Can crowdfunding stabilize Spain’s real estate market?

After the Spanish real estate bubble popped in 2008, prices declined more than 40%, according to the real estate portal Fotocasa. Then last year prices began to level, and it looked like time to follow the classic advice and invest at the bottom.

But after getting several sizeable commitments, Luna and Brusola found themselves signing up smaller and smaller investors, which complicated the process.

“We said, ‘To do this we really should have a crowdfunding site. How weird there isn’t one,’” said Brusola.

With prices at rock bottom, Spain indeed does look ripe for real estate crowdfunding, a system whereby individual investors buy a small share of a real estate property or loan.

Foreign funds from Blackstone, Goldman Sachs, and GreenOak have been pouring billions into the post-bubble fire sale of apartments, mortgages, and shopping centers. Last year, half of the €10.2 billion ($11.2 billion) invested in Spanish commercial real estate came from foreign investors, according to CBRE Spain.

But small local investors had been locked out of the market. After the 2008 collapse, local banks closed the mortgage tap and gave only gave 314,000 mortgages last year, down from 1.8 million in 2007, according to the INE, Spain’s national statistics bureau.

After some research, Luna and Brusola found that crowdfunding for real estate projects did indeed exist, albeit elsewhere. In 2009, Colombian-born developer Rodrigo Niño discovered that Colombian securities law allowed crowdsourcing and used it to raise over $220 million from more than 3,800 Colombians—not from the usual banks and funds—to build Bogotá’s 66-story BD Bacatá, the tallest tower in the nation.

“It allowed the population to invest in a necessary project that the traditional equity industry didn’t want to fund,” says Niño.

But real estate crowdfunding didn’t really take off until September 2013, when in the U.S. the Securities and Exchange Commission set rules for the JOBS Act, lifting a ban on publicly advertising equity investments. Before then, U.S. real estate investing was limited to rich investors and funds that had a direct line to developers, while ordinary people had to make do with buying shares in a REIT (Real Estate Investment Trust).

U.S. investors in the “crowd” still have to meet certain requirements—annual income over $200,000 and a net worth of more than $1 million—but at least real estate developers can now sell to them.

“Before I couldn’t tell people I didn’t have preexisting relationships with about raising money for specific deals,” says Adam Hooper, CEO and co-founder of RealCrowd, a Silicon Valley-based site launched in 2013 that has raised about $50 million for 55 projects in the U.S.

Since then, real estate crowdfunding has exploded in the U.S. and, as more countries set regulations, around the world. There are more than 130 sites in the U.S., 30 in Europe, and a handful in Asia, Africa, and the Middle East.

A recent industry report from Massolution says $1 billion in real estate investments were crowdfunded in the U.S. last year, a number that will rise to $2.5 billion by the end of 2015. Niño’s New York-based crowdfunding company Prodigy Network has funded several long-stay hotels in New York and raised more than $350 million from over 6,600 investors. (It has also been the subject of a Harvard Business School case study.)

Spain didn’t come out with across-the-board crowdfunding regulations until this April. (Kickstarter opened in Spain in June.) Under local rules, companies, funds, and individuals with annual income over €50,000 and a liquid net worth of €100,000 have no investment limit, while those who don’t reach the threshold can invest up to €10,000 a year. Crowdfunded projects are limited to €5 million.

Last week, Luna and Brusola launched their real estate crowdfunding site Housers with two options for investors to choose from: an apartment in Madrid and a storefront in Valencia. The investment minimum is €500.

Real estate crowdfunding sites tend to follow two models. In one, the site raises funds for debt financing, and the funders receive the interest income. Others, like Housers, raise capital to buy or build properties. Their investors receive a share of the rental income and the price appreciation when the property is sold, usually after a fixed time period.

The attraction for small investors is the prospect of high returns from an asset they can understand. Adam Hooper of RealCrowd says that the first of his projects to go from fundraising to sale—$815,000 raised for a new commercial building in Los Angeles—returned a 40% profit to its investors after 16 months. Ben Miller, the co-founder and CEO of Washington, D.C.-based Fundrise, which raises debt funding, says that a third of his site’s 70 deals have gone to completion with an average annual return of 13%.

According to Brusola, locations like the apartment and store on his site can return some 60% to 70% over four years. “These are small but very profitable deals,” he says.

Not everyone is convinced that real estate crowdfunding is a wise investment, however. Barcelona-based developer Lane Auten, a former managing director at Waypoint Real Estate Group, a California company that buys, refurbishes, and rents foreclosed properties, says the best deals always go to big institutional investors and that crowdfunding adds an extra set of intermediaries.

“Whenever retail investors are ‘attracted’ into the institutional world via things like crowdfunding, they usually get the worst deals and the highest fees,” he says. “Spain is full of crappy investments. Knowing Spaniards and their real estate market, they’re foaming at the mouth thinking ‘crowdfunding’ to get rid of stuff.”

Indeed, the fees are not negligible for sites in Spain and the U.S. Prodigy Network charges a 2% annual asset management fee and Fundrise charges 0.5%, while RealCrowd charges developers a flat fee to appear on its platform. Brusola says Housers will charge no management fee, but a 12.5% fee on rental income and other profits.

Still, supporters say real estate crowdfunding evens the playing field and offers regular people a ticket to a profitable investment class from which they were once barred.

“Before, if you had more money, your dollar had higher returns. With crowdfunding, everyone’s dollar has an equal return,” says Niño of Prodigy Network. “It’s just about access.”