The real estate industry has experienced a rather less exciting pace of innovation. Since companies such as Rightmove kicked off the first iteration of PropTech, the industry has remained largely unchanged, operating with the same rigidities and processes of the past. Despite being the largest asset class in the world (worth an estimated US$217 trillion), property remains a largely illiquid and opaque marketplace.
Part of the reason for this is structural. The high-stakes nature of property demands a greater level of due diligence, and thus investors tolerate the longer completion times and larger agent fees associated with each transaction. But it’s precisely this greater tolerance that has allowed inefficiency to creep in and take hold.
More recent developments in PropTech have sought to make incremental efficiency gains – CBRE has started trialling virtual reality viewings, while PurpleBricks has popularised a low fixed-fee agency model. However few have threatened to revolutionise the industry like crowdfunding has.
In the US, where crowdfunding is most developed, there are over 125 websites/platforms through which investors can gain exposure to real estate debt or equity for as little as $100. Investors used US property crowdfunding platforms to pour US$484 million into real estate projects in 2015, according to research by Cambridge University’s Judge Business School (up more than 300 per cent yoy). But the speed and size of crowdfunding’s expansion means that there will inevitably need to be industry consolidation at some point. The key determinants of platform survival will likely come down to asset quality and regulatory rigour.
Many of the property crowdfunding sites that have popped up in recent years have focused on user and asset acquisition, following the classic tech start-up growth model of prioritising the acquisition of “eyeballs” or eye-popping statistics. They hope that their momentum will carry them to such sufficient scale that the problems of the past will come out in the wash. Such an approach is incredibly short-sighted. In the wake of scandals such as payment protection insurance (PPI), regulators will toughen up in an effort to protect the oft ill-informed retail investor.
Property crowdfunding 2.0
It’s for the above reasons that our platform, Property Crowd (part of Global Alternatives), is focused on the origination of institutional-grade debt and equity opportunities, and offers them exclusively to professional investors. That’s why we’ve invested heavily in our proprietary Prime Custodian regulatory infrastructure – to provide professional investors with the transactional integrity and custodial safeguards that they expect in the domain of publicly-listed securities.
Tech start-ups have a tendency toward idealism, which in itself is not a bad thing. Many in the crowdfunding space will list the 3Ds – democratisation, disintermediation and disruption – as their key goals without realising what they actually mean, or how the market really operates.
In an ideal world of perfect knowledge and information, which exists only in the minds of tech entrepreneurs and economics textbooks, transactions take place seamlessly between two parties while intermediaries are relegated to the annals of history. This approach may work for a number of industries, such as retail, where the essential nature of the product/service exchanged is unaltered by the presence, or lack, of intermediaries. But the finance world is fundamentally different.
We all share similar goals of bringing investing to the masses, eliminating inefficiency and lowering barriers to entry. But the key point that will separate the winners from the losers is in how we understand and approach the challenge of bringing about such change.
In the same way that publicly-listed equity markets have allowed the average investor to participate in opportunities previously only accessible to a well-heeled, well-connected elite, the promise of property crowdfunding is to open up what has been a most dependable, but increasingly elusive, asset class. However, those who understand the financial markets realise that institutions and intermediaries must be part of the solution, rather than being cast as part of the problem. It’s the fund managers and market makers that provide the liquidity on which retail investors piggyback, and it’s the estate agents and broker-dealers that drive transactions in their respective markets.
As a sector, real estate stands at the precipice of exciting and potentially explosive change, but property crowdfunding as we know it remains in its infancy. The first generation platforms have served largely as marketing venues for domestic, primary issuance and have focused primarily on debt (popular in the current low-interest rate environment). Investors can select from a range of maturities in order to manage their own liquidity needs, but liquidity, in the truest sense of the word, is not yet present.
We consider the next step in the evolution of PropTech, and crowdfunding in particular, to be the creation of a cross-border secondary market with liquidity derived from the trading activity of an international investor base, rather than the finite balance sheet of a sponsoring platform.
To achieve this vision, PropTech start-ups need to work with institutional and professional investors to lay the foundations for a borderless universe of real estate investment - and for the real-time asset allocation of alternative investments more broadly.