Millionaire Jan Henric Buettner wanted to expand a luxury resort on the Baltic coast he’d built with some of the money he’d made over 20 years as a technology entrepreneur, first as head of AOL Europe and later as a venture capitalist.
Buettner had plenty of his own money, or he could have asked a bank or friends for a loan. Instead, he went to strangers on the Internet. So far, he’s raised 3.3 million euros ($4.4 million) from 800 investors on crowdfunding website Companisto.de, more than three times the minimum he was seeking and, according to the website, the most by a European for-profit organization.
“Nobody knows where to put their money at a time when interest rates are low and people are worried the stock market’s going to crash,” said Buettner, 49, whose Weissenhaus resort north of Hamburg has secluded cottages, private white sand beaches and rooms starting at 400 euros per night. “It’s a chance to lift crowd financing to the next level.”
Crowdfunding, which allows companies and people to raise money via online pitches, is a small yet growing alternative to traditional finance. Crowdfunding platforms around the world are expected to raise $10.7 billion this year for businesses, arts and charitable ventures, law firm Goodwin Procter LLP said, citing research firm Massolution. That’s up from $5.1 billion in 2013, Goodwin Procter said.
In Germany, crowdfunders seeking cash for business ventures raised a total of 8 million euros in the first half, 60 percent more than a year earlier, according to Frankfurt-based startup portal FuerGruender.de. Because Germany’s crowdfunding industry is small, Buettner’s campaign will probably account for a big chunk of the total for 2014.
Crowdfunding has been around since the late 1990s, when fans raised money online to finance a U.S. concert tour for British rock band Marillion.
Until recently, it was mostly used to finance projects by artists, musicians, filmmakers, designers and charitable campaigns. Fundraisers on popular websites such as Kickstarter and Indiegogo include a fashion designer who wants to expand clothing production, a coffee aficionado who wants to start a coffee festival in Milwaukee, and a homeless shelter seeking funds for bus tickets and laundry supplies. Last year, actor and filmmaker Zach Braff raised $3.1 million on Kickstarter to produce the film ‘‘Wish I Was Here.’’
Last year, Congress passed the Jumpstart our Small Business Startups Act that makes it easier for businesses to raise money online, paving the way for more for-profit, including property, crowdfunding in the U.S. Washington-based Fundrise LLC raised about $17 million with 19 property deals this year, while Los Angeles-based Realty Mogul raised $26 million for 85 properties.
“Real estate crowdfunding has a future because it involves specific projects,” said Karsten Wenzlaff, founder of industry group the German Crowdfunding Network. “The people investing aren’t the ones who are supporting startups or art projects: they’re using it as a real investment product.”
In Germany, the first property campaign was carried out on Berlin-based Kapitalfreunde in 2012. That helped it raise 67,500 euros for the renovation of a Tudor-style townhouse with apartments, shops and offices in Frankfurt.
Bergfuerst.de, another German crowdfunding platform, plans to start its first project later this year, seeking 1 million euros for investments in an existing mixed-use building in Hamburg that will pay interest of 3.5 percent, according to its website.
Some investors are reluctant to invest in traditional real estate funds after more than a dozen property mutual funds froze redemptions, said Michael Ullmann, who started Germany’s first property crowdfunding website, Kapitalfreunde.de, in 2012. The funds, run by banks including UBS AG (UBSN) and Skandinaviska Enskilda Banken AB (SEBA), took action after clients tried to withdraw more money than funds had available.
Crowdfunding is more transparent because investors can ask the fundraisers questions about the projects in open forums and share their insights and concerns about a deal with other investors, Ullmann said.
Buettner bought the 75-hectare (185-acre) property in Weissenhaus when it came up for sale in 2005 after 400 years in the hands of an aristocratic German family. He then spent 65 million euros to turn it into a resort.
Buettner structured the financing for the project as a subordinated loan that pays investors annual interest of 4 percent to 8 percent, according to the Companisto website. If the property is sold, investors may be able to share in the profits. The minimum investment is 5 euros.
Crowdfunding circumvents investor protections in place in more traditional sectors. What’s more, property crowdfunding investments lack the diversity offered by traditional funds, said Rene Klein, who runs FuerGruender. Finally, it’s difficult for most investors to verify whether information provided by fundraisers is accurate.
Bjoern Geidel, a Frankfurt-based banker who’s made an investment in Weissenhaus, says he’s experienced enough to understand the risks and makes an effort to spread his money across a variety of industries. So far, he’s contributed to crowdfunding projects to finance an online wine retailer and a computer-server maker.
“Weissenhaus isn’t as risky as funding a startup because the project is secured by the property and Buettner’s credit,” Geidel said. “There’s a lot more opportunity for a return investing with Buettner than putting my capital into a one-bedroom apartment that I’d then rent out.”
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