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Mar 3, 2016 11:41 EDT

Equity crowdfunding and interest rates

iCrowdNewswire - Mar 3, 2016

In 2016, we live in a world where negative interest rates are commonplace in developed nations. Don’t be fooled by US Fed’s move last December to raise interest rates from 0.25% to 0.5% per year. That was an exception.

Europe and Japan already adopted negative interest rates. Even Israel, constantly under threat, is considering negative rates as well. The only important economies that still have high interest rates are those of BRICS countries (led by Brazil, with 14.25%; Russia, with 11%; India, with 6.75%; and China, with 4.35%). Even so, the trend is lowering the rates even in those countries, with the possible exception of Brazil.

One may ask, why would anyone borrow money from a government-controlled Central Bank just to get less money at the end of the contract? Traditional economics suggest that a bank run would be likely in those situation, as money in the wallet has an implicit zero interest rate. However, the cost and risks associated with storing a high quantity of money, in addition to the deflation that some countries are facing now, make it acceptable.

The low interest rates don’t make keeping money in the bank an attractive option. If someone wants to increase his capital, he must invest in something. Easy ways of investing must be made available to everyone.

That’s why equity crowdfunding is so attractive in developed nations, especially real estate crowdfunding, a low-return and low-risk investment. After all, keeping money stored in the bank is much worse than having it locked but giving returns of 10-15% per year.

In Brazil, a case we studied, that situation is easily noticeable. We have tracked some real estate crowdfunding initiatives in the country (like Urbe.me). Backed by a major real estate developer, the project managed to raise enough money to become reality, but that took a long time. The return rates have to be very high so it is attractive to investors. But in the end, they were s even uccessful because of some particularities of the Brazilian economy.

Unlike the rest of the world, the Brazilian economy is suffering a double-digit inflation (nearly 11%), almost as high as the interest rate. So, the real interest rate is around 3%, not 14.25%. While the country was uncertain about their future during the entire year of 2015, now it looks like everyone expects high inflation and economic deterioration to only worsen, which means real estate investments are attractive again.

Image: interest rates in US from 1997 to 2010. Credit: Jarry1250, Wikimedia


Via iCrowdNewswire
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