In this article, we explore the current and future states of the global real estate investment market, with insight into how technology is able to facilitate a shift within the real estate investment industry.
The emphasis is on the many hurdles and barriers that small-scale investors face when attempting to enter the world of real estate investing & trading as well as the untapped value for real estate owners and their access to a new form of liquidity, while it provides an overview of how BrickEX is able to solve these challenges.
What is the current state of the global real estate investment industry?
Before we offer a glimpse into what the future of real estate investment might look like, it is worth highlighting how the industry is constructed and deals with new technologies today.
Real Estate is the largest asset class in the world, with a value of $217Tr in total (Savills Report — around the world in dollars and cents). Of all of this value, only 1% changes hand each year.
This value is unevenly distributed, where the most substantial part is located in America and Europe, 50 and 25% respectively.
Although Real Estate is a popular investment class and even on small scale remains one of the most reliable ways for individuals to boost their personal wealth, real estate investment is complicated, convoluted and expensive. This makes it by far the most complicated investments category to analyze since there has never been an standard source of real estate pricing data.
“The cold fact is that one-third of the industry still runs on Microsoft Excel. Research shows that there is not only a lack of innovation, but also a lack of understanding of what innovation is and its potential impact on the industry.” (Industry news, real estate)
Why is this a problem?
Well, if we consider that the global real estate market is estimated to be worth trillions of dollars and only 1 % is being moved and transacted, there is a largest sum of illiquid assets sitting there on the balance sheets of corporations, investment companies or individuals.
Real estate has proven time and time again to be a successful long-term investment strategy. Due to its tangible nature, and in line with an increasing world population, real estate ownership is a secure and value-appreciating asset, providing a stable and lucrative return on investment for those who own property all around the world. Apart from value appreciation, real estate owners are also able to benefit from fixed income and monthly fixed returns through rental income.
Apart from real estate ownership, the trading of real estate, i.e. the buying and selling thereof, is a relatively safe form of investing one’s capital. Value appreciation, capital growth and gains both in the short and long term make real estate trading a viable and lucrative investment option.
With only 1% of the world’s property being traded, however, a comparatively small amount of people are granted the capacities to benefit from real estate trading and investing.
What are the entry barriers excluding so many people from investing in real estate?
Firstly, the world of real estate investment is comprised of increasingly-high ‘buy-in’ prices. Whether you’re an individual or an organization, if you’re looking to purchase or trade real estate, a large, concentrated sum of capital is required. Naturally, not every small-scale investor has access to this.
Secondly, even if an individual does have the required capital to invest into a piece of real estate, the industry is constructed in such a way that many ‘good’ or ‘lucrative’ investment opportunities are ‘locked up’ behind screens of high profile investor network or ‘old boys clubs’. This is especially the case with investment opportunities that sit outside of a person’s immediate periphery (country, city or neighborhood), where they don’t have the necessary know-how, connections or entry-ways to possible investment opportunities.
The third, and arguably one of the most important barriers to entry for small-scale investors into the world of real estate trading is that of liquidity. Due to the large, concentrated sum of capital that goes into real estate development in the form of brick-by-brick construction, investor money is often ‘locked up’ for a period of several years, rendering such capital as fundamentally ‘illiquid’ within that time frame. As I always like to say, “profitable real estate developments can’t pay for a new BMW if you need one”.
The fourth major characteristic of the current real estate market is that of commission fees and middle men. Current trading practices and local rules and legislation require a lot of administrative hassle, which in conjunction with third-party agents or “middle men” result in extensive costs that further decrease the net profitability of your assets.
The fifth and final barrier to entry that I’d like to emphasize is that of diversification.
Because the current real estate market requires sizeable investments and capital injections, it becomes difficult for investors to diversify their portfolios. This is especially the case for the vast group of ‘small-scale’ investors that would like to diversify their portfolios with real estate, but aren’t able to due to its almost-impenetrable nature.
To summarize, the current global market for real estate trading is marked by various barriers to entry that result in the limited access to investment opportunities for those looking to invest in real estate, with an emphasis on small-scale investors.
How can technology facilitate a shift away from this?
I envision that real estate will be digitized in the future: recordings will be digital, deeds transferred via the blockchain, and real estate assets will be tokenized.
Despite its colloquial ‘overkill’ within the emerging tech scene, the principles of Blockchain technology, in conjunction with that of ‘tokenization’, allow for the above-outlined challenges to be overcome.
For starters, Blockchain technology has resulted in the advent of smart contracts, which can have a huge impact in facilitating a shift towards a more equitable and accessible real estate industry.
A smart contract is an immutable program stored in the Blockchain, and run by all of its scattered nodes. This decentralized computing technique allows agreements between parties to be expressed in programming language and executed transparently without the need for a trusted intermediary.
If sensitive processes, from value transactions to ownership transfers are externalised as smart contracts, this creates a very high degree of transparency, trust and neutrality.
This is where the notion of ‘tokenisation’ comes in. This can be understood as the converting of an asset into a digital ‘token’; created, transferred and secured via immutable smart contracts.
If real estate assets could be ‘tokenized’ so that investment opportunities are represented as their own digital tokens, then investment deals and trading opportunities could easily be facilitated via smart contracts, as described above. This cuts out the traditional processes required for a real estate ‘deal’ to go through. In other words, when envisioning an inevitably ‘decentralised’ future, the combination of smart contracts and ‘tokenization’ within the context of real estate trading enables us to move away from the dominant reliance on notarized documents, lawyers, surveyors and banks. In their place, we’d have a more secure, less corruptible ecosystem of investment opportunities facilitated by smart contracts.
The missing piece in this equation is an exchange platform or ‘marketplace’ for tokenized real estate.
If a real estate exchange platform existed that could seamlessly connect real estate owners to investors, regardless of investment capacity or physical location, then we’d be several steps closer to a global real estate market that is not only transparent, but fundamentally accessible.
Enter BrickEX, a real estate exchange platform that enables anybody to trade real estate assets in the same way that shares are traded.
In an effort to solve the challenges and hurdles within the real estate market, and with a strong drive to ensure that real estate doesn’t get left behind in the move towards a ‘decentralised’ future, we’ve created BrickEX.
BrickEX is an open decentralized Real Estate Marketplace that enables fractional real estate investment and trading by means of asset backed tokens.
What’s our objective?
To create transparency, accessibility and liquidity for every real estate owner and investor in the world.
By building the envisioned ‘future solution’ in the way that I’ve described above, we’re addressing transparency and accessibility.
As a distinguishing factor in relation to our competitors, we’re also addressing the issue of illiquidity,
How does BrickEX solve the issue of liquidity?
Asset liquidity can be understood as the ease in which assets are able to be sold and converted into fully ‘liquid’ cash.
‘Liquidity discount’ is a well known phenomenon in the real estate space. Essentially, because large sums are required for certain real estate investments, the amount of capable (‘liquid’) buyers able to purchase real estate is limited. For example, if a property were on the market for $100M, only a small pool of potential investors would have the means to invest. This results in a ‘buyers’ market, whereby a real estate seller is forced to lower their price (and offer a discount), in that limited liquidity exists for buying the real estate in the first place.
How do we know this? Because the normal rental return on larger pieces of real estate is generally between 12–14%, whilst the return on a smaller real estate asset (of about $1m) sits between 7–8%, at least in the US and EU.
With BrickEX, an investment opportunity can be presented to a larger group of investors by means of our fractional ownership model. As a result, more ‘liquid’ cash comes into the equation, as the large capital sum required is dispersed between a multitude of investors. As such, the property seller is able to sell at a higher price, whilst investors are still afforded with very attractive returns. In other words, BrickEX facilitates that a real estate piece valued at $100M with a 12% rental return rate could be sold for $120M, with returns of 10% to the investor. For ‘small ticket’ investors, this return rate is still very appealing, whilst they circumvent the issue of liquidity in relation to the large asset. Rather than having to try and sell a $120M asset, they can simply sell their asset-backed tokens on the BrickEX exchange in real time.
Fractionalized Real Estate and Investor pools
Another way in which BrickEX overcomes the challenges posed to small-scale real estate investors is by means of fractionalized real estate and investor pools. Whereas traditional investor pools normally consist of small groups of individuals, each with large amounts of money, BrickEX empowers large groups of individuals to each contribute smaller amounts, such as $5.000 to $10.000. By means of a fractional ownership model, large investor pools are simpler to manage, easier to attract, and still satisfied with returns of between 7 and 9%.
Tokenization
By tokenizing a real asset, it is much easier to transfer a partial piece of ownership thereof to other investors. By tokenizing this, you don’t need to immediately sell off the full asset, but can make parts of the asset liquid.
Tokenization facilitates liquidity, by shortening the process of buying and selling real estate. Furthermore, by tokenizing real estate assets and distributing the tokens between a large group of investors, instant liquidity is created for a traditionally illiquid asset. The token can easily be used to sell small fractions of a real estate asset. It is tradeable, easy to move and affordable.
Tokenization therefore creates instant liquidity.
Conclusion
By applying the above-outlined principles, BrickEX is on a mission to help move the real estate industry into a new era: one where it is in leverages the latest technological opportunities. More than that, we truly believe that real estate trading and investment should be a far more accessible endeavour, enabling more and more people around the world to benefit from the financial prosperity that it can offer. This means moving away from traditional practices and the business as usual approach to real estate investment.
We’d love to have as many people as possible join us on this journey.
Comments