Financial technology, also known as “FinTech”, is defined by Wikipedia as an economic industry composed of companies that use technology to make financial services more efficient. FinTech companies are generally startups, trying to disintermediate incumbent financial systems and challenge traditional corporations that are less reliant on software, using new applications, processes and business models. As of recently, FinTech has entered Canada’s apartment sector, inserting innovation where convention once reigned.
On the cusp of this innovation is a company called R2Crowd, a strategic partner with JLL, a Fortune 500 company and an approved participant with TSX private markets. To find out more about how FinTech is disrupting the multifamily capital formation process, we met up with Amar Nijjar, Founder & CEO of R2Crowd, and his team at their head office in downtown Toronto. Matthew Bruchkowsky, Senior Director from Colliers Multifamily Appraisal Group was also on hand for the discussion.
CA: Tell us a little bit about your company, R2Crowd, and what it offers Canadian apartment investors.
AN: Think of R2Crowd as a technology bridge that connects retail investors with apartment owners in need of capital to grow. The traditional capital formation process is very tedious and cumbersome. We have developed and invested in very advanced technology that can exponentially scale the distribution of investment product. The current way of capital formation in the real estate sector is like the 8-tracks of the 1960s, while we are more like Spotify. Technology is a huge enabler and it is shaking up several other traditional industries, as well. Just look at Uber versus traditional cab companies…AirBnB versus hotels…PayPal versus traditional payment providers…Google versus the Yellow Pages. The list is very long.
CA: What does it mean to ‘crowd fund’ and what does it take?
NA: First of all, let me begin by shattering the two biggest myths in the industry: that crowd funding is un-regulated, and that crowd funding means going to small retail investors. Both those myths are not true. We are heavily regulated across Canada by various securities commissions especially because we are fundamentally changing the way this industry has worked in the past (for the good). Our crowd, as a matter of fact, is not retail but accredited investors, family offices and institutions. On certain deals we are able to raise capital through the retail channel by using what’s now available in Ontario (and the rest of Canada): Offering Memorandum. As much as we are disrupting the traditional capital formation process in this space, the fundamentals of our investments are still the same. We are still matching sound investments with qualified investors. What’s changed is how we go about doing that.
CA: So, if an apartment owner comes to you with a proposal to develop or purchase an apartment building, how does your group help them?
NA: We are able to raise as much as 95 percent of the capital stack for our clients. This can be broken down into debt and equity pieces. First let’s look at debt. Debt, which is 70 to 75 percent of the capital stack—is pretty vanilla in nature and is called senior debt. We arrange that through our JLL Debt Capital Markets business. Lenders are very competitive in that space with over 50 lenders that are active at any given time. CMHC product is the real commodity in this space with over a dozen lenders competing for every basis point of pricing, and we are able to get our clients not only competitive pricing but also a very flexible structure, guiding them through each step along the way. But over the last few years, the non-CMHC (i.e. conventional financing) has seen a complete renaissance with very aggressive terms, such as 30-year amortization, two-year IO periods, partial recourse with earn outs down the road at pricing of around 200-250 bps over the GOC.
Now, let’s look at equity. Equity is like the secret sauce in every capital stack. It is complex but we make it simple. We understand LP, JV, Co-tenancy structures better than anybody else in the marketplace and are able to give sound advice to our clients on the level of preferred returns, cash on cash distribution and total IRR required to bring a project to fruition. Up until now, such complex advice was only available through large investment banks who typically did not touch projects under a certain size. At R2Crowd, we welcome them all and have different boxes to fit them in, based on their risk-return profile.
CA: Tell us about your partnership with Colliers Appraisal Group.
AN: I have personally known the appraisal group at Colliers for a number of years. One of the most important due diligence items for us at R2Crowd is the valuation of properties. Colliers has done an exceptional job of ensuring that CAP rates, rental rates, expenses and allowances used in valuation are real and have a lot of rigour behind them. Moreover, Colliers is a large global real estate firm and we are pleased to work with them as they have a national research group and multiple offices across Canada.
CA: How did you come up with the idea of R2Crowd?
AN: Two years ago, my colleague Chad Gemmell (Co-Founder & COO) and I were on a flight to Calgary to attend the Calgary Real Estate Forum. We had four hours to ponder our idea and started sketching the future. We were so excited that we couldn’t sleep. So, I guess that’s where this idea was hatched, 36,000 feet above ground. Literally from a big picture perspective.
CA: In a short time, you’ve accomplished a great deal—including a partnership with JLL, becoming an approved participant with Toronto Stock Exchange, and accepted by MARS as an innovation partner. What have these accomplishments meant for your business?
AN: It’s all about credibility and nothing speaks about that better than our track record and our partnerships. JLL is not only one of the largest advisory firms globally but also one of the most well respected and ethical companies. JLL’s management is simply one of the best that I have personally come across having worked for over a decade with some of the very large financial institutions in the past…especially from the view point of recognizing talent, nurturing it and respecting diversity. When we came up with this idea two years ago and proposed it to our management it was an instant hit as it complemented our traditional business quite nicely and we loved working with JLL and our colleagues who are simply the best in the industry. Similarly, we have now formed partnerships on multiple fronts including TSX Private Exchange, MARS, Colliers on the valuation side and many more.
CA: More broadly, how is technology changing the capital stack in the multifamily sector?
AN: First, through disintermediation. It puts more money both in the investors’ pockets and property owners’ at the same time. Second, through efficiencies. Investors can log onto our web portal by going to www.r2crowd.com and after that they are able to do full due diligence at the property level (see drone videos, pictures of the property, complete financial and 3rd party reports, etc.)
CA: Tell us about your team. It appears that you guys have a lot of fun together.
AN: We are very blessed to have an exceptionally talented, smart, dynamic and hard-working team of 11. I am personally also very proud to have a team that is diverse, not only by ethnicity but also by gender and background. My guys are happy to work on the weekend if they have to but I am also happy to let them take the time off when they want to. We work hard, play hard and have lots of fun along the way. Each of us bring a unique and complementary skillset to the team.
CA: When it comes to the availability of capital, what are some areas of concern you see for the multifamily sector over the next few years?
AN: Some of the shadow banks and Alt lenders in Canada have grown quite significantly over the last decade. Both the Ministry of Finance and provincial and federal governments have been very concerned about this, and rightly so. They have made several changes to the way loans are underwritten by these institutions, for instance. These Alt lenders certainly had brought a lot of froth to the market and it would be interesting to see what additional regulatory changes are brought forward by the government. For example, the formation of a new regulatory regime in Ontario. FSRA and dismantling of FSCO has been recommended to the Minister of Finance by the Review Panel after extensive consultation in the industry.
CA: What shifts are you seeing in the Canadian multifamily landscape?
MB: The market has shifted as renters are looking for higher quality space, and have shown a willingness to spend a higher percentage of disposable income on housing. For this reason, we have seen an increased investment for purpose-built rental, and as well, investment to common areas, mechanical and insuite programs to strengthen product quality within older stock. In many markets the economics have shifted to make purpose-built rentals feasible, making this an attractive alternative to building condos. More and more developers and lenders have been engaging the Colliers Multifamily practice to understand the value of purpose-built rentals. We expect this to be a theme going forward in the Canadian multifamily market.
CA: What trends do you see evolving over next five years in the multifamily space?
AN: Based on what Matthew Bruchkowsky and his research team is telling us, it would appear that rents are continuing to go up, especially in the purpose-built rental market. CAP rates will continue to see compression until the five year GOC’s reverses the trend. Certain markets, like Alberta, face uncertainty, but the Toronto market continues to perform exceptionally well. Beyond that, as the momentum in the crowd funding space continues to build over the coming few years, we certainly see the multifamily asset class as a strong investment vehicle for a lot of investors to park their savings in.
CA: Any final words?
AN: I would finish off with the following two quotes.
- “The impact of technology is perhaps a bit overstated in the short term but is definitely understated in the long run.”
- “It’s not a sprint but a marathon….change is happening.”
About Matthew Bruchkowsky
Matthew Bruchkowsky is Senior Director at Colliers International within the Valuation and Advisory Group, and the National Lead of the Multifamily Valuations Group. Matthew has valued over $20 billion in multifamily assets and has recently focused his attention on tracking trends in the purpose-built rental world. Matthew is an Accredited Appraiser, Appraisal Institute of Canada (AACI) and a Professional Land Economist (PLE) of Ontario Land Economists.
About Amar Nijjar
Amar Nijjar is the founder of Real Crowd Capital. He is responsible for strategic direction, business development, operations, and sits on R2CROWD’s Board of Directors and Investment Committee. Amar has funded over $5 billion and underwritten over $20 billion of real estate during his career. He is also an Executive Vice President at JLL (formerly Jones Lang LaSalle), where he leads the Debt Capital Markets group. Amar has an undergraduate degree in Chemical Engineering and holds an MBA from York University’s Schulich School of Business.
Erin Ruddy is the editor of Canadian Apartment Magazine.