According to recent reports by The Saudi Authority for Accredited Valuers (TSAV), the popularity of crowdfunded properties in Saudi Arabia has increased significantly in recent years.
So it’s not surprising that crowdfunding is becoming an increasingly popular option for property investment. There has been a growing interest in the advantages and disadvantages of investing in this way.
So join our crowdfunding platform experts to discover more about the pros and cons of using this innovative way of property investing in Saudi Arabia.
The Pros and Cons of Property Crowdfunding in Saudi Arabia
In Saudi Arabia, property crowdfunding is growing in popularity as investors become aware of the many benefits it can provide.
The main advantage to investing in this way is that it allows for a more diversified portfolio than traditional investments and also provides access to properties that would otherwise be inaccessible or extremely expensive.
So before we head into more detail about the pros and cons, let’s take a brief look into the background of crowdfunding in Saudi Arabia.
Crowdfunding in Saudi Arabia – when did it begin?
The concept of crowdfunding first began to gain traction in Saudi Arabia from 2012 onwards, with the country’s economic development plan Vision 2030 taking the lead in its implementation.
The goal was to create a more transparent and efficient way for people to invest their money in businesses, companies, and even property investments.
The idea was that by giving investors the ability to pool their money together, they could benefit from larger investments in return for the same amount of money.
Property Crowdfunding is a growing market
Since 2012, property crowdfunding has grown rapidly in Saudi Arabia, with many investors taking advantage of the various opportunities to make money and increase returns.
It’s grown so quickly that the government speedily set up regulations and guidelines to help ensure its safe and legal use.
Those guidelines from the Saudi Central Bank include requiring companies to register as real estate investment companies, having an annual audit report, and providing adequate disclosure and transparency.
But despite the benefits of property crowdfunding in Saudi Arabia, some drawbacks need to be taken into account before investing.
Let’s start by finding out why property crowdfunding in Saudi Arabia can be a great investment opportunity.
What are the Pros and Cons of Property Crowdfunding In Saudi Arabia?
According to recent reports in the Arab News, From 2019 to the end of 2021, the total amount of funds invested through equity crowdfunding platforms on the Saudi Exchange rose 242%, totalling $56 million.
So there’s no doubt many Saudi Arabian investors are looking at using this innovative method of investing in property.
One of the biggest advantages of investing in crowdfunded property is that it allows investors to diversify their portfolios.
It also crucially allows investing in multiple properties at the same time without having to commit large sums of money upfront.
The risk can be spread across several different investments, allowing investors to mitigate potential losses from any one particular investment.
The platform also makes it easy to transfer money and track progress, meaning investors can keep an eye on their investments without having to constantly check in with a broker or adviser.
So let’s dive in and discover more of the benefits of using crowdfunding for property investment in Saudi Arabia.
The main advantage of property crowdfunding is that it makes investing much more accessible for those who might not have the financial resources to invest in a property on their own.
The lower entry point can allow more people to start investing in real estate and benefit from its returns.
2. Lower risk
The pooling of funds also makes it possible for investors to spread out their risk over multiple properties, reducing their risk exposure in the process.
3. Professional management
The funds are managed by professional real estate managers, meaning that investors don’t have to worry about the day-to-day management of any properties they might own.
4. The ability to leverage
The use of leverage, such as mortgages and other forms of financing, makes it possible for investors to increase their returns by amplifying the amount of capital they have available to invest.
5. The potential for high returns
The potential returns earned through property crowdfunding in Saudi Arabia are higher than those of traditional investments, making it an attractive option for investors.
The ability to invest in multiple properties through property crowdfunding allows investors to spread their risk across different geographic locations and asset types.
Property crowdfunding platforms typically offer secondary trading options, allowing investors to quickly sell their investments without waiting for a physical sale or other forms of exit.
So with the main advantages in place, let’s take a look at some of the pitfalls to be aware of before you invest using crowdfunding in Saudi Arabia.
The risks associated with property crowdfunding should also be considered. As with any investment, there are risks and no real guarantee of success.
Investors must thoroughly research the project before investing and familiarize themselves with the terms and conditions of the agreement to ensure their investment is safe.
Additionally, it’s worth understanding that as investors rely on others for capital, there is a greater chance that payment may be delayed or not completed.
The return on investment may also be much lower than that of traditional investments, as the investor’s returns are entirely dependent on the success of the project they have invested in.
Let’s look at some of the main drawbacks of using crowdfunding to invest in Saudi Arabian property.
1. Potential hidden fees
The charges associated with property crowdfunding in Saudi Arabia may not be immediately apparent to the investor, meaning that it’s important to research the full cost of any proposed investment.
2. The need for due diligence
Unlike traditional investments, there may be less information available on property crowdfunding investments, so investors must do their due diligence before committing funds.
3. The potential for liquidity
Although this can be a benefit for anyone crowdfunding property in Saudi Arabia it can also be a drawback too.
The secondary market for property crowdfunding investments is not as developed or liquid as the stock market, so investors may find it difficult to exit their investments quickly and easily.
4. The risk of fraud
Although as we saw earlier in the article, The Saudi Arabian government has placed regulations on crowdfunding due to its speed of success, crowdfunding as an investment can still be relatively unregulated when compared with other forms of investment.
This lack of regulation can sometimes leave crowdfunding platforms vulnerable to scams or fraudulent schemes.
Investors must do their research before committing funds and be aware of the potential risks they face.
Check out our other helpful article to find out Is Real State Crowdfunding In the Middle East Safe?
5. The need for patience
Anyone looking to buy a house in Saudi Arabia through crowdfunding needs to understand the process of investing in property through crowdfunding can be slow, as it often involves paperwork and other administrative tasks that need time to be completed
The Saudi Arabian government has only recently started to accept crowdfunding as a legitimate form of investment, so the legal process can take time.
The length of time it takes for returns on investments to become visible means that investors must have patience and not expect quick profits.
And to finish on…
Overall, property crowdfunding can be a beneficial and rewarding experience for investors who want to diversify their portfolios and gain access to a wide range of potential investments.
The lack of fund availability, the risk associated with crowdfunding, and the lower returns are some of the downsides that come with investing in property through this method.
Ultimately, investors must weigh up the pros and cons before deciding to invest.
That being said, more people are turning to property crowdfunding as an alternative source of financing in Saudi Arabia.
The number of investors has grown significantly over the past few years, with more people looking to benefit from the potential returns that can be earned from investing in real estate projects through crowdfunding.
Ultimately, it is up to each investor to decide whether or not property crowdfunding is a good fit for their financial needs and investment goals.
Head over to discover more about White Label Real Estate Crowdfunding in, the Middle East What Do I Need to Know?