“Platform-Driven Investing is Still in its Infancy – and Growing Pains Will Persist for Some Time.”
This is a guest article written by John Engle and first appeared in our collaborative e-book “The Future of Property,” which features 17 thought leadership articles covering PropTech, property investment and housing. You can download your free copy here.
John Engle is president of Almington Capital, a family office merchant bank based outside of Chicago, IL, USA. He heads Almington’s asset management operations, specializing in alternative investments and small-cap public equity investing. Engle has received a Bachelor’s Degree in economics from Trinity College Dublin and an MBA from the University of Oxford.
“Platform-driven investing is still in its infancy – and growing pains will persist for some time.”
Real estate is one of the few “alternative” investment classes with which almost everyone is familiar. Everybody has to live somewhere, after all, and homeownership remains a widely held aspiration. From ordinary savers to the most sophisticated high-net-worth individuals, property is regarded as an important part of an investment portfolio – and rightly so.
The value of real estate to an investor is clear: While the stock market fluctuates, property provides an investment resource that is uncorrelated to market swings. That means adding real estate to an investment portfolio will generally improve yields and lower volatility. For investors concerned about spreading out risks, property offers a great way to reap the benefits of diversification.
Let us explore the ways people currently access investment real estate, their limitations, and how in future ever more people will be able to access – and prosper from – investing in property.
“Managing a property day to day, dealing with repairs, collecting rents, etc. consumes money and personal bandwidth – two things that are in short supply for most working people.”
The allure of property as an investment asset is clear, but the best way for an investor to access it is not. The most common means of doing so have been to buy actual properties or to invest in real estate investment trusts (REITs). Yet, while both offer valuable exposure to real estate, they also carry significant pitfalls.
Investors sometimes like to play landlord. Owning a property can provide a stable income stream, and improving it can build equity for a later resale. Yet buying and owning an investment property is an expensive proposition, and tends to be out of reach of most investors. The costs extend well beyond the purchase price: Managing a property day to day, dealing with repairs, collecting rents, etc. consumes money and personal bandwidth – two things that are in short supply for most working people. Added onto all the costs is the risk involved in sinking significant capital into one or a few properties; it limits the benefits of diversification that real estate is meant to provide. Being a landlord, even when one can afford to buy an investment property, can turn into an onerous proposition very quickly.
The other popular method of accessing the boons of property is to buy REITs, many of which are publicly traded and quite easy for most investors to buy and sell. REIT shares represent fractions of a portfolio of investment properties. There are REITs of all shapes and sizes, focusing on specific asset classes, geographies, etc. Income-oriented folks like them because they are obligated to pay out the vast majority of their earnings to their investors in the form of dividends.
Unfortunately, REITs have their own problems under the surface. Most are publicly traded, which means their price is affected by the movements of the overall stock market to an extent, limiting their value as an uncorrelated hedge to the broader market. So while they may seem like a sure bet for stable income, the value of a REIT can evaporate in a falling stock market. That hardly speaks in favor of real estate’s diversification value.
“The United Kingdom has been an early pioneer in this space even as the United States, home of the world’s deepest and most sophisticated capital markets, has lagged behind.”
While the universe of property investment has been limited to just a few options for many years, we are in the midst of a revolutionary upheaval that promises to disrupt the real estate industry and transform the way people access it. That disruption is being driven by a mixture of technological and regulatory change across the developed world.
The power of equity crowdfunding, especially, has begun to manifest itself. The United Kingdom has been an early pioneer in this space even as the United States, home of the world’s deepest and most sophisticated capital markets, has lagged behind. Platforms such as Seedrs offer individual investors the ability to buy shares in private companies and startups. Now the same thing is happening in the realm of real estate.
Increasingly, sophisticated platforms offer individuals the ability to buy stakes in a range of individual properties. Property managers and would-be investment tycoons can now present deals to a wider audience than ever before. That has transformational possibilities for both sides of the transaction. For the managers, it offers a deeper pool of capital than they could have hoped to access. For investors interested in getting exposure to real estate, it means being able to participate in more deals and spread capital around (gaining all-important diversification), as well as reducing the purchase cost which is the most intransigent barrier to entry.
As laws have been relaxed to allow a wider group of people to qualify as investors, a huge store of capital is being opened up. While property ownership was once largely the purview of the wealthy, more and more ordinary savers and investors can now tap into the long-term stability of real estate holdings.
“As real estate investing is democratized, more and more people will finally have access to an asset class that has been, since time immemorial, a fundamental bedrock of wealth creation and preservation.”
There are also growing opportunities beyond individual deal syndication. Crowdfunding is being tapped by more traditional asset managers, such as private equity real estate funds, to access a wider audience and pull in more investment capital. The very term “private equity” conjures up images of exclusivity and privilege. Yet laws are gradually changing to embrace a new technological reality, which is further democratizing access to even the most rarefied of asset classes. Private equity funds can offer investors better quality deals, superior due diligence, and genuine management expertise that can put additional zip into portfolios.
The new era of platform-driven investing is still in its infancy – and growing pains will persist for some time. Yet the platforms that can offer well-vetted, quality deal-flow to ordinary investors interested in diversifying their portfolios will see green fields aplenty in the years ahead
As real estate investing is democratized, more and more people will finally have access to an asset class that has been, since time immemorial, a fundamental bedrock of wealth creation and preservation. More and more people will be able to profit and prosper. Who could be against that?
- Written by John Engle
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