October 27, 2016 / 9:31 AM / 3 years ago

Crowd-funding finds fanbase in Germany property market

FRANKFURT, Oct 27 (Reuters) - For Hermann Tecklenburg, head of a family-run construction firm in western Germany, the country’s property boom was double-edged: while orders kept growing, he ran out of cash to back loans for new projects, prompting him to look for alternatives.

With banks cutting back on risk and setting strict rules on collateral, he turned to a fledgling crowd-funding industry, where individual savers lend money in the hope of high returns.

The 68-year-old has now raised 2.75 million euros ($3 million) from private investors and, having financed four projects in 18 months, has a fifth in the pipeline.

“I was in need of new outside capital or would’ve simply not been able to keep construction going,” Tecklenburg said of his Duesseldorf-based company which has been run by his family for five generations since 1878.

He is one of a growing number of German entrepreneurs, particularly in the property industry, to turn to crowd-funding.

German crowd-funding proptechs (property technology firms) raised around 49 million euros in the first nine months of this year, more than double the total amount for 2015 and also more than twice any other business sector, according to data from crowdinvest, an online platform tracking German crowd-funding.

While that is still small compared with the United States, where investors poured $484 million into crowd-funding real estate projects last year according to University of Cambridge data, some industry watchers see a big potential in Germany.

This is partly because Germans have a long history of putting money into real estate through investment funds, and also because some banks themselves are getting involved in crowd-funding as a way of boosting lending and sharing risk.

“Crowd-funding is particularly suitable for Germany,” said Tanja Aschenbeck-Florange, a Germany-based lawyer with Osborne Clarke who specialises in investment products and banking regulation.

“Through crowd-funding, a new and younger customer base is discovering the (real estate) market.”

RISKS AND RETURNS

Tecklenburg listed his projects on Zinsland, one of about a dozen real estate crowd-funding platforms that have appeared in Germany over the past year.

The platforms typically charge around 3 percent in fees to have projects listed and marketed on their websites. They have backed developers with individual investments of as little as 500 euros ($561), and allowed savers to cash in on rising prices, with returns of 5 to 7 percent.

Consumer groups, however, warn of the high default risks of crowd-funding loans. Crowd-investors sign a subordinated debt agreement and are only entitled to repayment once the banks have received their share from a delinquent developer.

Germany’s largest crowd-funding real estate platform is Hamburg-based Exporo, which has so far raised a total of 23.6 million euros for 22 projects.

“The German real estate market is big and Exporo is now opening it up to a wide range of people and establishing it as a retail class,” said Jimmy Fussing Nielsen, a managing partner at Sunstone Capital, a Danish venture capital firm that joined other investors in an 8.2-million euro funding round for Exporo.

The industry has also attracted the interest of banks, with all of the crowd-funding platforms contacted by Reuters saying they were discussing collaborations with established lenders.

“This is a clear opportunity to feed each other’s (business) lines,” said Bernd Huetter, head of real estate finance at Germany’s fourth-biggest lender DZ Bank, which works with Zinsland to refer interested developers to the platform.

DZ Bank reviews the projects’ eligibility before suggesting them to the crowd-funding platform, bestowing Zinsland with a lower risk of default and potentially helping to strengthen businesses to which the bank lends itself.

“The need for such financing means is endless and I believe that the market will only continue to grow over the next years,” Huetter said.

$1 = 0.9158 euros Reporting by Tina Bellon; Editing by Mark Potter

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