A report filed in Bloomberg noted that Malaysia is looking at property crowdfunding to boost the residential real estate market.
According to Bloomberg, equity crowdfunding and peer-to-peer lending platforms raised $84 million for small businesses across 11,261 investors. Of those investors, more than 50% were under age 35.
Finance Minister Lim Guan Eng openly called for banks to lend more to the residential real estate market but stated that if banks didn’t intervene that the Government would look at crowdfunding incentives in next year’s budget.
The gaps in local real estate lending are chronicled in neighborhoods throughout the world. Local banks are known to be risk-averse, across residential real estate and local small business.
Crowdfunding remains an untapped source of finance. In local economies, peer-to-peer lenders could provide local residential real-estate markets with capital where risk. Crowd investors spread risk across thousands of small investments. Bank risk, however, is spread systemically across one institution.
Further, local lenders could gain an additional return on investment as nearby property values increase. A local peer-to-peer lender might see appreciate in their neighborhood property values as residents gain access to credit for renovations and remodel. Community land trusts offer a similar model to guard against gentrification and racial displacement.
A local small business could also benefit from additional equity finance. In past articles, we explored the 20%-30% loss in value that small businesses face due to a lack of secondary trading or market liquidity. However, as secondary trading markets come online, small businesses and investors both could benefit from more equity financing.
For a small business, equity finance could increase their total loan volume that would help the firm operate more profitably. For example, a local small business could purchase their real estate, so that owner/operators earn equity into their business instead of paying rent to a landlord.
In many local economies, specifically in small to mid-size cities across the world, small business and residential finance are likely underfunded. Many nonprofits and quasi-government organizations are set up to address funding shortfalls across small business and residential property finance. In the U.S. alone, many States have State-run equity finance firms or grant subsidies for residential property owners who cannot obtain bank financing.
Equity crowdfunding and peer-to-peer lending could open up a significant market for local capital that revitalizes the world’s decaying infrastructure, especially in small to mid-size cities.