The different ways of using collective investing in real estate in South Africa
...crowdfunding versus stokvels by Scott Picken CEO and Founder Wealth Migrate
Investors currently have two main options to pool funds together with people or businesses to invest in real estate. Whether it’s a stokvel or crowdfunding, this is based on a principle that uses the collective buying power of a group to ensure that each participating individual can attain ownership of a property.[1] This levels the playing field for investors,[2] especially in circumstances where a lack of funds limits an individual’s ability to invest in private or commercial real estate.
Since the 19th century in South Africa, stokvels originally came about to give people options at cattle auctions,[3] as it may be unaffordable for one individual but by using a community’s power to fund the purchase, then it becomes affordable. While both stokvels and crowdfunding are based on similar principles, the main difference is how the group funding is administered and the cash custody when pledging specific amounts.[4]
The main differences between stokvels and crowdfunded investments
All investors need to do their own due diligence before committing to these forms of financial savings, especially as a stokvel is considered a more informal method. Stokvels are self-regulated when it comes to forming rules, the responsibilities of each member, the set amount to be pledged, and how the group fund is affected when an individual can’t meet their financial obligations or leaves the group.[5] “Online crowdfunding allows for expanded access to larger communities and networks as well as the beauty of the power of collective buying”, says[1] Riaan van der Vyver, Chief Investment Officer of Wealth Migrate.
Here’s an example of how this equity crowdfunding method works on the online marketplace, funds are collected to purchase a large property like an apartment block. Investors then receive pay-outs each quarter based on the revenue generated by the property and the amounts that were individually pledged. While there is a minimum investment amount, each individual is left to decide whether they can invest more and potentially receive larger returns.[7]
The benefits of crowdfunding to investors
Crowdfunding gives a South African investor more options in the local and global property market, through the evolution of an online savings scheme into private and commercial real estate investments.
While a stokvel’s reach may be limited due to its self-regulation, crowdfunding is given a wider reach through its digital approach. More potential investors “are able to see it, share it and can choose to participate.”[8] In terms of risk and diversification, crowdfunded deals also tend to have a lower risk as since it’s not tied to fluctuations in the stock market, and investors have direct control over the diversity of their investment portfolios.[9]
“What is exciting… is how closely online crowdfunding relates to the behaviours and practices we, as South Africans, already adopt in our lives: stokvels, burial societies, church fundraising, school raffles…” [10]
The end results
Property investments are now accessible to more people through crowdfunded or stokvel initiatives, however, crowdfunding has adapted through technology to give people more convenient and trustworthy access to international investing opportunities.
1 Parker, D. (October 2019). ‘Crowdfunding on the rise in Africa’. Retrieved from Creamer Media.
2 Moodley, N. (July 2019). ‘ The pros and cons of property stokvels ‘. Retrieved from The Citizen.
3 PropertyWheel. (April 2021). ‘Op-ed: Investing in property and creating wealth using community stokvels’. Retrieved from PropertyWheel.
4 PropertyWheel. (April 2021). ‘Op-ed: Investing in property and creating wealth using community stokvels’. Retrieved from PropertyWheel.
5 Moodley, N. (July 2019). ‘ The pros and cons of property stokvels ‘. Retrieved from The Citizen.
6 CNBC Africa. (May 2021). ‘FSCA grants Wealth Migrate licence to offer crowdfunding services’. Retrieved from CNBC Africa.
7 Gavaza, M and Picken, S. (March 2021). ‘Podcast: online platform aids access to global investment opportunities.’ Retrieved from Business Day.
8 (October 2020). ‘Crowdfunding – an alternative funding option’. Retrieved from Western Cape Government.
9 (October 2020). ‘Crowdfunding – an alternative funding option’. Retrieved from Western Cape Government.
10 Parker, D. (October 2019). ‘Crowdfunding on the rise in Africa’. Retrieved from Creamer Media.
