Charles Tan looks at how crowdfunding is making real estate a more accessible asset class for retail investors.
With equities and bonds both at record highs, it’s a real challenge for retail investors to find value in today’s markets. Institutional investors face the same dilemma and are increasingly favouring alternatives, including real estate. But retail investors haven’t historically had the same opportunities to gain exposure to the asset class.
Until recently, UK investors were filling their boots with buy-to-let properties, but that market is now looking less lucrative. Savills is forecasting that it will dive by 27% by 2022. The estate agent says it is already seeing the first signs of landlords selling up and exiting the market, a trend that is likely to continue as tighter mortgage regulations, increased stamp duty charges and the phasing out of mortgage interest relief combine to deter direct investments in property.
Real estate investment trusts (REITs) are one alternative, albeit indirect, route into the market. PIMCO, the world’s largest bond manager, says that in the US total returns for the Dow Jones Select REIT Total Return Index are lagging the S&P 500 by nearly 1,100 basis points (bps) in the last 12 months. “The upshot? REIT valuations are looking attractive relative to other liquid financial assets,” says PIMCO.
The manager’s reasoning is that over the past 20 years, for every 10 bps of “cheapness” compared to the real yield available on other financial assets, using Treasury Inflation-Protected Securities as a benchmark, subsequent REIT returns over the next 12 months have been 180 bps higher, all else being equal.
“The current spread of roughly 80 bps is solidly above the 15-bp long-term average, and with the exception of the 2008-2009 financial crisis, is near the widest level since June 2004 – at which point REITs returned 35% over the next 12 months, outperforming the S&P 500 by more than 2,500 bps,” says PIMCO.
Some UK listed REITs, after falling heavily in the wake of the Brexit vote, are still trading at a discount to the value of the underlying assets and also look attractively valued if you believe, as we do, that the UK market isn’t about to collapse.
The downside, however, of investing in property via a REIT is fourfold. First, you’ll need to select a fund run by a skilled manager to delegate the responsibility of deciding which properties to include in the portfolio. Second, you’ll need to pay them a hefty fee. Third, the diversification benefits are likely to be limited because REITs are correlated with the stock market. And fourthly, frankly, it’s dull and boring.
While some less confident investors will welcome an expert taking all the decisions for them, others who want more control over their investments will miss out on the emotional excitement of being closely involved in the deal.
Fortunately, there is another alternative.
Thanks to the advent of crowdfunding, investing in real estate is now far more accessible than ever before. Investors no longer need to put all their eggs into just one or two buy-to-let baskets at one extreme or surrender control to an expensive fund manager at the other.
They can now effectively get the best of both worlds. They can do their own detailed due diligence, have full discretion over which properties go into their portfolio (without managing the day-to-day like conventional buy-to-let landlords do), and they can gain access to syndicated deals with superior risk-adjusted returns which would normally be reserved for institutional investors in the know. All from the comfort of their armchairs and with the click of a mouse.
The downside of real estate crowdfunding, unlike REITs, remains the lack of liquidity. There is no recognised trading exchange for real estate securities. But watch this space. Property Crowd’s parent company, Global Alternatives, is working on establishing one. We hope to be able to share more details about our new exchange shortly.
AltFi is returning to Amsterdam for its second annual Summit in the city. The inaugural event last year was a roaring success, with key figures from across Continental Europe's alternative finance and digital banking sectors highlighted. These included Jeroen Broekema, managing director of Funding Circle Netherlands, and Mieke van Engelen, head of innovative partnerships at ABN AMRO's standalone lending platform, New10.