HI-TRAC
The author’s shorthand for Happiness Index, Infrastructure, Talent, Regulations, Access and Capital. The six pillars that make the UAE a great place for a startup. This week’s is about a company that is leveraging the positive regulatory environment and creating capital for small investors in real estate.
Forty two years – that’s the time it will take for a millennial male to save for a studio apartment in London. That’s according to a 2017 report from the Financial Times in London. Apparently, because of gender bias, it will take a millennial female 50 years.
According to a 2015 report by Savills, the size of the global real estate market was approximately $217 trillion back then. It has grown since. It dwarfs any other investable asset class. At that level, it represents 2.7 times the value of the global gross domestic product (GDP). It would not be incorrect to state that only a small percentage of the world’s population actually owns real estate. In the UAE, real estate contributes to about 15 per cent to 16 per cent of GDP, depending on the source of information.
The situation is both an opportunity and a challenge. On the one hand, investments in real estate and valuations in the industry are going up. On the other hand, this value is only available to an increasingly smaller percentage of the population which can afford the investment required.
Smart Crowd (www.smartcrowd.ae) aims to make a difference. Its founder and CEO Siddiq Farid says: “Real estate transactions in Dubai alone amount to approximately $70 billion, with residential units accounting for approximately $20 billion to $25 billion spread across 45,000+ transactions. That is a sizeable addressable market.”
To facilitate entry into this lucrative market, especially for the millennial population who have probably not owned a property before, the company has set up a digital platform that allows for fractional ownership using special purpose vehicles (SPVs) with participation from small investors. What is critically important is the actual structure of the SPV. Here is where Smart Crowd aims to make a difference.
For example, syndicated ownership of properties is not new. However, it is an informal arrangement at best. It leaves a lot of questions relating to who has the title and all the attendant challenges pertaining to resale, management and letting out the property as well as dispute resolution. Farid has persevered with the regulators for 11 months to gain approval from the Dubai Financial Service Authority, making Smart Crowd the first and only regulated digital real estate investment platform in the region. This was achieved in April 2018.
To further protect the investor, each investment is translated into shares in the property, thereby allowing for equity-based ownership. To further support this proposition, the business model adopted by Smart Crowd is interesting. It takes a 1.5 per cent upfront charge from any investor. This is not enough to cover expenses. What drives Smart Crowd is its target to earn 10 per cent of the annual rental value of the property. This fee is meant to cover property management fees, management of the investment vehicle, reporting to investors as well as access to a digital platform for managing their portfolios. In future, this platform will enable access to the secondary market. Should the investors decide to sell the property, there is an exit load of 2.5 per cent. This aligns Smart Crowd’s interests with those of the investors.
Smart Crowd is transparent in that it is not taking any risks on behalf of the investors. The decision to participate in SPVs is entirely that of the investors. What Smart Crowd does is that it facilitates a viable, regulated and transparent platform to enable this. As proof, Smart Crowd completed its first investment on June 21, 2018. The expected yield to the investors at this stage is in excess of eight per cent per annum, net of all charges.
Smart Crowd has been recognised for its business model by being accepted in the DIFC’s Fintech Hive. It has received multiple awards, including the Accenture Innovation award at Gitex 2017, has been recognised at the Sharjah Entrepreneurship Festival Pitch competition and most recently at Smart Dubai’s Global Blockchain Challenge. Smart Crowd expects to be live to the public later this year. Smart Crowd is also acting on the MoU signed between the Dubai Land Department and DIFC.
Farid is driven by a sense of purpose. A Credit Suisse report indicated that one per cent of the world’s population owns 50.1 per cent of its wealth. Globally, the middle class is being hollowed out. When he saw an opportunity to invest in post-Brexit Britain, Farid realised that the opportunity was being picked up by those with deep pockets. That moved him to find a way to generate wealth for the small investor also. He is a CPA, a CA and a CFA by training. He’s worked with one of the world’s leading consulting organisations.
Although he is a capitalist, he professes a strong belief in an equitable platform that allows the world’s less wealthy to build wealth over time. Smart Crowd allows entrants to the property market with investments as low as Dh5,000. The aim is to allow even the small investor to get the same kind of returns as larger players.
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