. With that in view, I knew it would not be easy but also that it was not impossible.
Interview date: June 19, 2018
Editor: Makoto Nakazato
Photographer: Tokuhiro Watari
CEO, Crowd Realty, Inc.
Takeshi Kito graduated from the University of Tokyo’s Faculty of Engineering with an MS in Architecture in 2007. Following Boston Consulting Group, he joined Merrill Lynch Japan Securities Co., Ltd. in June 2010. In the Investment Banking group, he led a number of projects including IPOs and FPOs mainly for real estate companies and J-REITs as well as advisory work for real estate development securitization. In December 2014, he established Crowd Realty, Inc. and became its representative director. He is also a member of the Cabinet Office’s Innovative Technology/Business Model Evaluation Committee as well as an executive board member of the Fintech Association of Japan (FAJ).