Key Risks

Regulatory Disclosure

Smart Crowd Limited (SmartCrowd) is fully regulated by the Dubai Financial Services Authority (DFSA).

RISK WARNING: Investments in property and unlisted shares carry a risk. Your capital may be at risk and you may not receive the anticipated returns. Using credit or borrowed monies to invest on SmartCrowd carries a greater risk as even if your investment declines in value or is not repaid, you will still need to meet your repayment obligations.

Conflicts of Interest

Smart Crowd is 100% owned by Smart Crowd Holdings Limited which also owns other real estate entities such as Windsor Estates and Havn Holiday Homes. These entities may be given some business by Smart Crowd for identifying real estate for the Smart Crowd platform or putting some Smart Crowd properties as Holiday Homes. The business arrangements Smart Crowd has with these entities is the same it has with any 3rd party vendor.

The Smart Crowd platform could be used by sellers who cannot sell their property in the traditional market.

Although a thorough due diligence is done on all properties listed on the Smart Crowd Platform there may be issues that escaped our due diligence.

Investment Risk Warnings

Smart Crowd does not remove any of the risks that you may experience should you acquire a residential property directly and outright (i.e. without a mortgage). Some additional risks are introduced by virtue of shared ownership and the timing of your exit. We encourage you to diversify your Smart Crowd investments across multiple properties to safeguard against excessive exposure to any one property that could incur issues such as tenant default or a problem specific to that property that impacts valuation. If you are investing in the Flip Product there are further risk and disclosures set out in the Flip Product Risks and Disclosures section below.

Variable Income

Whilst Smart Crowd provides gross rental income estimates based on information from third parties, these are not guaranteed. It may be that lower rents are secured. Furthermore, rental income could cease completely for certain periods. In the event of a tenant failing to meet its obligations to the owner of the property, investors will experience a fall in the cash receipts and cash available for distribution to them. From time to time, vacancies can be expected to arise in the operation of real estate assets. In some cases, sizable vacancies may mean there is less cash available for distribution to investors.

• Investment in real estate is speculative, the market value of the property can fall and rental income is not guaranteed;
• Forecasts and past performance are not reliable indicators of future performance.
• The real estate market can experience a downturn affecting your property valuation
  
  

The value of your Smart Crowd investment can go down as well as up and historic performance is not a guide to future performance. Achievement of rental and capital returns will depend on a range of factors including the property asset as well as the wider economy. A fall in the value of your investment may be due to a number of reasons, such as a fall in the underlying value of the property or a problem with the property that will need to be funded from future rental income. Real estate investments can perform in a cyclical way, and values may increase or decrease accordingly. Economic, political and legal issues can affect values as they would other asset classes. In some cases, there may be government restrictions on the sale of a property to foreign owners, which may restrict the range of potential buyers. Any future downturn in the real estate market could materially adversely affect the value of the property resulting in partial or complete loss and income generated from a property investment. Investors are to individually assess and establish their level of comfort with this risk from the outset. If for any reason the operator ceases to carry on its business, investors may lose their capital money, incur costs or experience delays in the investment being wound up.

Ownership in non-tradable shares

Investors will not own the property; rather the investor will have an interest in another legal entity that owns the property. As the investor’s interest in that entity is not listed or traded, it is likely to be an ‘illiquid’ investment; that is, it may be difficult to sell the interest because of a lack of investors willing to buy such an interest. So the investor must be prepared to commit to investing for the full investment period.

Liquidity

As real estate is an ‘illiquid asset’; that is, an asset that cannot always be easily sold, it may be difficult to sell the property at the end of the investment period, resulting in a delay in investors receiving their capital or in the property being sold at a loss. Once the share transfer is operational, you will be able to advertise your investment for sale to other SmartCrowd investors at any point. However, there may not be anyone willing to buy your investment at a price that you deem reasonable (or buy it at all). In that event, you will be required to wait until the end of the investment term for an exit. Even at this point, the timing and ability to exit will depend on the completion of a transaction to sell the underlying property. This transaction could take several months.

Disclaimer

SmartCrowd does not provide any investment advice and no assessment is made to determine if an investment is suitable for investors. All information is provided to help you make your own informed decisions. You must rely on your own due diligence before investing, if in doubt, please seek the advice of an independent financial adviser.

Client Money Account

The client’s money is held in a separate client account with Emirates NBD and is administered by SmartCrowd in line with the DFSA COB Rules on Client Money.

SmartCrowd has conducted due diligence and an assessment on the suitability of Emirates NBD’s custodial systems and controls and has deemed them fit and proper to hold client money on its behalf. Emirates NBD is regulated by the UAE Central Bank.

While Emirates NBD is responsible to SmartCrowd for the safe custody of its clients’ money, Emirates NBD has no direct relationship with clients. Therefore, SmartCrowd is fully responsible to maintain proper segregation, reporting and reconciliation of customer monies deposited in the Emirates NBD account.

Clients are subject to the protection afforded by the DFSA’s client money provisions, and in the event of an insolvency, liquidation, or other distribution relating to SmartCrowd, which is a DFSA regulated firm, Client Money will be subject to the DFSA Client Money Distribution Rules.

Key Risks – FLIP

Market Risks

1. The inherent unpredictability of the real estate market represents the primary risk associated with the Flip Product. Upon renovation the selling price may not meet the initial expectations which could lead to reduced returns to investors.
2. The property in the Flip Product may not sell immediately upon renovation and Smart Crowd may require to rent the property which would delay the sale even further as buyers prefer vacant possession.
3. The value of properties can fluctuate, potentially resulting in financial losses for investors especially as the Flip Product is a shorter-term investments.
4. Mitigation: a meticulous selection of undervalued properties in desirable locales characterized by strong appreciation potential can partially mitigate this risk.

Operational Risk

1. Sourcing discounted properties has its risks as the property may have defects that are not immediately recognizable and could push the renovation costs higher once the work begins.
2. securing necessary approvals may take longer than anticipated and would prolong the investment term of the Flip Product reducing the returns to investors.
3. completing renovations within designated timelines may not be possible due to delays by contractors which would prolong the investment term of the Flip Product reducing the returns to investors.
4. budgets may present operational challenges if not effectively prepared by the Sponsor and Project Manager at the inception of the Flip Product. This can be mitigated by the contractual arrangements with the Sponsor holding them liable for any cost overruns.
5. Mitigations:
   5.1. Diligent due diligence, collaboration with reputable real estate firms, and robust project management practices can help effectively manage these operational risks. To mitigate these risks, strict adherence to regulatory standards, transparent communication with investors regarding associated risks, and close collaboration with regulators for ongoing monitoring are vital measures.
   5.2. A notable aspect contributing to risk mitigation within the proposed property flipping model is the possibility of generating rental income from a renovated property if an immediate sale is not realized. This secondary income stream acts as a safety net, providing investors with increased protection and flexibility, distinguishing the Flip opportunity from alternative investment options.

Due Diligence

1. Choosing the appropriate real estate company and contractor is pivotal to minimizing operational risks within Flip projects. Effective due diligence on contractors and sponsoring entities can significantly mitigate project risks.
2. Examples of due diligence done are as follows: Check Licenses and Insurance, ensure Performance Guarantees are in place, Verify References, Examine the Portfolio, Conducting a Background Check and Hold detailed Meetings with the Sponsor, Project Manager and Contractors.

Project Management Risk

1. There is a risk the project will not be managed effectively and the detailed project plan milestones not met, so Smart Crowd is committed to ensuring effective project management by undertaking the following measures. Developing a Detailed Project Plan with the Project Manager, having regular project updates from the Project Manager and issuing the Investors detailed updates on the progress of the Flip Product.

2. Third-Party due diligence:
   A) As per section 2 above, Smart Crowd will conduct due diligence on all third parties involved in the Flip Product so the risk of underperformance or fraud is mitigated when using third party Sponsors, Project Managers and Contractors. Smart Crowd will work to ensure all conflicts of interests between the Investors, Sponsors, Contractors and Project Managers are identified and mitigated and made aware to the investors.
   
   B) Smart Crowd will conduct due diligence on the Sponsors, Project Managers and Contractors by checking their references, their track record in delivering renovation projects, financial history, credit history and their reputation.

3. Conflict of Interest: Smart Crowd has a conflicts of interest policy to ensure all conflicts are reported and mitigated.

Valuation Risk

Complying with DFSA regulations, an independent valuation report for the property is mandated during the crowdfunding campaign. However, given the dynamic nature of property flipping, potential market fluctuations, and the necessity of projecting post-refurbishment values, inherent risks accompany valuing properties at the time of resale. As such independent valuations will be performed when buying the Flip property and at the time of selling the Flip property. 

Market Fluctuations Risk

There are risks stemming from changing economic conditions, demand-supply dynamics, and other external factors which can reduce the selling price of the property after renovation or delay the sale of the renovated property. This risk is effectively managed through the following approach: To counteract this challenge, our strategy involves maintaining continuous communications with investors, ensuring they remain informed about market fluctuations. Regular updates on property valuations will be conducted throughout the property’s holding period, allowing us to monitor any shifts in its value closely. By implementing this proactive approach, we can effectively address the impact of market volatility and keep investors well-informed about the property’s performance.

Fees

1. Fees for the Flip Product are different from the Standard Product on the Smart Crowd Crowdfunding platform. There will be an entry fee of 1.5% of the total value of the Flip project (Purchase price of the Flip property + Renovation costs) and a performance fee of 40% of the profits at the sale of the Flip Product if the profits exceed 10%. This 40% performance fee would be split 2% for Smart Crowd and 38% by the Sponsor. This is a much larger fee than the fees in the Standard Products on the Smart Crowd platform and reflect that large amounts of risk and work required to be put in by Smart Crowd and the Sponsor.
2. As it is in the interest of the Sponsor to come within the budget amount for the renovations (as any cost overruns will be borne by them) there is the potential conflict of interest that they could reduce the quality of the renovations which would negatively impact the sale price upon renovation. This is mitigated by the larger success fee for the Sponsor which incentivizes them to get the highest possible sale price for the property upon renovations being completed.

Cost Overruns

As is the nature of renovations and construction, there can be costs which were not budgeted by the Sponsor/Project Manager. Smart Crowd has worked with the Sponsor/Project Manager to ensure there are contractual provisions that any cost over-runs are borne by the Sponsor/Project Manager and not the investors.

Terms

• The Flip Product is intended to be a shorter term investment however there are a number of scenarios which could prolong this investment:
  1.1. If there are delays in the renovation this would prolong the investment and potentially decrease returns to investors
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If the market softens, there could be a struggle to sell the property which would require Smart Crowd to lease the property which could prolong the investment and reduce returns