Technology is an important enabler, however, understanding the fundamentals of finance is equally critical to create a functional algorithm, says Minterest.
November 9, 2020 – Minterest, a Singapore-based company formed in 2016, is a crowdfunding platform that links corporate and individual borrowers with international lenders who are keen to invest into real estate or SME loans. It was started by Charis Liau, who currently serves as CEO, and Ronnie Chia, as COO. Both Charis and Ronnie are from the banking and finance industry and former colleagues at an international bank.
On May 5, Minterest announced that real estate giant ARA Asset Management acquired a stake in the company. A few weeks on, it also announced that it had raised S$500,000 (US$371,000) in 11 minutes through its platform for its first real estate product. The short-term fixed-income product was backed by the secured mezzanine debt financing of a A$440 million (US$315 million), 64-level high-rise residential development project in Melbourne’s central business district, which offered a gross return of 6% per annum for a minimum tenor of three months.
To date, Minterest has facilitated a cumulative origination volume of over S$145 million in Singapore across its corporate and consumer businesses. It has also raised over S$43 million for three real estate products so far.
REITAsiaPac sat down with Liau to discuss her views on innovations in real estate financing and Proptech. Here is what she has to say:
Q: How did the idea of Minterest come about?
I was with an international bank for 13 years, including a two-year stint in China. During my time at the bank, I was in relationship management, corporate governance, and structured finance. I was exposed to the various facets of how a bank runs its operations globally, and this experience has proven to be valuable during my time at Minterest. After banking, I was involved in private fundraising activities for SMEs.
I started Minterest in 2016 with my partners because I saw a large gap in the SME financing market. This arose after the 2008 Global Financial Crisis, as banks had to continuously reduce their exposure to assets that required more risk capital allocation, i.e. SME loans on their books. However, SMEs are the workhorses of the Singapore economy. They contribute almost half of our GDP and employ about 65% of our workforce.
In May this year, ARA took a strategic stake in us. With its strong track record in real estate, we were able to work together to unlock institutional-grade real estate investment opportunities for our retail investors, along with the opportunity to invest in corporate loans and invoice financing transactions.
Q: How does crowdfunding through platforms such as Minterest revolutionise real estate investment?
With data-driven models and lower operating costs, crowdfunding platforms provide opportunities to access a pool of curated real estate investment opportunities directly. We are talking about investors who can invest any time of the day, 24/7. This enhances investors’ portfolio diversification across geographies and asset classes while delivering higher risk-adjusted returns.
Through the Minterest platform, we democratise real estate investments which have primarily only been accessible by institutional investors and now made available to a whole universe of investors. As much as 87% of our deals are funded within a day.
Beyond real estate investing, we are also creating a cost-efficient platform for capital raising. With the platform, we can bridge previously untapped streams of capital with businesses or investments that would have otherwise typically opted for traditional funding vehicles.
Q: What are the risks and benefits associated with crowdfunding for real estate?
Crowdfunding makes real estate investing easier and more accessible. The benefits are, firstly, diversification away from traditional investments like stocks and bonds where yields may be compressed currently. Real estate returns generally don’t move in tandem with the equity market and are likely to be less susceptible to short-term market volatility. In addition, there is also the benefit of geographical diversification as real estate crowdfunding gives investors the opportunity invest in different markets.
Secondly, the platform allows bite-sized dollar investments. Our platform allows investors to participate in deals for as little as S$2,000. Ultimately, it is about providing more options for investors. Investors can choose between lower-risk, lower-reward debt offerings or higher- upside, higher-risk equity deals.
Any investment carries risk. Perhaps one of the most cited problems with online real estate crowdfunding is that it is deemed to carry a higher risk, given some bad publicity in the past. So, anyone who wishes to invest in real estate crowdfunding must perform their due diligence and research the companies with which they partner.
The viability and profitability of the investment rely on the sponsor and the management team’s ability to run the asset well. Besides that, investors should also check the platform itself. Every platform has a different process for vetting the deals. It is imperative to know how the crowdfunding platform performs its due diligence on the sponsor.
At Minterest, being an intermediary, we believe that reputation and reliability are critical. Hence, it is important that our platform provides confidence to both the borrowers and investors. From the borrowers’ point of view, there is the availability of investment liquidity for their business funding needs and from the investor’s position, there are quality offerings that would meet their return requirements.
Q: How does Asia Pacific’s crowdfunding sector compare with those in the US and Europe?
Global Alternative Financing has seen massive growth: the sector has grown from infancy in 2005 to US$11 billion in 2013 to US$305 billion in 2018.
In the US, the market is mostly dominated by consumer credit platforms (57% of the US market share – mostly student loans/ credit card loans), with an emphasis on institutional investments and emerging securitisation models. In 2017, 88% of the market volume was funded through institutional investors or a total of US$37.6 billion. This is due to the relative maturity of the US market, where platforms can provide higher levels of product diversification.
Asia Pacific has a significant market share, given that China alone accounted for 71% of 2018 global volumes. Excluding China, Asia Pacific accounted for 2% of the market (US$6.1 billion), as compared to US which accounted for 20% (US$61 billion) and Europe (including the UK) which had a 6% market share (US$18.3 billion). Within the crowdfunding sector, there are numerous sub-sectors which include consumer lending, business lending, real estate crowdfunding, equity crowdfunding, and non-investment activities such as reward crowdfunding.
In Europe, there is also a strong focus on consumer credit platforms, although, in the UK, marketplace business lending is the dominant model, closely followed by consumer lending.
In Asia Pacific (excluding China), marketplace business lending is the dominant model closely followed by consumer lending. Established markets such as Australia and Japan have business lending transaction volumes above US$1 billion in 2018, along with Indonesia, which has a large consumer credit market. In the Asia-Pacific region (excluding China) as a whole, most investor activities were driven by individual investors rather than institutional investors.
From a real estate marketplace lending perspective, Asia Pacific (including China) has the largest market share at 44% with a volume of US$2.5 billion in 2018. Europe follows with US$1.9 billion (33% global market share) and the US with US$ 655 million (11%).
However, equity-based crowdfunding for real estate is gaining momentum. The US is leading the market with a share of 60% and transacted volumes of US$1.8 billion in 2018. Europe has US$865 million and APAC at US$258 million. Given that the real estate component of crowdfunding is still relatively small, there is potential for growth.
Q: What are your thoughts about the future of the crowdfunding sector in real estate? What are the implications of crowdfunding on the traditional means of owning real estate (i.e., acquiring physical property and investing in REITs)?
The global real estate market makes up more than half the value of all mainstream assets in the world, but it is extremely illiquid. We need to go beyond our mindset that we need to own real estate traditionally, i.e. buy a physical property and hold it for many years for capital appreciation. It may not be possible, given ownership restrictions, the huge quantum of investment required, property maintenance expertise, etc.
With advancements in technology and legal developments, real estate crowdfunding is increasingly popular with developers and investors, and it is redefining the way commercial real estate assets are bought, managed and sold today.
Many financial institutions, regulators and even governments are looking at related blockchain technologies. With that, we can create an active secondary market for the trading of real estate and open up new pools of liquidity for all. Being a forward-looking real estate investment company, we have a view of the future, that is, creating a blockchain token to represent a real estate asset will enable a new species of crowdfunding. A digitalised asset can be much more liquid, transparent, and secure than the existing paper-based asset infrastructure.
Q: What role does the acquisition of a majority stake in Minterest play in ARA’s broader ambition in the global real estate credit business? What can we expect from Minterest in the foreseeable future?
All of our real estate deals to date are successfully closed within a month from origination to distribution. Our success lies in our ability to originate, structure and distribute institutional-quality real estate investment deals, from the start to the end of the whole investment value chain. This capability is unique due to the synergistic partnership with ARA and a technology-enabled robust crowdfunding platform that offers every investor financial empowerment.
Given ARA’s global presence in 28 countries, we will be able to access real estate products globally. Further, ARA has the local expertise and teams that will manage the assets professionally, so investors are assured that from start to end, the deal is institutionally-managed on their behalf.
Q: Can you talk about your technology and how crucial is getting the right type of tech for your kind of business?
Financial services is rapidly evolving with advances in technology and shifting customer expectations. That is why we always believe that technology has to support the business. The technology underpinning the business has to be purposeful. Customers are expecting frictionless, omni-channel and personalised experiences. As such, a smooth onboarding process is critical.
From our lenders’ perspective, we leverage on technology to make it very easy for our members to be onboarded, top up their e-wallets and to make an investment. Our investment process is seamless with an easy 3-click process to make an investment. Our youngest investor is 18 years old while our oldest investor is 82 years old. Similarly, our investor profile is highly diversified from retail investors all the way to UHNWI and family offices. Technology enables democratisation of investments where all can participate in any given offering.
Q: How did you curate your algorithm?
We have a credit algorithm that is tried and tested over time with thousands of borrowers who came through our platform. When it comes to evaluating the credit risk of a particular loan financing, we consider two main factors. One is the company’s ability to pay, which can be gleaned from its latest financial records, cashflows, competitive positioning and payment track record.
The second is its willingness to pay. For this, we examine aspects such as a the strength of the promoter’s personal guarantee, the promoter’s background and his or her behavioral attributes.
How do you do due diligence on your investors and borrowers?
We perform credit checks on companies by pulling third-party information. These are independent authoritative reports. We also meet with our borrowers as part of the due diligence we do for our investors.
Q: What are your views on Proptech?
Proptech is still in a relatively nascent stage. It is quite common to find their application within the physical asset management domain. As some would describe, a building as a supercomputer with a roof. Today, technology is focused on collecting vital measurements of the building to ensure optimal maintenance and management.
Increasingly user experience is being collected, which will provide a better understanding of the delicate relationship between the occupier and the building, something that was not possible before. With the advent of 5G, we can expect more of such information and data to transpire from the physical asset realm.
There is increasingly more Proptech focusing on new emerging areas investors should consider, i.e. through harnessing and integrating the intelligence of big social data with traditional economic and real estate information.
What that is still lagging is the understanding of a building’s performance with its investment returns. The integration of these two compelling sets of information is something worth watching out for.
The article was contributed by REIT AsiaPac.