The Gifts that Coronavirus will Bring to Crowdfunding and SMEs

April 24, 2020


In comparison to the upcoming forecasted recession, the cause of the financial crisis in 2008 is completely different. Financial institutions took heavy risks by lending to risky individuals with no income and no collateral to fund the mortgage market, leading to an economic bubble and thus, resulting in the bankruptcies of big banks alongside downfall of the market after said bubble popped. These events created a huge opportunity for alternative finance such as crowdfunding, peer-to-peer lending, and micro-loans due to the loss of faith in traditional markets.

Moreover, opportunities for crowdfunding presents as a means of portfolio diversification, whilst also offering high return on invested capital.

Let’s take a look at the opportunities for crowdfunding:

a.    High expected return

According to the data from Stock Exchange of Thailand, between 2016 and 2019, average dividend yields of the companies in the SET index was only 3.03% and the number has been lower than 5% for more than 10 years. Also, we believe that there will be many companies in the stock market will suspend their dividend payments to investors because they need to reserve cash for the pandemic, especially those belong to the tourism and retail sectors since they are likely to have no revenue in the next few months.

In addition to dividend yields, the compound annual growth rate of the index was 0.59% between 2016 and 2019, compared to almost 10% of S&P 500. In my opinion, the deterioration of the stock market and low-bond yields in recent years have turned the attention of investors to SMEs and startups.

b. Real Estate Crowdfunding

From the birth of real estate crowdfunding, retail investors have been given the opportunity to invest in a real-estate projects using small amounts of money. The average return for the investment in real-estate projects can range from 7% to 20% on Realty Mogul and 12.7% to 18% on CrowdStreet. According to Ian Formigle, Chief Investment Officer of CrowdStreet, real estate crowdfunding can become powerful if more investors on the platform are retail investors, especially during the economic slowdown. This is because institutional investors are often more conservative and might quickly protect their capitals at the first indication of market volatility. Mr. Formigle also stated that there were high-quality projects in the pipeline from sponsors that used to approach institutional investors, but they later changed to crowdfunding because these investors decided to postpone their investments (Alois, 2020).

Commercial real estate Crowdfunding also offers diversification for the investor’s portfolios as it does not correlate with stocks and bonds, and it is very resilient in this economic cycle. As a matter of fact, according to National Association of Real Estate Investment Trusts, the returns of real estate investments exceeded the returns of stocks over half of the 10-year periods. The average return of real estate investment ranged from 10% to 13.3% annually; despite the Great Recession and the Dotcom Bubble, it still outperformed stocks and generated positive return for investors (Case, 2016).

Investing in residential property such as apartment or dormitory is highly recommended because there are demands for these types of properties even during the recession. The investment can produce satisfactory return and guarantee the safety of principle for investors when the property is at a good location and the occupancy rate is high. Correspondingly, industrial real estate can still be a good investment during the pandemic despite the ubiquitous negative work-from-home stigma. It can generate fixed income for investors as companies are required to pay their rents even as employees are working from home. However, investors have to do thorough research on the projects that they are planning to invest because each project has different quality and invest in low-quality projects can result in heavy loss.

c. New businesses will be born

Indeed, a recession may cause many companies to fold, but it also presents opportunities for startups to meet the demand of the market. Airbnb and Uber have successfully captured the opportunity from the financial crisis in 2008; during the recession, people required extra income to cover their daily expenses as wages were reduced, or they were laid off. Therefore, Uber and Airbnb had been able to create a market for these people by developing platforms and applications to facilitate consumers renting out their houses and apartments, as well as using their vehicles to make money.

Coronavirus presents an opportunity for medical tourism because there will be more tourists from other countries coming to Thailand for medical treatment after the pandemic if the health system is capable of controlling and treating the virus well and rapidly; thus, strengthening the position of Thailand as one of the top countries in medical tourism. In addition, there have been many startups that leverage the booming of medical tourism by developing platforms to serve medical tourists; these platforms facilitate in-app hospital booking and help setting up appointments with physicians. These startups will definitely need external sources of funding from alternative finance such as crowdfunding or peer-to-peer lending in order to expand and grow their market shares. Therefore, we can conclude that the coronavirus can unveil opportunities and ideas for new startups to launch and offer alternatives to traditional methods.

References:

Alois, J. D. (2020, March 24). Flattening the Curve: CrowdStreet Goes Remote, Sees Opportunity in Real Estate with Favorable Terms. Crowdfund Insider. Retrieved fromhttps://www.crowdfundinsider.com/2020/03/159099-flattening-the-curve-crowdstreet-goes-remote-sees-opportunity-in-real-estate-with-favorable-terms/

Case, B. (2016, April 20). Comparing average REIT returns and stocks over long periods. National Association of Real Estate Investment Trusts. Retrieved from https://www.reit.com/news/blog/market-commentary/comparing-average-reit-returns-and-stocks-over-long-periods