Real estate crowdfunding is becoming increasingly popular as a method for participating in real estate investment with small amounts of money. It is characterized by the ability to invest from small amounts of around 10,000 yen and the fact that property operation and management tasks are left to the operator. Some products allow the entire process to be completed online, making it one of the options for considering real estate investment with small amounts.
When choosing a fund, many investors tend to focus on conditions such as the superficial expected yield, the location of the target property, and the age of the building. However, when making investment decisions, it is also necessary to check for ‘operator risk’ stemming from the operator’s management status. You should understand the legal mechanisms and the perspectives for checking operator information to know how investment funds are handled in the unlikely event that the company operating the fund goes bankrupt.
What is ‘operator risk’ in real estate crowdfunding?
Real estate crowdfunding is a mechanism based on the Real Estate Specified Joint Enterprise Act, where operators collect funds from investors to acquire and operate real estate. Unlike investments where you purchase physical real estate, investors do not directly hold ownership of the target property. Instead, they invest in a fund organized by the operator and receive distributions or redemption payments according to the contract terms.
*Segregated management is not a mechanism that guarantees the complete preservation of investors’ capital in the event of bankruptcy.
Therefore, the management status and financial condition of the operator, which is the operating entity, carry the risk of affecting the fund’s operation. If an operator falls into financial difficulty or goes bankrupt, there is a risk that the ongoing project will not proceed as planned. It is also conceivable that the sale of the target property may face difficulties, making it impossible to receive distributions or redemption payments at the scheduled time.
If you judge an investment destination solely by the height of the yield, you may not be able to sufficiently confirm the operator’s financial situation or operational structure. When considering an investment, it is important to check not only the conditions of the target property but also the operator’s financial information, management structure, and past operational performance to make a comprehensive judgment.
The legal mechanism of ‘segregated management’ for managing investment capital separately from the company’s own assets
When considering operator risk, it is important to understand the regulations and investor protection mechanisms based on the Real Estate Specified Joint Enterprise Act. Segregated management is a mechanism for managing assets received from investors separately from the operator’s own assets.
Such management is intended to prevent the commingling of funds received from investors with the operator’s own assets. However, the mere fact that segregated management is in place does not mean that the full amount of the investment capital will be returned if the operator goes bankrupt. The Ministry of Land, Infrastructure, Transport and Tourism also provides information for investor protection and sets advertising regulations for real estate specified joint enterprises, while also issuing warnings about cases where investment capital may not be returned.
Furthermore, when an operator receives permission or registration for a real estate specified joint enterprise, requirements regarding capital, financial foundation, and human resources are set according to the type of business. For example, in materials from the Ministry of Land, Infrastructure, Transport and Tourism, requirements such as capital of 100 million yen or more, a sound financial foundation, and an appropriate human resource structure are indicated as the main licensing criteria for Type 1 businesses.
However, the fact that an operator has received permission does not guarantee the financial safety of a specific operator or the principal of an investment product. The Ministry of Land, Infrastructure, Transport and Tourism publishes a list of permitted operators, but it is important to check the information for each operator and fund individually when investing.
In addition, many funds adopt a ‘priority-subordinated structure.’ This is a mechanism where, if a loss occurs due to operations, the loss is borne first by the operator’s subordinated investment portion within the scope stipulated in the contract.
This design is intended to suppress the impact on the principal of investors, who are priority investors, to a certain extent. However, if the loss amount exceeds the scope of the subordinated investment, it may affect the investors’ capital. Since this is not a principal guarantee, it is important to check the conditions for each fund, such as the ratio of subordinated investment and how losses are handled if they occur.
Business continuity brought about by the operator’s financial soundness and diversified management
While there are mechanisms such as segregated management and priority-subordinated structures, the operator’s management situation is also one of the points you want to check when choosing a fund. When checking for operator risk, in addition to capital and financial information, checking what kind of businesses the operator is developing is also one method.
One indicator for checking an operator’s business status is the scale of their capital and the business areas they operate in. For example, if a company relies on a single crowdfunding business for its revenue, changes in the real estate market or the status of fund formation could affect the company’s overall performance. On the other hand, if they operate in multiple business areas, they have multiple sources of revenue. Such business structure can also be considered one of the points to check when comparing operators.
Darwin Asset Partners Co., Ltd. has a capital of 100 million yen and operates in multiple business areas, including asset management, property management, development, global assets, crowdfunding, and energy.
Since its establishment in 2009, it has expanded its business areas to include real estate investment, new apartment development, overseas real estate, real estate specified joint ventures, construction contracting, and energy businesses. In 2022, it received approval for a real estate specified joint venture and launched ‘DARWIN funding’.
In this way, checking not only the nominal yield of a single fund but also the business content, financial information, and business continuity of the operating company is an important point when considering operator risk.
Points for ensuring steady asset management by verifying operator reliability and safety
When considering real estate crowdfunding, it is important to check information about the operator and the fund rather than judging solely by superficial yields or specific property conditions. Checking the operator’s credit risk, past performance, and financial content in advance is the first step in understanding the risks.
First, check the management system and information disclosure status based on the Real Estate Specified Joint Enterprise Act. In addition, it is important to check the ratio of priority/subordinated investment and how losses are handled in the pre-contract delivery documents and summary documents.
Furthermore, checking what kind of business the operator develops and how much of a business foundation they have is also a key point. By checking the amount of capital, the transparency of management, and whether they have multiple business areas, you can increase the material available to grasp operator risk.
In real estate crowdfunding, the target property, investment period, investment conditions, and handling of losses differ for each fund. It is important to understand the system, check the disclosed information, and make decisions based on your own investment objectives and risk tolerance.
[Notes (Disclaimer)]
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This article is intended to explain the market structure and general mechanisms of real estate crowdfunding and is not intended to solicit or recommend the purchase or sale of specific investment products or funds.
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The figures such as projected yields and investment results posted in this article are estimates based on past performance and analysis, and do not guarantee future investment results or principal.
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Asset management, including real estate crowdfunding, carries the risk of loss of principal (falling below the principal amount) or non-payment of distributions due to price fluctuations of the target real estate, vacancy risk, and the operator’s credit risk.
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Please make final investment decisions based on your own judgment and responsibility.
