Housing Development Programme speaks with Dr. Roland Igbinoba, the CEO PropCrowdy – Nigeria’s digital investment platform for the real estate sector, which provides a much unique opportunity for individuals, property developers to a one of its kind financial solution for property development.
In this Interview, Dr. Igbinoba explains crowdfunding as an alternative Investment asset with emphasis on how the concept democratizes real estate investment, thereby improving funding for the Housing Sector.
Q. We appreciate you taking out time to connect to the Zoom meeting today. Crowdfunding has been evolving as one of the fastest growing industries today. So let us know what is crowdfunding?
A. Dr. Roland Igbinoba:
Okay, thank you very much. Basically, the crowd comes together to basically fund a project. So funding and crowd just to break it down, you have a lot of people putting down several bits and pieces of the money together and then using it to fund a project in anticipation for a return. There are many types of crowd funding. There are crowdfunding that are donation crowdfunding, in which case maybe somebody is asking for help for anything for personal reasons. It could be health, it could be anything.
There is also equity crowdfunding and you have debt crowd funding too. But in general terms, when people come together to pull resources together to finance a particular objective, then we call that crowdfunding.
Q. How is crowd funding different from the conventional fundraising?
A. Dr. Roland Igbinoba:
Okay, interesting, what typically happens with the conventional fundraising you have is so different from crowdfunding as a channel. Conventional fundraising, maybe you want to go to the bank, you process your loans and all of that. So with technology today, I would say the difference is you get money faster and relatively cheaper depending on the project that you are doing.
Also crowdfunding helps in democratization of investment, okay? So when you go to the traditional funding channels, when you go to banks or whatever, private equity or even venture capital, you don’t have the barriers to entry as an investor. Say, take for example you want to get into real estate, okay? Typically people would think that you have to have millions of naira to be able to get into a real estate transaction, to be an investor in a real estate transaction’; for example, at propcrowdy we are saying that with as little as 10,000 naira, you can be a real estate investor because you can then put money in somebody who’s building maybe 500 millionaire project. And if you have 10,000 naira, you can actually invest your 10,000. So this is where it is different.
Also for the developers it becomes a faster route. For example, within 30 days you could crowd fund the money for your project and then the interest rate are also or rather the returns that you get depending whether it is, debt crowdfunding or equity crowdfunding.
for example, with construction loan, it depends on the size of the developer and the volume of transactions that the developer is doing. With the banks, interest rates could be anywhere from around 19% to as high as 28%. But on the crowdfunding platform you can crowd fund for maybe somewhere around 15% par annumn return, which is a lot better for the developer. So that’s basically what the difference with crowd funding is compared to the traditional financing channel.
Q. How can corporate organizations as well as individuals key into crowdfunding?
A. Dr. Roland Igbinoba:
Very good question. So we’ll start with corporate organization. As of today, the rules clearly states that crowdfunding will majorly be focusing on micro, small and medium enterprises. The reason why the SEC has gone this route is to encourage a lot of MSMEs to be able to raise funding. So if you’re an MSME and want to raise funding, then you can come to the platform. There are a list of requirements, if you go to our website, Propcrowdy.com, you will find that requirement. If you also go to the SEC platform, you will find that requirement. But some of those requirements are that you will be an organized MSME. So you will have directors. You’ll be a registered entity. You would have done business for at least two years. If you haven’t done your business for up to two years, even if it’s one year, you can find a technical partner, a reputable technical partner in your area of sector where you want to fund, and then you can partner with them.
Some of the guidelines require you to prepare what we call a placement memorandum, where you would tell us how much you want to raise, what you want to use the money for, and then, very importantly, how you are going to pay back to the investors who have subscribed to your project. I like to say that the corresponding platform, the way the SEC have done this, is that, for example, at Propcrowdy, it’s a marketplace. Different people who have different ideas, who have different products and they want to raise money, can come on that platform. So whether you are in the real estate value chain, wherever you are in the real estate value chain, whether you do construction equipment or you’re doing construction, or you’re building, as far as you meet the minimum criteria as stipulated, you can come on the platform and raise funding.
So our job as an intermediary, because that’s what the license is, our Job is to ensure and validate all the claims that you are making. So we will vet the project, make sure we will see the site. If it is a real estate development project, we will ensure that you have the title. We will follow through all of the needed requirements. Because at the end of the day, we want to make sure that whoever has invested in your project is able to get their money back and get the return on their money. So that’s basically what it is.
On the side of the individuals, like I touched on before, is that we are democratizing investments. Okay? So if I was passing through your offices, I want to be able to say, oh, I have my investment in that building. What does that mean? It meant that if you had raised money to build that building, and I’ve contributed and I’ve invested even 50,000 naira , now it means that I was part of the people who funded your building. And at the end of the year, depending on the agreement and depending on what you have told the subscribers, you will pay them back with interest or with earnings.
Now, for equity crowd funding, it also means that if we put money in that building, if it’s generating income, whatever income that is generated from that building, I would earn based on the profit basis of the 50,000 naira that I’ve invested. So, clearly, for the individual, you don’t need to pile up millions of naira to be able to be an investor in a real estate project or in any product and services that an MSME is bringing to the platform.
- How legit is crowd funding? Who regulates crowdfunding in Nigeria?
A. Dr. Roland Igbinoba:
Today crowd funding is regulated by the securities and Exchange Commission in Nigeria.
In January 2021, SEC brought out the rules on people who should crowd fund. So, as of today, I would say that there are about two crowd funding platforms as of today that the SEC have granted licensing and Propcrowdy is the first of that platform that the SEC has licensed. And the regulation is very open. Anybody wants to get a license can go to the Security and Commission.
So what SEC is doing is ensuring that whoever it is that is trying to crowdfund is known. So if, for example, if Housing Development Advocacy Network wants to raise money, what SEC is saying is that by vetting that process, by giving us the privilege to vet HDAN what SEC is saying is that I know, if you give them your money, we are here watching over them to make sure that the promises that they have made to you, that it will happen. And the process of crowd funding is not just putting money on the platform.
What SEC has done is to ensure that there are several parties to this transaction. So, for example, you have the Custodians. What basically happened is that when you crowd fund, when you’ve raised the money, the money goes to the custodians. We have about seven or eight Custodian banks in Nigeria who have the license to be in custody of the funds that are raised by the crowdfunding platforms. So when you raise money, the money goes to the custodians, at the close of the raise, maybe you are raising for 30 days or 60 days, the Custodian then takes the money and pass it on to the fund issuer.
Basically, what happens is when you raise money on Propcrowdy platform, the money is not for Propcrowdy. It doesn’t sit with propCrowdy, we sweep all that money to the custodians. The custodians are now the one who would then dispose the money to the fundraiser to be able to complete the project that they have said that they would do. And throughout the process of that project, we do reporting to all of the subscribers to let them know how the projects are going and what’s happening with the project. So that’s the level of security and validation that the Security and Exchange Commission has put on crowd funding.
But as you know, we still need to check, validating and providing route is ensuring that there is a lot of transparency throughout the process of the transaction. And we think that that is bringing a lot of confidence to the market.
- How can Real Estate developers and prospective homeowners benefit from Crowdfunding?
A. Dr. Roland Igbinoba:
In terms of real estate developers, you can come on the platform and crowd fund for your project. Today the cap is set at a 100 million per transaction. But the SEC, is very open to increasing that cap because they want to monitor the market and understand the market. So if you are a developer or you are anywhere in the real estate value chain and you require funding, you can come on to that platform provided you meet the minimum requirements.
As an individual, it gives you an opportunity to invest. If a developer was building lets say, ten units of 20 million naira, ten units of a two bedroom or three bedroom apartment that are 20 million naira, which is like 200 million, the developer can actually come onto the platform and raise 100 million.
As an individual, when a developer comes on the platform to raise money, you have the opportunity to invest in that developer, ordinarily the developer will go to the bank and all the earnings will go to the bank. But now as an individual, you have the opportunity to be able to invest in that project. And so at the end of the day, when the developer sells the unit and has made money, he pays back the money that you have invested. So this is how you benefit both on the development side and on the individual, the retail reversal side.
- How are investors protected against fraudulent/Rogue developers who will not complete projects?
A. Dr. Roland Igbinoba:
So what we have done is to ensure that when we crowd fund for a developer, as part of the crowd funding process, what we would typically do is prepare a cash utilization schedule. Basically, what that means is that the developer will give us a timeline or a project lifetime on how the fund is going to be used. So maybe we will split the capitalization. Schedules can be in three tranches of disbursement. So when money moves to the custodian bank, what typically happens is that money is disbursed to the developer based on milestone.
So a developer achieves a certain milestone as agreed by the cash utilization schedule, we instruct the custodian bank to make more disbursements.
Disbursements are done in tranches just to monitor the project. So if we raise money on the platform, we are not going to give all the money to the developers at once. Money will be disbursed on a milestone basis. Outside of that, we also ensure that for the projects that they have on a combat title, so the “c of o” that project will make sure it’s on a combat and it is deposited with the Custodian Bank.
There are risk management protocols that we have put in place to ensure that this doesn’t happen. So beyond just Crowdfunding, we haven’t thrown away the traditional real estate risk management procedures and protocols just to make sure that at the end of the day, that problems would not arise.
- A little about PropCrowdy?
A. Dr. Roland Igbinoba:
PropCrowdy really was born out of the need to democratize real estate investment. We’ve been on this for the last three years, but over a period of time and since getting the license, we have expanded that to anything around the real estate value chain.
Plus we can go into other sectors, but it will really depend on our expertise of understanding and managing that sector. So, for example, if you wanted to come to the platform to come and crowd fund for drilling and oil, well, we don’t have any expertise on that, and we will not be able to crowdfund you. Okay. If you’re doing agriculture business, definitely you would involve real estate, we are happy to look into that business.
If you are doing solar panels, which is part of the real estate value chain, if you were doing furniture, if you are SME, who manufactures furniture for real estate? Anything around the real estate value chain, we typically would look at it .
We have a twin objective of ensuring that everybody who’s invested in you is able to get their money back, including the returns that you have promised. So, like I said before, we’re almost like an exchange. It’s a marketplace. We’re an intermediary. Several people can come in onto the platform to come and raise funding. Our role and our job as an intermediary is to ensure that you meet the specifications as provided by the SEC.
- what is the present guarantee of ROI on maturity of the sponsorship and what plans are set aside to recover a fund in case of failure to comply from the organization in charge?
A. Dr. Roland Igbinoba:
So Propcrowdy will not guarantee you ROI. We are not allowed to do that. And the reason is very simple. Remember, as I’ve explained, for lack of a better word, you can call us an exchange where several fundraisers come to the fundraiser who is fundraising on the platform will state what he will be giving to investors. PropCrowding does not guarantee that returns.
However, before we put a fundraiser on the platform, we would have vetted and ensure that the claims he has made concerning the project and concerning his source of repayment are validated. So part of the things that the fundraiser will do is to provide insurance for the project in case that this project goes south and is unable to pay.
Also remember that we have said that for real estate projects, the title is deposited with the custodians. So, which means that there is a chartered arrangement where the developer is saying that if he’s unable to pay right, the collateral, the subscribers to this transaction, we take possession of the collateral, and this is done under a trusteeship arrangement.
So we have those protocols that have been put in place. But in terms of guaranteeing your ROI, PropCrowdy will not guarantee your ROI, but the investor, the fundraiser who has raised the money on the platform will tell all the subscribers how much ROI they will get.
- So we’ve actually been talking about the good sides of crowdfunding. I know there are some few disadvantages/downsides.
A. Dr. Roland Igbinoba:
Okay. Some of the disadvantages is that you have come onto the platform to raise the money and you are not able to raise the money.
The minimum amount that the SEC requires for a successful crowd funded from a fund issue is 50%. So if, for example, you come on the platform and you bring your project on the platform and you are not able to raise up to 50%, which is 15 million, now you would have to refund all the money to the subscribers. So I would say that’s part of the disadvantage.
If you wanted to raise 100 million and raised only 49 million, you cant have access to that 49 million because you haven’t met the 50% requirements that the SEC requires for that project for you to have access to that money. So that would be from my point that’s something that is a disadvantage.
