Mention the word “crowdfunding” to almost anyone in the large-scale investment community and they will look unconvinced.
Many hold the devout belief that getting together large clubs of small-scale retail investors to buy into complex property transactions is a process so tricky that it heavily caps transaction sizes to around £2m. And, in short, is more effort than it is worth.
But Tel Aviv firm Hagshama is bucking that trend. Founded in 2009, and better known in the UK and Europe as Cogress – its subsidiary investment house – Hagshama has grown to become the world’s largest property crowdfunding business.
It has invested around ILS2.3bn (£486.6m) for 26,000 investors into development projects, predominantly in the US, Canada and the UK, with a total end value of £2.3bn.
Now it is targeting larger deals, raising up to $15m of equity at a time. When it adds leverage of around 70% that means it is making initial investments of up to $50m-$60m.
The majority of its capital raised so far has been through Israeli investors, but that cash is now being put into deals alongside equity it is raising in both the UK and Spain.
The local Cogress offices in London, Madrid and New York effectively act as an advisor to the clubs that invest in the UK, Spain and the US.
This summer, the company completed its first acquisitions in Spain and it is desperately looking for new opportunities to team up with development and asset managers, targeting high returns that can provide opportunities for its retail investor base.
The company says it is currently investing between $25m-$30m of equity per month but an additional $100m goes unplaced due to a lack of suitable opportunities, with many of its vehicles achieving their target capital raise within a few minutes of going live.
Hagshama and Cogress may not be the biggest names in the world of property just yet but the company is moving into uncharted territory for a crowdfunding platform and may provide a glimpse into the future of large-scale property investing.
According to the company’s co-founder and chairman Hanan Shemesh, the model is starting to ruffle the feathers of traditional institutional investors, is providing developers with capital they would struggle to secure elsewhere and is giving retail investors the opportunity to create a more diversified – and consequently lower risk – portfolio.
“In the past 10 years with low interest rates we see that institutions are trying to invest not only in bonds and stocks, they are looking to alternative assets and we allow private investors the same opportunity,” he says.
Investors are offered a range of opportunities in terms of risk profile as well as geography and sector.
Hagshama investors can also opt to invest into debt that is provided to the schemes that has a lower risk and return profile than the equity investment in the same project.
Taking the risk
Hagshama’s business model is buoyed by a series of factors.
It is broadly accepted that Israeli investors have a higher risk profile in terms of their investment strategy than most.
They are tech-savvy and open to non-traditional investment platforms.
The Tel Aviv residential market, too, has seen prices rise so alarmingly in recent years that many investors are seeing crowdfunding as a more viable alternative to gain exposure to property investing.
“They may not have the money to buy a house or a building but this gives them the opportunity to gain that extra yield,” says Shemesh.
“They also understand the idea that even when you have money it’s better to split it. If you want to invest £500,000 in real estate, why risk it all on one thing?”
Funding for higher-risk projects can be scarce for developers and Shemesh says Hagshama fills a gap not just for retail investors, but also those looking to build out projects.
“We commit to the developer that 45 days from the agreement they get the cash. This is our commitment. And we did it 337 times, with a 100% record, every time.
“This is our reputation. From time to time we bridge from our own funds if we have three completions in one week but normally the demand is amazing, is raised in minutes and we have a waiting list,” he says.
With the business starting to hoover up cash from retail investors, it has become a disruptive force in the fund management world and Shemesh says Hagshama is not entirely loved as a new competitor.
“The institutions generally control the market and they can do whatever they like,” he says. “I’m not sure that all of them like us because when we started it was maybe only ILS 50m a year but now it is billions and growing.”
Breaking with tradition
Further stepping on the toes of institutional investors and fund managers, Hagshama also runs discretionary, co-mingled funds that allow it to put cash into four or more schemes of its choosing and, as a result, charge lower fees for such flexibility.
Ultimately, though, Shemesh envisages that as time goes on, institutions will look to invest in Hagshama’s funds and partner with them.
“Today when they want to invest in real estate they have to invest like ILS100m in a building in Berlin or London,” he says.
“Hagshama was founded for the little investors but it works so well that maybe institutional investors could be using us too. We are talking to them.”
So far, crowdfunding may have been largely seen in the property industry as a fledgling concept that has little chance of having an impact on the sector, but Hagshama is building momentum and before long it – and no doubt new competitors – may have to be taken far more seriously.
How the Hagshama model works
Hagshama’s local Cogress offices in the US, UK, Spain and Israel assess potential opportunities.
Typically these are put forward by development or asset managers who are looking for funding that fits the typically higher-yielding ambitions of Hagshama’s retail investor base, although the company does also invest in income-producing assets.
Due diligence is then undertaken on the opportunity and the developer.
An agreement is subsequently made between the developer and Hagshama. This can include a number of clauses such as:
- The developer’s equity co-investment
- A profit-share agreement which often prevents the developer from taking a profit before investors are given a particular return
- A clause that allows Hagshama to remove the developer from the project if it is not hitting performance targets
- Penalties if the project is not delivered on time
Once agreed, Hagshama signs the contract and guarantees the developer that it will provide the funding within 45 days.
The company’s investor base of 30,000 is then sent comprehensive details of the opportunity that they can access through an app.
Investors must have initial know-your-customer checks but once completed they are able to click and sign to commit to the opportunity.
Investments typically vary from between $10,000-$150,000 with an average of less than $50,000.
Hagshama takes a one-off asset management and acquisition fee of 4.5%-6.5%, depending on the size of the investment.
Hagshama will assess and monitor the development’s performance until the point of delivery and subsequent sale.
Once sold, the developer will take its profit and cash will be returned to investors minus a profit-sharing agreement with Hagshama.
This will typically be a percentage of profit over an initial return, such as 10% of the profit over an initial 8% return.
The company’s average return to investors so far has been 14%.
To send feedback, e-mail david.hatcher@egi.co.uk or tweet @hatcherdavid or @estatesgazette
