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 2, we ask Crowd Realty CEO Takeshi Kito about past projects and his goals (here is the Part 1).
Varied investor expectations and motivations for Crowd Realty
— What are the motivations and value standards of Crowd Realty’s investors? Is profit from investment their main concern?
Naturally, many are in it for the yields. However, Crowd Realty is focused on more than just yield, so that’s merely one of several indicators we use to evaluate projects.
For example, in the case of one Kyoto project, there were people who said, “Kyoto is my hometown so I want to preserve the landscape; I like the city so I want to support it” or “It seems like a fun place to stay in Kyoto so I want to get involved” or even “I want to support the team raising the funds.” Other people find Crowd Realty’s concept fascinating and want to try investing with it.
For every ten people there are ten different value standards and decisions, but as a service we want to leverage our unique advantages of diverse market participants and direct P2P financing.
What underpins Crowd Realty is our desire to create something universal. If you only look at yield, you’ll line up all real estate in order of yields and draw a line below which you don’t invest. But even if a property falls below the line in terms of yield, there are other metrics by which it is ripe for investment. Risks and returns cannot be measured with a single ruler – it depends on which investor is holding the ruler.
Creating an ecosystem of proposers, investors, users, and others
— What kinds of projects have succeeded so far?
There was one in Kyoto that went well – it attracted diverse investors and came together as a project. Renovation is now complete and it’s running as an accommodation facility.
Originally it was a vacant house deemed worthless real estate by conventional financial institutions. As a Crowd Realty project, it came under management, generated revenue, and lead to new economic activity. Furthermore, travelers from overseas stay there, bringing an energy to the town, so I think that as it develops, the project is having an indirect, invisible effect as well.
— Sounds like a very local project – is an ecosystem of proposers, investors, and users emerging?
That’s our number-one goal. It’s like we’re creating an autonomous ecosystem with each project. Those ecosystems are composed of the investors and project teams but also, because real estate is involved, local residents, the people of Kyoto, those involved in urban development, and others.
For Crowd Realty, we’re not done once we gather all the money; rather, that’s only the beginning. The question is how to use this money to form an ecosystem around the proposers and circulate value within this system in a way that leads to economic and social activity. This is what we get involved in supporting.
There’s no escaping the concept of time in finance, as it is the business of dealing with future uncertainty, so another question is how to build the ecosystem to incorporate that uncertainty. Our aim as a platform is to support participants in creating value over a timeframe of three to five years.
— And you’re also implementing projects in Estonia?
It’s finally becoming common to hear about Estonia even in Japan, mainly in the startup community, but the country is pouring effort into the IT industry. The population continues to grow in the capital of Tallinn, but many old buildings remain from the period of Soviet rule.
As the population increases and buildings deteriorate, housing demand also increases, resulting in more projects for real estate developers. However, as some cannot get sufficient loans from banks, financial need is on the rise. Together with Estonian companies supporting such fundraising, we are matching difficult-to-fund projects such as real estate development and renovation with Japanese capital.
Handling equity finance in rural areas as an investment bank
— Municipal governments seem to have large needs as well – do you get consulted?
Numerous inquiries every day. Many local governments are facing idle real estate and vacant houses. There are also many shuttered shopping districts, especially in downtown areas. In some cases, we hear from governments that they want to revive these areas. There are many people who live in the vicinity and share values and context, so we believe a certain amount of groundwork for ecosystems has been laid.
— These are the types of projects supported by regional banks and credit unions up until now?
Regional financial institutions deal in debt financing, so the deeper risk money was significantly lacking.
One type of institution that takes on equity finance to supply this risk money is the investment bank, especially the division that issues securities in the primary market, but these are overwhelmingly concentrated in Tokyo and almost non-existent outside of it. Crowd Realty thinks there is significance to creating a new primary market network that covers every corner of Japan.
Still at 1% of ultimate goal
— What stage are you at in terms of achieving your goals? Are you growing steadily as you originally expected?
I think we’re off to a good start with a successful launch. I mentioned that each investor has different value standards, but I think we’re being communicated correctly to those involved. However, compared to what we really want to do; what we really want to achieve, we’ve only accomplished about 1%.
What we’re aiming for is a market that anyone, without exception, can access. To achieve that, we need to extend our projects not only to Kyoto but to the entire world and expand our investor base from Japan to the world as well. I think there’s also a need to work to change each country’s laws.
— Are there things you can solve with technology?
Yes. In more meta terms, Crowd Realty is a platform for exchanging value accompanied by future uncertainty, but I feel that ultimately this value exchange will not even require currency. If P2P transactions are secured with a high degree of liquidity, currency becomes unnecessary.
However, to do that, people need to be able to trade for what they want with what others want at the right timing, and this is extremely difficult. Currency is one solution to that, but with the development of the internet, it is now possible to communicate efficiently with people all around the world, making it easier to find trading partners, and with various applications emerging to supply liquidity to the market, I think there are alternatives to currency.
Thinking of value in terms other than money enables exchange of value itself
— Currently value is exchanged via currency due to convenience, but do you mean substituting this by other methods?
Yes. Exchanging it for a currency reveals how much it is worth “objectively”, as its value is measured with the ruler of currency. But that’s not the only form of value.
There is also the time and material each person put into obtaining that money. To not mediate with money means exchanging this time or material directly. For example, instead of giving money for a townhouse renovation, technically it would be possible to fund the actual material by providing the necessary electric appliances.
Originally money was merely an intermediary, and only gained significance when it was exchanged for something in the real world. To hold on to money without a purpose is to postpone decision-making about what to trade it for at the expense of time. It is to increase options without having decided within oneself what one will use it for, what one wants, and what is valuable in what way. I think the exchange of value would go a lot smoother if everyone made these ultimate decisions.
Since value, unlike price, is subjective, each person would have to think for themselves – and there is no one right answer. It’s essential to be able to execute that subjective decision-making with the right timing.
A value exchange platform beyond real estate
— A platform for exchanging value is not necessarily limited to real estate, is it?
Right. Real estate is one of the things in which many people feel value, but I think we can add a lot of other things. Commodities, for instance. Furthermore, although the platform itself is currently centralized, I think we may need to apply a scalpel to that in the future.
— Many discussions of blockchains and token economies also reference returning to a barter system, don’t they?
I think that blockchains are one effective way to realize decentralized architecture and make it easier to exchange value in ecosystems, especially cyberspace, so the worldview envisioned in those conversations is probably similar to my own.
— Decentralized society is one of Blockchain Insight’s themes – do you think a decentralized society will indeed come to fruition?
Yes, I think the society that Crowd Realty is pursuing cannot be achieved without a decentralized architecture. To exchange value is to form an ecosystem of people with similar values. Values are diverse, so equally numerous communities and ecosystems will form in a decentralized fashion, likely producing a decentralized society based on varied value standards rather than a few centralized standards.
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).