This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on March 7- 13, 2016.

How to invest

EthisCrowd’s target market is middle to upper-middle class professionals and small business owners who can afford to invest a minimum of S$500. Currently, its investors are between 20 and 40 years of age, work as professionals and hail from Singapore, Malaysia, Indonesia and the Middle East, although the platform is open to investors of all nationalities. It is now in talks with institutional investors from Southeast Asia. 

Currently, EthisCrowd investors can expect a return of 4% to 33%, depending on the tenure of the listed projects. The shorter the project, the lower the return. Umar says the return could be higher in the future in line with the size and duration of the project. Once a profit margin is determined by the developer, EthisCrowd takes a 5% cut from the amount raised.

For projects in Indonesia, the investments are denominated in Singapore dollars to minimise currency risk. But for projects in Malaysia, it is denominated in ringgit.

In terms of the profit for investors, the share is given by EthisCrowd based on an internal analysis of the risks involved and decision on what is “a fair and good return”. Nevertheless, it is important to note that although the minimum profit rate is fixed, investors could stand to gain more. 

“We fix the percentage share of the profit. It is dependent entirely on how profitable the project is. So, the more profitable your project, the higher your return,” says Umar.

In the case of oversubscription of funds, the extra money will be returned to the investors if the developers decline it. “It depends on the projects. If the developers want to take more, they can. But they try not to because the more [investments] they take, the more [profit] they have to share eventually. So, they would rather take less and be lean,” says Umar.

Ethis is currently operating out of Singapore. It has a representative’s office in Kuala Lumpur at law firm Azmi & Associates, but is looking to have its own offices soon. 

“Right now, we are looking at regulations. Once we are clear on the regulations and licensing, we hope to be running here by June,” says Umar. 

Ethis has already broken even (its inception was in 2014). As a start-up with very lean resources, it only has a team of seven (interns included) to run a business that spans three countries. 

In terms of profit, which is 5% of the total amount funded, Ethis has generated a commendable S$160,000 for itself thus far. The success rate of its crowdfunded projects: 100%.

Unlike other crowdfunding platforms, EthisCrowd is very project selective, says Umar. “We also have lull periods when there is nothing between projects,” he adds. 

“So, when it comes to EthisCrowd’s projects listed online, you can be very confident that they are very good and we are very certain the money can be raised. That’s why we are slightly slower than other crowdfunding platforms. Since our inception, we have had only nine projects [worldwide].”

“We feel that we are responsible for the success of that funding,” says Ronald.

Regulations and Legalities

In Singapore, as there are no specific regulations for crowdfunding platforms, Ethis is operating within the boundaries of the Monetary Authority of Singapore’s Securities and Futures Act, Cap.289. Thus, it is limited to offering business matching and consultancy. It does not take deposits or do transactions directly. 

“The funds we collect go straight to the developer. I think the major issue is some people are worried about scams. That’s our key selling point: you invest directly with project owners, not through intermediaries, not through banks,” Umar points out. 

In Malaysia, while there are regulations for equity crowdfunding, there aren’t any for real estate crowdfunding at the moment. As for shariah compliance in financial services, only Islamic banks are regulated by Bank Negara Malaysia. 

In the event of a dispute, the application of a judicial process in Singapore is to be expected as all of Ethis’ agreements are based on Singapore laws. However, if there is a dispute with the developers, it depends on the provisions of the law in the country of the said project. Umar states that although Ethis cannot handle the dispute for the investors, it can help facilitate the process by referring lawyers. 

“That is why having PT Ethis is important,” says Umar. “PT Ethis will hold the asset. So, if there are any disputes over the projects, we are holding the asset. So the [worst-case scenario is that] we can sell it and disburse the funds to the investors,” explains Ronald. 

With regard to investment legalities, investors will need to sign a profit-sharing agreement or contract (mudarabah) with the project owner (property developer). The mudarabah will specify the legal and financial arrangements and, most importantly, stipulate the share of profit and ratio to total investment. Once the margin has been set by the developer, EthisCrowd takes a 5% cut.

“So, everything is set. That includes your rights in the event of defaults or delays. The recourse is laid out [in the document],” says Umar.

Presently, investments can only be made by online transfer or telegraphic transfer via banks or remittance companies, as well as local cheques. When a project is completed, investors will be sent an email of the breakdown and calculation of their investment, followed by a transfer of their share of the profit directly to their bank account. 

Risks

Umar points out that when it comes to regulations and risks, many countries that regulate crowdfunding in general make it compulsory to disclose one statement very clearly — that investors have the risk of losing their capital. He emphasises that this is the first thing investors need to know and be comfortable with when dealing with alternative investments.

“That is very important. Because these are non-bank alternative investments. Real businesses may have cash flow issues, go bankrupt or close down,” he says.

As EthisCrowd focuses only on real estate, Umar reassures investors that they are investing in infrastructure, unlike a business, which has no underlying assets. “The investors must have holding power,” he adds.

Second, when investments are made across countries in different currencies, one is open to currency risk. “In Indonesia, as most of the investors of Indonesian projects are Singaporeans and prefer to invest in the Singapore dollar, we fixed the investment currency as Singapore dollar. In this case, the project owner absorbs the currency risk,” says Umar. 

“For Malaysia, the investment currency is the ringgit. If the ringgit [exchange rate] changes, then your returns are affected.”

Third, there is always political risk. Umar, nevertheless, is optimistic. “As our major market is Indonesia, so far we see that the political situation there is quite favourable because President Jokowi Widodo is very pro-foreign investment.”

In the event that Ethis’ business goes south, investors do not have to worry as the company does not keep their funds. Even if it goes bust, the transactions between the investors and developers remain valid.

“They [the investors] already have a direct arrangement legally, and there is a paper trail, money trail. The projects will continue and are not affected by Ethis, should we encounter this problem,” says Umar.

But how much will investors stand to lose? Ronald and Umar say it is difficult to give a blanket answer as it depends on the project and asset value. “At the very least, we could liquidate the assets to be given back to the investors. So, it may not be the full amount,” says Umar.

To prove that transparency is the main capital of the company, he pledges to update investors regularly. Ethis also organises visits and trips so that investors can better understand and appreciate the impact of their investments, according to Umar.

“Also, Ethis continually communicates with the project owners to get updates and reports on the project’s progress so as to keep investors informed,” he adds. 

In the future, investors will be able to view drone-captured videos of the construction. “We will share the CCTV video feed with our investors so they can see for themselves the people working on the project,” says Umar.

The focus of the platform is market-driven and may evolve in the future. But for now, it is focused on the social impact of real estate development.

“We are not buying or selling properties. Most of the time, we are developing properties. This is what we want to be known for as our core product and positioning,” Umar says empathetically. 

In terms of the risk of uncompleted projects, Umar says it is low. “The projects we list typically already have structured exits or at least identified potential buyers, with the support of financing from the bank. This means there is a low likelihood of the developer having cash flow problems. We also have to screen the financial health of the developers. The main risk in our projects is delays.”

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