Commercial FinTech-based investment in hotel industry

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Master of Science in Management of Built Environment

School of Urban Planning Construction Engineering

Thesis Topic

Commercial FinTech-Based Investment in

Hotel Industry

Supervisor: Professor Ms. Liala Baiardi

Co-supervisors: Eng. Alice Paola Pomè

and Eng. Silvia Francesca Leoncini

Master Graduation Thesis by

Arash Yazdan

Student ID. Number: 896409

Academic Year: 2019-2020

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Abstract

The human's ambition and the innovation endowment are the differentiated characteristics of the human intrinsic nature. Every operation has been improved during passing times and never stopped as the new solutions has always been emerged to optimize processes.

This dissertation tries to dissect how FinTech facilitates the establishment of investment in the hotel industry. Primarily, the FinTech science, and the relevant characteristics, framework and trend described. Consequently, one of the FinTech procedures named "Crowdfunding" demonstrated. Finally, the application of crowdfunding in the commercial real estate investment specifically hotel industry examined to understand how effective can each transactional and contractual process could be executed to satisfy all sides of a deal.

After analyzing all the relevant facts covering the issues of crowdfunding and hotel industry specifications, a case study is designed including the creation of an investment operation through employing hierarchical stages of the crowdfunding procedure. The result is represented as a flow diagram containing the decision making for each stage of the procedure.

Finally, the results state that the overall world-wide trend is to applying more human-centered financial operations by eliminating the extra activities and costs. This leads to focusing more on the main target and accomplishing the mega projects with fast pace to meet deadlines.

Therefore, it can be said that there are other required proceedings that shall be done in order to rectify the structure of FinTech procedures such as syncing these innovative processes with all the needed governmental regulations to eliminate any potential fraud.

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Abstract (Italian)

L'ambizione dell'essere umano e la dotazione di innovazione sono le caratteristiche differenziate della natura intrinseca umana. Ogni operazione è stata migliorata nel tempo e non si è mai fermata poiché sono sempre emerse le nuove soluzioni per ottimizzare i processi.

Questa tesi cerca di analizzare in che modo FinTech facilita la creazione di investimenti nel settore alberghiero. In primo luogo, la scienza FinTech e le relative caratteristiche, quadro e tendenza descritti. Di conseguenza, ha dimostrato una delle procedure FinTech denominate "Crowdfunding". Infine, l'applicazione del crowdfunding nell'investimento immobiliare commerciale, in particolare nel settore alberghiero, ha esaminato per capire l'efficacia di ciascun processo transazionale e contrattuale che può essere eseguito per soddisfare tutti i lati di un accordo.

Dopo aver analizzato tutti i fatti rilevanti riguardanti le questioni relative al crowdfunding e alle specifiche del settore alberghiero, viene progettato un caso di studio che include la creazione di un'operazione di investimento attraverso l'utilizzo di fasi gerarchiche della procedura di crowdfunding. Il risultato è rappresentato come un diagramma di flusso contenente il processo decisionale per ogni fase della procedura.

Infine, i risultati affermano che la tendenza generale a livello mondiale è quella di applicare più operazioni finanziarie incentrate sull'uomo eliminando le attività e i costi aggiuntivi. Ciò porta a concentrarsi maggiormente sull'obiettivo principale e a realizzare i mega progetti con un ritmo rapido per rispettare le scadenze.

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Pertanto, si può dire che ci sono altri procedimenti necessari che devono essere condotti al fine di rettificare la struttura delle procedure FinTech come la sincronizzazione di questi processi innovativi con tutti i regolamenti governativi necessari per eliminare qualsiasi potenziale frode.

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Through examining the historical progress of FinTech technology, the rapid growth of this technology and subsequently its influence to link it with other enterprises can be simply observed. For instance, Fintech has linked wide range of interactive operations from banking, wealth management to real estate investment. Meaning that technology has a high epidemic trend.

Crowdfunding as a Fintech procedure, represents a way of capital raising through establishing online platforms. As a principle, crowdfunding is open to everyone – private persons as well as economic actors. A group of people, the crowd, financially contributes small amounts to projects, products or ideas. These projects, products or ideas are owned by fundraisers. Fundraisers search for investors directly or via a specific digital platform, referred to as intermediaries.

The dissertation seeks to design a specific crowdfunding procedure for investment in hotel industry through applying a comprehensive structure of crowdfunding model and corresponding it with commercial investment in hotel industry. Two projects have been defined, the first one is the construction of a new branch of franchised hotel and the second parallel project is the revamping of the existing hotel complex. The application of proportional crowdfunding procedures fitting to each project has been designed accordingly.

The main concept of this design is to build a proper structure for capital raising with the aim of eliminating time-consuming banking systems and more agile and dynamic proceedings and expedition.

Finally, the result represents a flexible procedure of crowdfunding in which the investment operation optimized and all needed new modification has been arisen.

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2. FinTech

According to the "David Varga" 's designed structure of FinTech which representing in the below figure 01, FinTech's emersion primarily based on gathering big data related to customers and experiences from traditional procedures as well as all the innovative solutions with the aim of centering human and individuals for the elimination of redundant bureaucracy and streamlining the banking systems of the business workflow.

The second layer includes implementing the main progress and high-tech procedures through the establishment of the new infrastructures with respect to the traditional tasks. Obviously, in this stage many disruptive sources and activities emerge and each company should be flexible enough to adapt its organization to the updates if it would like to keep its success.

The third layer contains the platforms and instruments which all facilitate the performance of the FinTech at the desired scale meaning country or world-wide ranges. This layer is so close to the profit-making operations, therefore, extreme activities including updating the technological aspects and upgrading platform's risk profiles always are performed based on the government updated regulations to constantly keep value-adding trend.

As it can be seen, all three layers follow value drivers meaning that results of FinTech application in the various business's financial activities, yields value-added profits through out lessening traditional overhead costs and time-consuming hierarchies.

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Figure 01 – Key value drivers behind FinTechs

Source: " David Varga", " Fintech, the new era of financial services", November 2017

Distinctively, in this thesis the FinTech methodology and application in investment in the real estate namely "Hoteling Industry" will be discussed and with being more precise, investment in Fintech companies or startups is another issue and is not included within this thesis context.

In the simplest form of definition, FinTech is including two parts. A resource describes this term in a way that FinTech is a word created by combining “finance” and “technology,” and it can be said that it is the technology applying IT to the financial world. However, I wish to define FinTech as essentially something that has the potential to change the way that finance operates, a technology that can contribute to a new form of finance and that will give birth to novel financial

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services (Tokushi Nakashima, 2018). Besides, "Nakashima" in the same article named "Creating credit by making use of mobility with FinTech and IoT" refer to FinTech and IoT as tools to make the world more convenient. And he exactly elaborates that " Their role is to improve and promote society to a new level; or to improve the way that people live and the way that they think by offering greater happiness or satisfaction with their lives". On the other hand, he believes the best way to utilize revolutionary technologies such as FinTech or IoT is to develop society and to increase each company's business in response to this social development.

2.1. Statistical FinTech Trend

‘Finovate’ — Largest FinTech Conferences and nowadays it performs updating FinTech companies' news and valuation — has tried to aggregate all major FinTech companies in the world and classified them by domain and company valuation. Classification includes unicorns (companies valued at or more than one billion dollars), and semi-unicorns (FinTech companies which are valued more than 500 million dollars). Thirty-six FinTech unicorns and 34 semi-unicorns had been identified as of May, 2015. There was a jump in semi-unicorns' numbers from 36 to 48 just within 2 months later and semi-unicorns from 34 to 37. This rapid growth indicates the strong dynamics of the FinTech sector (Finovate's list of July, 2015).

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Figure 02 – Trend Comparison of FinTech Various Domains

Source: Finovate's list of July, 2015

Figure 02 shows that FinTech had been mostly employed in the fields of main transactional operations specifically "Payments", "Lending" and then "Real estate".

In order to realize more specifically, we can refer to the trend modality of "Lending Platform" using FinTech in British Market. This platform has risen at 60% year-on-year since its inception, and now owns 3% of U.K. retail lending market having lent 400 million GBP so far (King, 2014).

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2.2. FinTech Range of Applications

Here, the reason of focusing on Lending and Payments by FinTech companies is to changing the slow and expensive processes of traditional banking systems. Besides, the main idea of inventing FinTech is to facilitate the "Lending" procedure as the lending is the basic stage in various businesses investment.

Operating in almost all major business domains previously served by traditional financial institutions: business lending, capital markets and trading, credit score and analytics, financial services and infrastructure, general lending, insurance, merchant services, mortgage lending, personal and customer lending, processing and payments infrastructure, regulatory and compliance, real estate investing, and wallets and money transfer (CB Insights, 2017).

FinTech companies are usually proceeding to process optimization, the extensive use of information technology and reduced overheads to progress their competitiveness and to offer products and services to market segments which were previously either unreached by traditional business units.

Neo-banks and FinTechs grabbed the market opportunity in creating a community of lenders and borrowers and innovated the crowdfunding business model. Crowdsources lending benefits individuals with low or different amount of funds by offering them access to capital at reasonable rates of interest, and creating a revenue stream for lenders who can acquire above-average yields on their funds. The disadvantage of not personally knowing customers was overcome by superior data analysis and by using internet-based platforms to decrease the distance between lenders and borrowers (Bachmann et al., 2011).

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Wisely, P2P lending platforms have created the opportunity to non-professional investors and households to provide funding for borrowers through lending platforms. Despite generating extra income for families, a strong level of risk has been resulted that may cause household money lost on the loans they supplied in the case of borrower default or non-payment.

Therefore, this concept is currently encouraging investors to make international commercial investment in high profit real estate namely "Hotel Industry Complexes".

The idea of using FinTech technology for investing in hotel establishment, demonstrates applying the online rapid financial transactions systems featuring the low costs and risks for a constant period of the investment. Whereas the important characteristic of hotel establishment is the development of that hotel's brand in the form of branches over the world wide, so again the logical constant solution could be applying the FinTech procedures.

2.3. FinTech Framework

Every part of the economy is gradually integrating and embedding FinTech as a part of its infrastructure.

As a purely talking, the aim of applying FinTech is making Smart Contracts which streamlines the execution of the Property and Cash Flow Management needed in the real estate investment.

Fintech Methods should be established as a main infrastructure for running commercial real estate investments and not to be viewed as a facilitator or some advanced options to announce that our company presents modern and luxury technology so that in this case this Pretention shows off just a passive advertisement.

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The reason of recommending the establishment of Fintech as an infrastructure is to proceed a series of reforms of the traditional investment procedures Imperfections.

The main Operations of FinTech orients on “Lending Processes”, “Providing a Huge Integrated Data Base Relating to the Target Market” and “Offering Investment Decisions through Smart Analysis”.

CRE — Commercial real estate — investments are steadily on the rise, owing to steady economic and employment growth in key markets. Although there has been some concern about a flattening yield curve, several tax reform initiatives and the threat of trade tariffs. The full impact of Brexit in Europe is also not yet fully determined. In the first six months of 2018, CRE transaction volume globally increased 13 per cent year on year to USD 341 billion “ValuSrat, 2018”.

Due to an ever-growing population, commercial real estate is becoming impactful as every real property like hotels, skyscrapers and shopping malls owes its existence to CRE lender capital.

According to Real Capital Analytics (RCA), global volumes for completed sales of commercial properties totaled USD 873 billion in 2017, matching the total registered in 2016 “ValuSrat, 2018”.

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Figure 03 – Global Capital Flows 2017

Source: ValuSrat, " How will FinTech impact the commercial real estate market?", Nov 2018

Based on Deloitte survey research in 2018, real estate FinTech startups globally increased by 18 percent between 2008 and 2017 from 246 to 1,3247.

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Figure 04 – Global Capital Flows 2017 -Continents

Source: ValuSrat, " How will FinTech impact the commercial real estate market?", Nov 2018

Figure 05 shows real estate parameters which have been changed by technology. Besides, Savills research demonstrates that North America has almost the most valuable CRE, estimated at 9.5 trillion - 29 percent of all the world commercial properties.

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Figure 05 - Global Real Estate Transaction in 2017

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As currently technology is working in all CRE sectors, companies are adopting various technology applications.

Specifically, investors claim certain qualifications about technology usage from their CRE investments. According to Deloitte’s survey respondents announced that CRE companies should plan to use of “Predictive Analytics” and “Business Intelligence”.

Following diagram demonstrates the tools that companies are applying to provide investors with predictive analytics and business intelligence in order to invest wisely with the lowest level of risk.

Figure 06 - Investors’ Interest in Applying Smart Tech

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2.4. An Overview of Fintech Methods

Online lending is the principle of FinTech in the commercial real estate industry and plays the role of catalyst for launching investments. Therefore, FinTech leads in shortening the lending process up to two business days for getting lender acceptance. Moreover, the due diligence now needs less time as well.

FinTech technologies are including artificial intelligence (AI) — having the ability of analyzing large data pools with higher speed and lower errors than humans — and blockchain— serving higher safety and security in contractual and transactional operations.

Crowdfunding as a sample of “RealtyMogul” presents a platform enable invertors to invest in

opportunities examined by experts starting at USD1,000. So, to be noted that the success aspect is its ability to raising capital pandemically from investors with various affordability.

Blockchain provides an organized structure through which the following traditional challenges

are being removed: “ValuSrat”

▪ Inefficient property search process due to fragmented listings data

▪ Time-consuming, paper-driven, predominately offline due-diligence process

▪ Complexity in managing ongoing lease agreement, property operations and cash flow

Real-time rich data directly influences management’s decision-making capability. Below diagram breaks down blockchain flow operation.

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Figure 07 - Blockchain Lease Transaction

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Figure 08 - Blockchain Purchase Transaction

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Commercial mortgage is typically closed in 3 months and finance approvals require a great deal of paperwork. Blockchain removes the paperwork stage and facilitate the process by simplifying financing procedure. Besides, due-diligence and documentation times deducted due to the integrated rich data availability.

Finally, based on the defined FinTech cycles, the Smart Contracts lead efficient property management and cash flow which results in transparent and automated payments.

2.5. Lending

Deposit and lending have been changed from the traditional ways to emerging alternative models. These changes influence the market dynamics of traditional lenders.

In the continue of financial crisis, lower risk desires among retail banks remarkably confined access to traditional band intermediated lending. Over the same period of time alternative lending platforms leveraging P2P models have experienced rapid growth. These platforms apply alternative adjudication methods and lean, automated processes to present loans to a wider range of customers and a new level of investment opportunities to savers.

2.6. Future of Lending

Due to rising of competitive pressure from alternative lending platforms, the overall saving and lending industry will be forced to compete. The occurred trends are:

▪ Alternative lenders could go upstream to replace traditional institutions in intermediating prime loans while traditional lenders are limited by legacy procedures and high capital requirements resulted in losing shares.

▪ Alternatively, traditional institutions and alternative platforms may follow to prepare different classes of investors and borrowers, specifically through

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increasing partnership between smaller traditional institution and alternative platforms.

▪ Traditional organizations could also convert their procedures and technologies by applying alternative platforms, to accept the key feature of alternative lending business models.

Insomuch, emerging alternative lending models arises both competitive threats and evolutionary opportunities for financial organizations, putting it at higher level of importance for incumbent enterprises and alternative platforms to extend more integrated partnership and lean from and share each other's capabilities.

2.7. New Lending Procedure Advantages

Retail banks collect savings from their account holders and offer interest on the savings in return. In many countries, regulators legislate banks to assure and hold minimum reserve on the savings held.

Through using saved funds, retail banks offer loans to borrowers and collect interest in return. The present of loans and the interest rates are regulated by the adjudication of borrower's risk profiles.

Generally, interest collected on loans are higher than interest submitted on savings to account for default risks and other operational costs.

The range of borrowers served is dependent on each bank’s risk appetences, which is generally related to the dimension and scale of the banks.

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Figure 09 – Lending Methodology

Source: World Economic Forum, " The Future of Financial Services", Jun 2015

Key Characteristics of Traditional Procedure

A. Limited Access: Rising lending gap confines the availability of loans to individuals and businesses with higher risk profiles.

B. Margin for Error: Traditional adjudication types and credit scores desire to miss proper lending opportunities in virtual economy.

C. Restricted Control: Borrowers have limited monitoring and visibility over the usage of funds and interest rates obtained.

D. Slow Pace: Traditional adjudication procedures with multiple layers of approval confines bank's capability to proceed loans in timely manner.

E. Poor Customer Experience: Huge manual adjudication operations and requirements fall short of increasing expectations on customer experiences.

F. Low Return: Executional inefficiency and reduced risk appetences of banks lead to low return on savings (GUD Capital, Specialist Loan Services Company _ Press).

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Evolution Modality of Traditional Lending Types

▪ Based on the 2008-2009 global financial crisis, client trust around financial services quickly dissipated.

▪ Regulators necessitate increased safety indexes about loans (e.g., higher capital requirements) which resulted in many bank's tightening loan essentials.

▪ This reciprocal loss of confidence caused a lending gap, leaving a significant segment of borrowing needs unserved by financial institutions.

▪ Moreover, client priority in financial services are rapidly changing, demanding more transparency, efficiency and monitoring over their deposits and loans.

2.8. Alternative Lending Models

Alternative lending institutions have appeared to fill gaps in the traditional lending services. New entrepreneurs are coming out all over the world, representing a great number of value proposals and strategies that are disrupting traditional business models.

Online and P2P lending platforms offer customers low-cost, fast, flexible and more human-oriented alternatives to streamline retail banking that traditional financial institution once predominated in.

Whilst the business models of various lenders usually differ from one another, most suppliers directly link borrowers and lenders, applying advanced adjudication procedures and facilitate the workflows.

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Figure 10 – Alternative Lending Models

2.9. Key Features of Alternative Lending Platforms

▪ P2P

Alternative lenders offer online platforms and legal contracts to represent direct conformity of funds between savers and borrowers. Executing lending operation through online or virtual marketplace, lenders encountering lower operational and funding costs that traditional depository lenders.

▪ Alternative Adjudication

Alternative lending platforms assess the creditworthiness of borrowers based on the indexes beyond the credit scores applied by traditional lenders (e.g., social data)

Most alternative lenders rectify their risk profiles more frequently that traditional lenders to implement needed reactions in accordance with occurred variations and empirical analysis.

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Alternative lending platforms are free of bureaucracy and legacy operations, making possible for these platforms to evaluate borrowers and lenders in a more streamlined style.

2.10. Lending Models – Flexibility and Risk Allocation

Traditional lending intermediaries (e.g., retail banks) accept risks themselves and leverage their scale to supply stability to lenders, although their targeted customers are low-risk borrowers and they are charged high fees in the form of interest rates.

Various lending platforms generally represent an online marketplace where lenders have the flexibility to select and invest in a desired risk portfolio. This virtual marketplace creates lender's scores and typically it defined portions of loan originations and ongoing loan revenue but does not directly take risks.

Comparison of Traditional and Alternative Lending Models

(A) Traditional Lending Intermediaries

Description:

▪ Traditional intermediaries keep savings from retail, institutional and commercial clients and submit interest in return.

▪ Applying those funds, traditional intermediaries originate loans to borrowers based on their creditworthiness and obtain interest.

Advantages:

▪ Lender's funds are secured by the intermediaries' reserves and by deposit insurance scheme.

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▪ The total pooling of funds and loans most effectively mitigates individual nonpayment risks.

Limitations:

▪ Lenders do not own flexibility to define the preferred level of risk and return. ▪ Initially focus on small risk loans miss out higher risk borrowers, based on the

market condition.

(B) Modern Various Lending Platforms

Description:

▪ Modern lending platforms directly match lenders and borrowers based on their desired needs.

▪ Contractual regulations exist directly between borrowers and lenders and platforms represent little intermediation and adjudication.

▪ Modern platforms are recouped through operation fees or percentage of interest payments.

Advantages:

▪ Lending operations and risk profiles are transparent to both borrowers and lenders. ▪ Traditionally undeserved borrowers acquire access to loans and various risk

appetences of lenders are met.

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Limitations:

▪ Investments may be more exposed to personal nonpayment risks even with portfolio approach, specifically for small businesses.

▪ Guarantees on the investments are restricted.

Finally, the main characteristics of future lending models can be mentioned as below:

A. Higher Precise Underwriting:

Various selection by lending intermediaries with premium underwriting capabilities will result in a broader adoption of alternative credit indexes for judgement and pricing.

B. Wider Access

Availability of various adjudication and diversification of lenders will represent more lending choices to a broader spectrum of borrowers (e.g., "thin file" borrowers).

C. Monitoring and Transparency

Lenders are provided with more control over the return on their funding based on their risk appetite and more monitoring on the stream of their funding.

D. Reduced Costs for Borrowers and Increased Returns for Lenders

Due to the more sensitivity and improvement of borrower's risk profiles, the margin of lending intermediaries may be pressured, leading to lower costs of acquiring loans for borrowers and increased return for lenders.

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E. Fast Pace and Customer Friendly

Streamlined and automated procedures expedite loan operations and improve customer experience for borrowers.

2.11. Capital Raising

Going further than loan operations through lending platforms, there are also funding online platforms enabling the crowd for providing capital to investment opportunities.

Alternative funding platforms represent an opportunity for businesses to cooperate directly with individual investors to extending options for raising capital.

Rather than offering investment advice or directly marketing investment in equity or debt capital, alternative funding platforms aggregate investment cases, represent a standardized view of the cases and streamline legal structuring of equity or debt issued.

The rating of investment projects is investigated through the awareness of the crowd (i.e., minimum requirement must be met for successful funding) or by employing more experienced individual investors to lead the investment tasks, instead of applying credit rating agencies or sell-side analysts.

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Figure 11 – Alternative Funding Platforms

2.12. Key Features of Alternative Funding Platforms

▪ Crowd Based

Alternative funding platforms represent a marketplace for individual investors to directly investigate and invest in commercial investment opportunities.

Investment opportunities are generally only funded when a pre-determined aim is met, to eliminate less credible or less promising opportunities through “crowd’s approval”.

▪ Authorizing Individuals

Some alternative funding platforms enforce the skill of more experienced investors in specific context (e.g., angel investors) by supplying them an opportunity to conduct funding for desired investments.

Some platforms facilitate these “lead” investors to obtain extra income through fees, similar to carries paid to general partners of private equity firms.

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Alternative funding platforms provide a number of customizable choices for enterprises to set up and easily design funding options desirable for them (e.g., term, equity share).

Moreover, some platforms allow businesses to set up unique proviso, such as rewards, to make them attracting to investor segments.

3. Crowdfunding

In this dissertation, crowdfunding is addressed as a FinTech way for the execution of the investment in commercial real estate namely Hotel Industry. Therefore, firstly it has been tried to analyzed the crowdfunding structures meaning all the alternative lending models recently designed between lender, borrowers and other possible sides. Secondly, the proper crowdfunding model will be designed and elaborated for establishment of the commercial investment in Hotel Industry.

Crowdfunding represents one dimension of the phenomenon of crowdsourcing besides crowdvoting and crowdcreation (e.g. Leimeister, 2012; Leimeister and Zogaj, 2013; Richter et al., 2014). The term crowdsourcing is composed of "crowd" and "outsourcing", pointing to the meaning to outsource specific functions to a group of external persons (Kleeman et al., 2008).

Besides crowdsourcing (Howe, 2008), crowdfunding is closely connected to micro lending (Vitale, 2013). Micro lending refers to the idea of funding of individuals, who do not have access to conventional financing from credit institutions (Armendariz and Morduch, 2010).

Due to existing various definition for crowdfunding which none did receive the scientific acceptance. Thereupon, prominent definitions are collected in the following table.

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Table 01 - Definitions of Crowdfunding

Source: International Business & Economics Research Journal – May/June 2015 Volume 14, Number 3

Bottom line of all definitions from numerous authors is, that crowdfunding focuses on raising financial funding from the public, represented by a group of people, by using specific internet-based platforms (e.g. Mazzola and Distefano, 2010; Ribiere and Tuggle, 2010; Yang et al., 2008).

In accordance with all above-mentioned formal definitions, it can be simply said that crowdfunding originates from crowdsourcing. Crowdfunding platforms are widening access to capital raising activities, making the overall ecosystem richer (R. Jesse McWaters, 2015).

Key disruptive trends in the context of crowdfunding are "Empowered Angel Investors" and "Alternative Adjudication".

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▪ Access to more diverse funding options allow new companies to grow at a quicker pace and shorten the average time between early funding stages

▪ Distribution platforms create a venue for investors to tailor their investment portfolio across dimensions beyond financial return

▪ As the barriers to enter the asset class fall, it becomes ever more important for traditional intermediaries’ profitability to find undiscovered “start” investments (R. Jesse McWaters, 2015)

3.1 Crowdfunding Basic Structure

In this section of thesis, the basic stream of operations will be demonstrated. The main idea is to understand to what extend the process is secure and with fast pace is executed.

Figure 12 - Crowdfunding Basic Structure

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3.2 Crowdfunding Elements

Crowdfunding is a collection of equity and debt to be invested in many types of projects through a web-based platform capable to provide opportunities by matching lenders and sponsors.

Various stakeholders participate in, the majority of them is as below:

Crowdfunder: investor, backer, donor and, in some cases, private and public institutions;

Beneficiary-investee: individuals, small companies, start-ups, NGOs, product, project,

initiative or ideas;

Crowdfunding online platform: a marketplace to connect crowdfunders with the

beneficiary or investee, that is remunerated through commissions from both crowdfunder and beneficiaries;

Third party verifier and other service providers: those parties who support platforms

and beneficiaries/investees by providing services such as due diligence, legal support, tax structuring, project monitoring.

Sponsors: those providing assistance in designing and running crowdfunding campaigns.

In particular, there are mainly two crowdfunding categories of return: the first, called the “financing procedure”, including equity and lending crowdfunding, represents a financial yield to investors; the latter is identified as a “non-financing procedure”, as it offers to users the possibility to donate money or to gain a non-monetary return.

Crowdfunding should support the trust aspect for its investment procedure. Based on the regulatory framework, it differs remarkably across countries based on the model used, the project sponsor and beneficiary. In some countries, general provisions are applied to protect investors in

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the case of legislation shortage. In other countries, there are various requirements such as registration and reporting tasks in equity and lending crowdfunding or banking license in case the platforms act as like a bank. Finally, in some cases platforms are monitored at federal level along with state-level agencies.

Figure 13 – Crowdfunding Typical Diagram

Source: EY Elaboration on several sources

3.3 Crowdfunding Costs

To set up crowdfunding campaigns, some operating costs are incurred by beneficiaries/investees: (EY, March 2019)

Platform fees: usually in the range between 3% and 8% of the capital raised depending on

the platform and on the type of crowdfunding. Instead of platforms fees, there could be recovery contribution costs in order not to bear the commercial costs but the operational one;

Equity (additional) fees: can include accounting fees, legal and securities costs,

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Marketing costs: refers to communications, IT, design and video production due to the

fact that successful campaigns are often supported by well-designed marketing strategies and professional service providers;

Project specific costs as some campaigns may need prototypes as proof of concept. Equity

crowdfunding campaigns can involve other costs:

Costs of control or due diligence on the feasibility of projects and insurance premiums

for investors protection;

Payment of interests (if any);

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Figure 14 – The history of the crowdfunding market

Source: EY Elaboration on several sources

3.4 Crowdfunding Trend

The world-wide crowdfunding market is worth $ 84 bn as at 2018 and is predicted to reach $ 114 bn by 2021, meaning an expected CAGR (2016-2022) of approximately 17%. The region which will fuel the market growth is APAC, which will contribute for almost 50% to the global market growth.

Americas account in 2018 for, approximately, 50% of the global market share, meaning $42 bn, 85% of which is represented by US ($ 33 bn).

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EMEA is worth about 20% of the total market share reaching $ 16 bn in 2018, expected CAGR is approximately 14.7%.

As at 2018, APAC region contributed to c.a. 30% of the global crowdfunding market (c.a. $ 28 bn). APAC is showing a faster growth rate and by 2022 this region should achieve a total market share near to 40%.

With regards to leading countries, US, UK and Canada are the top three states with, respectively, 42%, 11% and 5% global market share (EY, March2019).

Figure 15 – Crowdfunding Statistical Trend

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Moreover, on a global level, 70% of the crowdfunding industry is allocated by lending crowdfunding (2016), while equity investments have the 8% of the total market share.

Equity crowdfunding is the fastest-growing segment with a CAGR (2016-2021) of 33.9% in contrast with 10.9% performed by lending crowdfunding.

The leading industries in terms of market share by end-users are: Entrepreneurship, Social cause, Entertainment and Real Estate. Moreover, crowdfunding is becoming a primary source of capital for ventures in the Entertainment industries (i.e. movies and theater, music and publishing) which have a restricted access to the traditional source of financing (EY, March2019).

Figure 16 – Real Estate Crowdfunding Statistical Trend

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The places where having the highest rate of the capital collected through crowdfunding are USA & Canada, UK & Ireland, Australia & New Zealand, Europe, Norway, Switzerland, Hong Kong, Singapore, Japan and Mexico.

Crowdfunding investments has been employed in a variety of sectors, among which the most “capital-attractive” ones are: Food & Beverage, Healthcare & Fitness, Design & Fashion, Technology, Advertising & Marketing, Construction & Hospitality services, Automotive, Consumer goods, Data & Analytics and Energy.

Based on the volumes, USA has the biggest market, specified by platforms that have provided (on a singular basis) since their launch, more than $1 bn to several clients.

Figure 17 – Most Applied Crowdfunding Platforms Worldwide

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3.5 Real Estate Crowdfunding

Real Estate crowdfunding is a type of commercial and international investment, which employs fintech logic to capital raising for Real Estate investments. The capital raised is used in order to construct, purchase, develop or refurbish a Real Estate asset with the aim of subsequent use or transaction. Thanks to the nature of the crowdfunding mechanism, crowdfunders can diversify their portfolios by investing in a variety of properties generally through a low minimum investment amount required.

The typical Real Estate crowdfunding project is usually operable when a revamping company in the market intend to build or refurbish an asset placed in a location with a high growing potential. Crowdfunding occurs among the different sources of capital aimed to finance its investment, including Capital expenditure predicted in its business plan.

The success of the investment and its returns depend on some drivers, such as: the platform's capability to represent projects (independence), the operator's track record and the amount of initial equity.

In addition, Real Estate crowdfunding platforms perform as service providers for developer companies and their projects. The capital package of a project includes: preferred equity, common equity, mezzanine debt, senior debt and crowdfunding which is used in a supportive way to the other means of financing. Therefore, crowdfunding members must be able to adapt flexibly to meet their sponsors’ requests.

Through the funding platforms both investors and sponsors will benefit from the capital raising which can be mentioned as below:

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Investors:

▪ Reduced intermediaries (real estate agents, brokers or contractors) ▪ Lower cost, fees and tax deduction

▪ Diversification by risk, strategy and geography

▪ Straight access to project investment opportunities through investing even low money amounts

▪ Higher returns compared to traditional way of investments

Sponsors:

▪ Access to an extended network of investors

▪ Optimized state for fees, taxes and administrative costs

▪ Various sources of capital, less depended on few major capital providers

▪ Elimination of initial financial constraints emerging at the beginning of company life cycle

3.6 Real Estate crowdfunding Types

Crowdfunding models include both non-financial return formats (donation and reward-based) and financial returns ones (lending and equity), based on the different needs of the campaign’s owner. The most-commonly used model is the one offering financial gains. There could be platforms working either in equity crowdfunding or in lending crowdfunding and “hybrid” models which deal with both.

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3.7 Lending Crowdfunding

The revenue usually is given by the interest rate, which can be fixed or indexed. The issue is the subject loan, not the specific usage of the amount lended to the borrower. However, in some cases, it is possible to acquire an extra return related to the sale of the property.

In this case, capital return usually performed through interest rates. Examples of platforms: ▪ Patch of Land (US) with $725 mn collected

▪ Sharestates (US) with $ 1.56 bn

This model includes lending of capital through platforms, which acts as financial intermediaries. It matches individual lenders with excessive liquidity with third parties that are borrowers and the procedure is proceeded through the web.

The platform distributes a project requesting for loans and investors. On the other hand, the investors desire to recoup the capital invested plus an agreed interest over the period of time.

Main Risks of Lending Crowdfunding:

Delayed payments: there is no assurance that borrowers will be able to repay investors on

time.

Mortgage: the crowdfunding platforms are not permitted to register a mortgage on the

asset. The RE Company which borrows the money acquires the property of the assets and gives it as a mortgage guarantee to a third party (SPV) that holds it as a guarantee for all lenders.

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3.8 Equity Crowdfunding

This model facilitates to distribute the risk of business on a great number of investors who, in case of failure, would encounter a smaller loss. The backer acquires shares of a company, usually in its initial stages, in exchange for the money pledged.

As a remarkable feature of the related platforms is that any type of projects can call on a great number of investors. The non-listed company defines a planned amount and divides it in a number of shares that will be sold on the platform for a particular period of time.

It means that, one share of the company is purchased and the return will be generated by the exit value achieved. In fact, there will be a difference between the sale price of the property (exit) and the previously invested capital.

In an easier statement, it is an investment for an ownership stake in specific enterprise. Examples of platforms:

▪ 1031 crowdfunding (US) with $ 1.3 bn

▪ Crowd House (Switzerland) with € 600 CHF mn ▪ CrowdStreet (US) with $460 mn collected

Main Risks of Equity Crowdfunding:

Capital gain/loss: The achievement of the investment depends on the fluctuating price of

shares. So, if the project fails, the difference between the exit value and the invested capital will be negative, therefore investors lose money.

Liquidity risks: Shares in smaller or newfound companies are illiquid and expose to

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Figure 18 – Geographical Capital Raising Through Newfound Platforms

Source: World Economic Forum

Figure 19 – Real Estate Crowdfunding Diversification (No.)

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3.9 Real Estate Crowdfunding Global Trends

Most of the famous platforms specialized in real estate were established between 2010and 2014 in the USA. The active hubs are located in California.

The reason of the USA successful marketplace established on online platform is that the mentioned marketplace extended and covers many types of investment as both "Focused" or "Diversified" portfolios. And it is because of variety of asset classes they invest in.

On average, half of the platforms invests in residential properties while the other half invests in Real Estate assets with different use (residential, retail, office, industrial).

Based on the reports, platforms require the users to invest within the range from $100 up to $10,000. Besides, the number of active users is reported 40,000 to 500,000 individuals.

Through focusing on European financial return, most of the crowdfunding platforms were born in the UK.

It should be considered that two important features of equity crowdfunding are due diligence, performed by many platforms before posting the project online, and the engagement of specific categories of investors.

On the other hand, another critical issue which may impact upon the future development of crowdfunding is regulation. Crowdfunding is largely still an unregulated activity. The ways in which crowdfunding is regulated will seriously affect its capacity to reduce the funding gap for start-ups and SMEs (Small or Medium Enterprises).

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Figure 20 – Most Applied Real Estate Crowdfunding Platforms

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Figure 21 – Italian Crowdfunding Modality

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4. Hotels - Asset Class Overview

In this section, the principles of this asset class including key metrics to evaluate hotel performance, its potential to compete in the market are examined for collecting necessary data to make informed investment decisions.

Hospitality industry contains the CRE investment type which is subject to shifts in supply and demand that results in significant impact on net operating income, profitability and yield. More clearer, these shifts in hospitality occurs immediately.

Hotels are specified basically by the services and amenities that they offer. The four main hotels include:

1- Full-Service: Hotels providing guest services and amenities, such as on-site restaurants, banquet and meeting rooms, concierge service, spas and retail shops. Some examples are Hyatt, Ritz-Carlton, St. Regis and Westin. For full-service hotels, the markable success of the hotel is highly depending on the quality of its on-site amenities, particularly the food and beverage services.

2- Limited-Service: These estates are a step down in terms of services and amenities but still typically present a fitness center and a swimming pool. It can be said, the operations of this class are more predictable in comparison to full-service hotels. An example is Hampton Inn and Holiday Inn Express.

3- Budget: These “no frills” hotels may serve one or two guest services or amenities, but they typically provide the basic requirements for a low rate. Example includes EconoLodge.

4- Extended Stay: These hotels focus at business travelers on extended assignments, families during relocation, and others needing temporary housing. Their concept

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orients on offering discounts for stays of five days or greater and providing home-like facilities that are unavailable at standard hotels such as laundry and kitchen access. There exist remarkable variations among extended stay hotels by considering the quality of services but most specialize in mid-range to budget market segments.

4.1. Hotel Industry KPIs

Hotels have unique KPIs to monitor performances and growth, which are including average daily rates (ADR) and revenue per available room (RevPar).

(Ian Formigle, August 2016 – Crowdstreet.com)

ADR: ADR determines the average rate paid for rooms sold and calculated by dividing

room revenue by rooms sold in any given period:

ADR = Room Revenue / Rooms Sold

RevPar: defines the total room revenue divided by the total number of available rooms.

RevPar is affected by the number of unoccupied available rooms, while ADR demonstrates only the average rate of rooms actually sold.

RevPar = Occupancy Rate x ADR

Occupancy = Rooms sold / Total possible rooms sold

The procedure to realize these metrics is to compare RevPar of the hotel for each 12 preceding months and besides, compare this set of data with other competitor’s set of data. Therefore, the required data presents performance and competitiveness of this hotel over the defined period.

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4.2. Demand Drivers

The two main categories of customers forming demand for hotel rooms are tourism and business travelers. Moreover, the local market and environmental events and the existing of tourist and historical attractions arising other demand drivers. Tourism tends to enjoy hotels during weekends or all week during high season periods and also seasonally like winter ski resorts.

Business travelers tends to occupy from Sunday through Thursday. In this case, hotels positioning near convention centers or having on-site meeting and event spaces, capture more business travelers.

As a view to invest, it should be considered that hotels being located at the sites of amenities like casinos or waterparks or as well, being close to airport or a major highways or interstate, automatically receive high and constant demand.

On the other hand, to be noted that the investment for hotel establishment with more pace and low capital could be planned on the city zones which have potentials including infrastructure construction like subway station, fairs and festival spots.

4.3. Changes in Use

The issue of Changes is correlated with the ways of booking and offering rooms. However, it does not remarkably influence investment decisions, it could be considered wisely to determine clear defined specification for each room like dimensions, facilities, specific usage (equipped for the elderly with auxiliary rods, wheelchairs, …) in order to advertise and promote monthly or yearly offers exclusively for each type of rooms.

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When having sharp and transparent data of the inventories meaning rooms and their specifications then investment in that hotel will be resulted in precise calculated NOI, Risks of Customer indicator and ROI.

The procedure for offering bookings easily can be outsourced to the powerful companies having the large numbers of website visitors like Online Travel Agencies (OTAs). As it works particularly with technology, therefore, it needs ongoing upgrades and then logically it is better to outsource to the high-tech companies that provide and support their specific software and application.

Totally, the new changes arise in terms of how hotels are developed and used as well as how they are marketed. Other than applying technology platforms for booking requests, hotels are presenting small size and affordable rooms by splitting the large-sized rooms to keep the rate of their customers. Moreover, offering flexible booking periods by providing customers with substitutable predefined periods, enables customers to change their booking days due to probable happenings without paying any penalty.

Finally, for making informed investment decision based on the principles dominating the hotel industry and market, it can be said that a large-scale analysis should be executed through measuring various parameters alongside discovering the local economic situation and employment rate. The aforementioned giant analysis can be executed through FinTech tools as the big data base needs to be analyzed and optimized investment decision will be offer thanks to the machine learning systems. For instance, regardless of considering many factors, it can be wisely understood that in some cases due to featuring a cost-efficient environment, a limited-service hotel with a small staff may actually be more profitable than a full-service with huge staff and lavish surroundings.

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5. Invest in Hotel Industry with Real Estate Crowdfunding

The records of booming growth in the real estate crowdfunding validate the reason of increasement in the number of investments and investors interested in this type of FinTech. Throughout a research the below data extracted which demonstrate the Specifications and

Benefits of crowdfunding type of CRE investment.

1- Online Convenience

The speed and convenience for accessing the information, compare and prioritize choices, lead to making investment decision and accomplishing a transaction at the time of being anywhere like in an office or poolside or at favorite beaches. Nowadays, investors have access to institutional-quality real estate crowdfunding offerings at their fingertips and in real time.

2- National and International Access

Online platforms present a gateway to access information on a huge various live deal across the country. Therefore, the nature of being Online Service, makes it possible to be accessible both nationally and internationally.

3- Compare Multiple Competing Investments

Due to offering comprehensive information on online platforms, investors can now immediately compare competing offerings and customize their findings to select a project that fits their investment criteria. The point is that, as the number of similar online platforms rises, the quality of investment choices and terms offering to investors inevitably continue to improve as more investors enter these platforms and this generates a transparent, perfect and optimized investment choices which lead to a competitive market place both for investors and sponsors.

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4- Direct Investment In CRE

It means that direct investment enables investors to select the specific asset class like hotels, the location and the operator that best suits their investment desires and targets. The idea implies that investors do not buy some publicly traded real estate shares, instead they focus on specific detailed comprehensive investment in commercial real estate.

5- Cash Flow

Usually, private real estate options offer a sustainable investor, a cash flow distribution that are planned to grow over the asset holding period. Mostly, these distributions commenced at 6% - 9% annualized rates of return, typically paid quarterly and can turn to double digit yields within three years. Nowadays, depending on each case, investors recognize which CRE investment creates strong cash flow and yields and presents attractive option encouraging to invest.

6- Lower Minimum Investment Amounts

Online investment platforms offer CRE investments more easily in rich for individual investors. Specifically, currently investors can access CRE offerings for as little as $25,000 contrary to past era that minimum amount of investment was $100,000 or greater. This facility causes more and more individuals or companies invest with different capitals.

7- Diversification

Modern portfolio theory proved that diversification is key to achieving optimal returns. The low minimum investment amounts provided by online platforms enable individual investors to immediately build a diversified CRE portfolio. Instead of investing over $200,000 into a single property and waiting for it to rich maturity, investors now can decide to invest $10,000 or $20,000

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into five to ten different deals that vary by sponsor, investment structure, asset class, risk profiles, geographic regions and holding periods. Therefore, more than increasing the profit and lowering the risks, wide range of portfolio experience can be made by individual which results in future sustainable and constant successful international CRE investments with large-scale capital.

8- Resilient Reporting and Periodically Statement

Online platforms design an applied professional website’s dashboard enabling investors to manage their single or portfolio investments through constantly obtaining various models of reports like KPIs reports. Moreover, periodically reports, access to all investor documents empower the investor to make ongoing strategical informed decisions.

9- Equity Markets Uncertainty

Due to negative output and fluctuating trend of equity markets which resulted in dissatisfaction and concerns during 2016, investors moved into CRE investment opportunities. The reason was to make a deal on the basis of well-leased commercial real estate asset with a durable rate of return.

10- Emerged Technology and Unreturnable Trend

The most important principle at this stage is that the online platforms has been generated and from long ago many businesses foundations has been based on this infrastructure. In addition, investors get used to make profit through this fast pace and transparent platforms.

Therefore, getting back to the past offline procedure is too risky and cause many losses. Nowadays, online CRE investing is formed a specific syndication. Consequently, the relevant

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regulation and laws are formulating, and many investors have planned their investments for many years later from now and by means of these online platforms.

6. Hotel Crowdfunding Investment Case Study

In this section of this dissertation, I will Design a workflow for establishment of a crowdfunding platform for investment in Hospitality or Hotel Industry.

The aspects that I consider for the creation, is based on the development of the current funding platforms. The revamping which I rectify is based on the general regulation and predominant situation in Europe or to some extent in USA.

6.1. Crowdfunding Desired Model – State of the Art

The concept is to extend and build other branches of a franchised Hotel with the following specification:

According to the KPIs definition mentioned in the previous section, and based on the logical possible high-demand hotels fee ratings and with respect to the current market situation, I plan to raise equity for a hotel with a minimum $75 Revenue per Available Room (RevPar) and will raise capital for debt for properties with a minimum $50 RevPar.

The interesting idea is that both Lending Crowdfunding and Equity Crowdfunding will be employed in this project.

Lending Crowdfunding Platform will be applied to supply the basic construction of new branches meaning following the current structural design and frameworks base on the hotel brand's appearance.

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Simultaneously, Equity Crowdfunding will be applied to raise capital for major new revamping operations such as demolishing and reforming some of the current rooms to the new small economic rooms as well as few special large rooms locating on roof and also adding a carrier elevator and furnishing with new decoration but strictly following the current standard formats.

6.2. 1st_{Stage – Type of Fundraising}

In order to provide the participation of remarkable number of investors, the Indirect

Crowdfunding is selected for the construction of new branches. The reason is to guarantee the

participation of as much as possible numbers of users, by the execution of funding through popular and tagged platforms like Kickstarter rather than the hotel's itself portal that needs huge working hours and might not be as known as top ranked platforms.

Direct Crowdfunding is preferred for the hotel's revamping project. The reason of this

selection is that the popularity of the hotel's brand and the hotel's environmental atmosphere which had been inspired in the minds of all current hotel's guests lead to make straight investment decision by those guest and also other individuals who directly and professionally invest in hotel industry. On the other hand, the reason of not selecting the indirect crowdfunding is that, investors should search and allocate time to find this project among all other giant projects and might not make sense for them and appealing as a strong investment.

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Figure 22 – Crowdfunding Investment Type (Part 1)

Source: Venture Capital 2013

6.3. 2nd_{Stage – Type of Investment}

Figure 23 – Investment Type (Part 2)

After choosing fundraiser type, Again the selection is mutually exclusive on either path of ex post or ex ante and cannot be merged as an investment opportunity either has an existing product

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(ex post) or does not (ex ante). The double circle object immediately following ex post and ex ante is an intermediate event.

Ex post means funding after the construction completed opposed to Ex ante in which funding executed before the completion of the project.

For our case of investment, the state is the type of ex ante funded project and does not require an established track record to decide, meaning that a fundraiser is less likely to require a certain performance background as a business or organization to receive funding from investors. This is because of the availability, existence and popularity of the hotel's brand and having many years of hosting history.

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6.4. 3rd_{Stage - Crowdfunding Payout modes}

Figure 24 – Payout Types – Allowance for Using Funds by Fundraiser (Part 3)

There are four payout types of crowdfunding. These ‘Payout Modes’ are the rules regulating how and when crowdfunding platforms release funds pooled from investors to the fundraiser. This can potentially be a serious barrier when funds are not permitted to be released to the fundraiser and in some cases the investment model can stop at this stage.

Many platforms apply the all-or-nothing funding model, whereby the total amount of money set as the fundraising target by the fundraiser when posting the campaign must be met or exceeded in order for the funds to be released. If this minimum amount of money is not pledged