If the Swarm Finances a Luxury Hotel

The restaurant critics of Gault & Millau are feared for their cynical-sarcastic formulations. If a meal is served to them, which is displeasing to their delicate palate sensitivity, it hails sharp-tongued criticism. However, Christopher Schlang, maître de cuisine in the restaurant “Bootshaus” of the “Weissenhaus Grand Village Resort”, obviously knows how delicious dishes are prepared. The testers of the gastronomy leader of his kitchen, founded by French gastronomic critics, Henri Gault and Christian Millau,

The most recent award is not only a welcome trophy for the five-star superior hotel complex opened on the Schleswig-Holstein Baltic Sea coast in 2014. It is also a further proof for 1670 investors that they had not made a bad choice when they jointly handed over € 7.5 million to the former AOL German chef Jan Henric Buettner to make this dream of the luxury resort at the Weißenhäuser Beach – exclusively via the Internet.

On the network platform of the Berlin company Companista Buettner had promised money for his project – and in this “Schwarmfinanzierung” the necessary millions get together. The “swarm”, called the “Crowd”, is the users who are traveling around the world’s data network. And the crowd funding, the acquisition of capital via the Internet, is the latest craze for project developers who need money for a real estate project – and for private investors who want to achieve a higher rate of return than straight-line or fixed-income investments with their mini-coins.

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More than 40 million euros collected

For those who borrow money from the swarm over the Internet pays for seemingly attractive interest. “The span ranged from five to seven percent in 2016,” says Michael Stephan, founder and managing director of the Berlin company iFunded. The company, which also operates a crowdfunding platform, has now investigated what happened on the German real estate swarm financing market last year. The result: “A total of 41.2 million euros were collected in the crowds for real estate projects in 2016,” says Stephan. Compared with the 18.6 million euro that project developers in 2015 were able to obtain from swarm financing, this represents an increase of more than 121 per cent.

Crowdfunding plays hardly any role in the overall market. “In the past year, a total of 219.4 billion euros was invested in German residential and commercial real estate,” says Jürgen Michael Schick, President of the real estate agency “Immobilienverband Deutschland”.

The amount should have been similarly high in 2016, says Günter Vornholz, professor of real estate economics at the EBZ Business School in Bochum. “Around 70 per cent of these real estate investments are likely to have been lent, since even large professional investors can not pay their real estate purchases entirely from their own funds.” This would correspond to a total loan sum of around 154 billion euros. “The proportion of crowdfunding in the entire financing business would thus have amounted to just 0.026 percent,” says Vornholz.

Private investors are desperate for interest income

Up to now, banks, savings banks, insurance companies and credit funds have provided the majority of real estate financing. These are vehicles in which institutional investors, such as family offices and pension funds, are capital in order to lend them to professional real estate buyers.

This gives the operators of the swarm financing platforms a lot of space to grow strongly. Finally, the rate of inflation recently increased to 1.9 per cent, making it possible for private investors to look for ways to generate higher interest income for their money. “Real estate crowdfunding is so popular because it lowers the hurdles for investors and opens up real estate investments to a broad population,” says iFunded CEO Stephan. Already with an amount of only 500 euro, private investors on the platforms could participate as a lender in a real estate project. Moreover, the capital is usually only tied for a few years. Once a project developer has sold his property, the loan is repaid.

But experts doubt that the swarm financing will ever be more than a niche product. The reason: “Investors do not receive an adequate return on their risk during crowdfunding,” says Steffen Sebastian, professor of real estate finance at the University of Regensburg. “Private equity funds, which are usually the capital capita- tion generated by crowdfunding platforms, require annual interest rates of between 12 and 20 percent.”

If the Swarm Finances a Luxury Hotel

Project developers do not use the loans taken over swarm finance to finance the entire construction of a property. Rather, according to the crowdfunding platforms of the iFunded study, they obtain on average only 8.9 percent of the total investment volume. “It would be much too expensive for developers to push an entire project through a swarm financing at an average interest rate of six percent,” says Immobilienökonom Vornholz. “Finally, banks make real estate loans at interest rates of less than two percent.”

Mezzanine loans are risky and expensive

This applies however only to loans, which amount to 60 to 70 per cent of the property value. However, because project developers generally only have ten to 15 percent equity, they also need so-called mezzanine capital to meet the banks’ equity requirement. The terminology is based on the Italian word mezzo – half: and describes loans that fulfill a hermaphroditic function. In the balance sheet terms, they are considered half as a credit and half as equity. The borrower has to repay the loan, but the bank can recognize it as equity when it receives additional loans.

This is possible because mezzanine loans are collateralized by other lenders against loans from banks, insurance companies or loan funds. For this reason, these institutions reckon mezzanine loans to the borrower’s equity and therefore reduce the interest rate for the loans they provide themselves.

However, these mezzanine loans are risky and correspondingly expensive because of the subordinated collateral. “In the event of insolvency, the banks’ claims are served, then the mezzanine capital providers,” says Sebastian, the finance expert. “Mezzanine investors therefore bear the risk of a total loss.” Therefore, private equity funds charged the project developers the high interest rates to offset their risk. “Investors who make such mezzanine loans via crowds finance, on the other hand, receive a far too low remuneration for the risk they take, given normal interest rates of between five and seven percent,” says Sebastian.

Swarm financing with multiplier effect

However, the project developers would hardly get the mezzanine capital at crowds finance more than if they were getting private equity funds, the finance expert says. “The platforms also require borrowers to pay interest on their accumulated capital of usually six percent or more per cent.” Therefore, the interest of project developers in swarm financing has so far been rather low.

In fact, the € 8.5 million financing of the “Weissenhaus Grand Village Resort” was still the highest amount to be invested in German crowdfunding platforms for a real estate project. The Berlin-based platform operator Companista described the project as a “lighthouse project for the crowdfunding industry”. A good three years later, the amount has still not been surpassed.

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