Asset Focus: Real Estate
Diversification. Capital appreciation. Protection from inflation. Real estate offers a slew of advantages that make it a natural fit for many investment portfolios. Since these assets aren’t typically tied to daily market ups and downs, investors often incorporate them alongside equities and fixed income. As part of a diversified portfolio, real estate can offer a more stable, long-term investment with the potential to grow in value and produce income, in some cases.
These benefits help to explain why investors are pouring funds into the U.S. real estate market. Real estate-focused private equity firms reached $909 billion in total assets under management last year, driven by yet another strong year for fundraising, industry data shows. In 2018, 300 real estate funds raised a total of $124 billion, marking the sixth year in a row that investments have topped $100 billion. Yet those figures only scratch the surface of the total U.S. real estate market, with the residential market and commercial market valued at a combined $49 trillion total.
From individual properties to private real estate investment trusts (REITs), investors have a spectrum of ways to gain exposure to the real estate market. A significant amount of interest is coming from abroad, with buyers from China, Canada, India and elsewhere investing in real estate for reasons that range from seizing market opportunities to establishing U.S. residency for college.
The Physical Goes Digital
Despite intense interest from buyers around the globe, much of the private real estate industry’s value remains locked up because of ingrained market inefficiencies. While non-accredited investors can get exposure to real estate through publicly-traded REITs, the majority of assets remain largely out of reach for them. Large offering minimums, long lockup periods and a lack of a secondary market also complicate investment for accredited investors, while almost certainly depressing valuations for issuers.
Enter digital securities. These securities are merely a digital representation of an underlying asset or security, like commercial real estate, a REIT, a natural resource or a venture capital fund – and real estate is the asset class most likely to benefit from their emergence.
Fully compliant with U.S. securities laws, the growing digital securities market has the potential to unlock massive new opportunities in the private real estate industry. Initial offerings like the St. Regis’ Aspen Resort (Aspen Coin), which gives investors a stake in the Aspen, Colorado-based hotel, are the first hint of a potential surge in digitized real estate investment in the coming years. For both real estate investors and issuers, digital securities offer benefits like:
Easier access for investors around the globe. Secondary trading platforms are creating true liquidity in the private real estate market for the first time, allowing U.S.-based and global investors to explore a rapidly growing set of investment opportunities. In addition, lower offering minimums make it easier to take part in investments and diversify among a variety of individual properties and funds. For issuers, digitization allows them to connect with a new pool of investors, increasing interest and potentially boosting valuations.
Helping investors make informed decisions. For investors, part of the attraction of real estate is that you can physically see and touch your investment, making it easier to understand exactly what you’re investing in. With digitization, investors have even more insight into their investments. Secondary trading platforms offer a real-time look at how a particular investment is performing, so investors can adjust allocations and capitalize on new opportunities accordingly.
Improving efficiency. While a real estate transfer can take weeks or even months in the traditional market, digital security transactions take mere minutes to settle. Issuers can also send dividends or distributions directly through the Openfinance platform, helping to strengthen investor trust and satisfaction by delivering payments faster and more efficiently. In addition, built-in compliance features help to streamline administration for issuers by automating requirements like managing shareholder limits.
As the foundation of any alternative asset strategy, real estate has historically been a very popular investment, despite widespread illiquidity and unavailability for many investors. The movement toward digitization will only further its use and importance, benefiting investors and issuers alike.