Generation Start-up: Smart Crowd helps micro-investors build wealth, brick by brick

A Dubai crowdfunding website helps investors buy fractional real estate for as little as Dh5,000

Siddiq Farid is the chief executive and co-founder of Smart Crowd, which he set up after struggling to invest in property in the UK. Antonie Robertson/The National .

“Real estate has been used by the wealthy for centuries to accumulate and preserve capital and the average Joe has been left out."

These are the words of Siddiq Farid, the chief executive and one of three co-founders of the real estate crowdfunding platform, Smart Crowd.

"This is our attempt to solve many things, but at the same time tackle this income inequality," he says, in an interview with The National in Dubai.

It’s a profound ambition for a start-up, but crowdfunding is in many ways the epitome of open democracy - a digital fundraising tool to empower citizens to take ownership of things they previously had no access to.

In the case of Smart Crowd, the platform enables fractional ownership of real estate. Investors can purchase a stake in a rental property for as little as Dh5,000 ($1,300), ‘co-owning’ the asset along with tens, hundreds (or thousands, depending on the size and value of the unit) of other people.

They can hold their stake for as long as they wish, collecting the rent from it, or sell it and use the proceeds to invest in something else listed on the platform. Or they can use accumulated returns to buy a property on their own.

“The idea is simple: the platform lowers the entry barrier for people to start building a portfolio of assets to generate a secondary source of income and accumulate wealth over time. Our slogan is ‘Unlock Your Wealth Potential’,” Mr Farid explains. If the platform is successful, the same concept could be used for other assets, from cars to restaurants, to mixed-use schemes. “We are a long way from that,” he laughs.

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Smart Crowd is licensed by the Dubai Financial Services Authority, the regulator of Dubai International Financial Centre, Dubai’s financial free zone, to provide crowdfunding services for real estate. It won regulatory approval in January, obtained an operating licence in April, and in June completed its first transaction - the acquisition of a Dh365,000 studio in Remraam generating a gross annual yield of 10.8 per cent (approximately 8.6 per cent with fees), the founders say.

The transaction was conducted in a controlled environment as part of the DFSA-regulated ITL (Innovation Testing Licence) initiative for fintech start-ups. Smart Crowd is part of the DIFC’s Fintech Hive accelerator programme.

The average size of investment made in the Remraam studio is significantly higher than the Dh10,000 to Dh30,000 range Smart Crowd will target when it launches full-scale operations this September. The founders say they are courting investors for a seed funding round, with lead investor Shorooq Investments, an Abu Dhabi-based investment fund, already committed. They decline to say how much they want to raise but plan to use the money to hire new technology and marketing staff. There are around 15 employees at present.

Mr Farid, a corporate finance executive who has worked for Deloitte, KPMG and EY, spotted a gap in the market for a Middle East property crowdfunding website in 2016, just after the UK had voted to leave the European Union. With the pound diminishing in value, Mr Farid wanted to invest money into UK real estate.

However, he failed to find anything he could afford, and for personal reasons did not want to use mortgage financing. He tried to find family and friends to pool money but found it hard to source people with the same requirements and risk appetite.

“It dawned on me it would be great to find somewhere to source like-minded people, a community that brings people together in an easy fashion. And I thought, hang on, there’s a business here,” he says.

Real estate crowdfunding exists but not in the region, according to Mr Farid. Yet there is high demand. “Traditionally if you look at the Arabian Gulf, people favour hard assets - real estate or gold - but few people have the means to access them.” He cites a report by the humanitarian charity Oxfam in January, which claims real estate is the largest asset class in the world, worth $217 trillion, yet only 12 per cent of the world’s population has any sort of ownership of it.

In 2017, he began hatching a business, teaming up with Musfique Ahmed, the digital and disruptive technology leader at EY, and Abdul Faizal, former chief executive of Dubai real estate agency ERE Homes, who sold his business to Gulf Sotheby’s International Realty in 2016.

All three put their own start-up money into the firm - they decline to reveal how much but say a “significant chunk of money” was needed to hire lawyers and others to navigate the DFSA’s regulatory and compliance procedures, and to contract an Italian technology company to build the website last year. Securing regulatory approvals was deemed crucial in gaining the trust of prospective investors.

“As a chartered accountant, it’s sad to hear horror stories of people making bad investment decisions because of inefficient products or getting caught up in scams,” Mr Farid says. “So we knew whatever we did we had to make sure investors’ interests were protected. That’s why the platform is a financially regulated structure.”

Opportunities listed on Smart Crowd are vetted according to a 100-point screening tool that evaluates the asset based on quantitative factors such as rental yield, as well as quality and serviceability (how easy it is to rent and sell). The aim is to use artificial intelligence to automate this process.

The founders work with real estate brokers to source assets that are already rented out, with the necessary property and Ejari registrations taken care of. “Having been in the market the last 10 years I know the credible agencies,” says Mr Faizal.

“At the moment we’re focussing on high-rental yield investments, which mostly come from the mid-tier market in second-tier locations. We’re looking at assets with higher capital appreciation in prime locations such as Dubai Marina and the Palm Jumeirah as second-transaction opportunities,” he says. Smart Crowd would only list off-plan properties if they were due to complete in less than six months, to minimise the risk.

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During his decade in real estate, Mr Faizal came across people from all walks of life eager to own property but unable to do so. They had around Dh20,000, Dh30,000, Dh50,000 in their bank accounts but that wasn’t enough to buy something. This is the target customer for Smart Crowd, he says.

The transaction process works as follows. Users subscribe to the platform and can invest as little as Dh5,000 in a property. There is a 30-day window for people to contribute capital and raise the target amount to purchase the asset. If the target is not reached, investors’ money is returned, including fees. If it is reached, Smart Crowd facilitates the set-up of a DIFC-registered vehicle to acquire the property, and the buyers become shareholders. The structure is “plain vanilla – we’re not reinventing the wheel,” says Mr Farid.

Investors’ money is held in two custodian banks – Emirates NBD, the UAE’s largest lender, and UK FCA (Financial Conduct Authority)-regulated Global Custodian Services – as ring-fenced funds Smart Crowd has no access to. The platform provides users with a personal 'Smart Crowd Wallet’ dashboard, a mirror image of their custodian account that shows transactions and rental income, similar to a brokerage account for stocks and shares.

Investors can withdraw their funds or roll them over to another stake purchase via the platform. Theoretically there is no restriction on the number of investors that can buy a property, but for administrative ease the team has limited it to 100 for now.

Smart Crowd charges users two fees. The first is a 4 per cent structuring fee, proportionate to the size of each investment, to set up the vehicle. Payment is split into two tranches, with 1.5 per cent paid upfront and the other 2.5 per cent paid on exit, when a property is sold and capital is returned. “We want to align our interest with the investor,” Mr Farid says. “If we make all our money upfront people would think we don’t care about whether they eventually sell, so that’s why a chunk of our fees are linked to a liquidity event.”

The second is an annual management fee of 10 per cent of the annual rent, extracted from investors’ quarterly rental returns. This covers facility management costs, management of the investment vehicle, sourcing properties, access to the digital dashboard and, in future, access to the secondary market where people will be able to sell their shares to one another.

The fee is comparable to the typical 8 to10 per cent management fee charged by brokers, and cheaper than those of a Reit (real estate investment trust), with greater returns possible, the founders argue.

They hope to use blockchain to eliminate many third-party costs. “If you have a property with 100 investors all selling parts of their shares every month and buying something else, it’s a constantly changing scenario with a lot of paperwork,” says Mr Ahmed. “That’s where digital innovation comes in.”

The founders have conducted extensive market research and will continue to do so as the business grows. “We’re not pushing an idea at people, we’re responding to demand. We don’t think we’ve cracked it because people’s needs are always changing and we must respond to that,” Mr Ahmed says.

“We’re talking about the emotional journey of our users,” Mr Farid adds. “We want to give them a sense of, ‘Look at that apartment in the Marina – I own part of that’. There’s an emotional high associated with that that you don’t get with a structured fund. We are empowering people to make their own decisions."

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PROFILE:

Company/date started: 2017 (licensed 2018)

Founder/CEO: Siddiq Farid, Abdul Kadir Faizal, Musfique Ahmed

Based: Dubai, UAE

Sector: Real estate, crowdfunding

Size: (employees/revenue) Around 15, six of which are based in Dubai, the remainder in India and Bangladesh

Stage: Seed

Investors: The founders, plus Shorooq Investments. In talks with other prospective seed investors