We have heard about the benefits of fractional real estate ownership for almost a decade now. The idea of fractional ownership came with a promise to democratize access to a traditionally exclusive investment class by enabling smaller investors to pool resources. This model aimed to open the lucrative real estate market to retail investors, offering a way to diversify portfolios and tap into a potentially high-return asset class. Despite its potential, the journey of fractional ownership has been fraught with challenges and a few notable failures.
One of the more well-known failures in this space was PeerStreet, a real estate debt marketplace that declared Chapter 11 bankruptcy. Despite backing from prominent figures, including Michael Burry and venture capitalists like Andreessen Horowitz, PeerStreet was unable to gain enough traction to remain solvent. Founded in 2014, PeerStreet aggregated fix-and-flip loans but ultimately crumbled under financial pressures, jeopardizing thousands of investors who entrusted their money to the platform. Its high-profile failure also casts doubt on the entire real estate crowdfunding industry.
This year has already seen its share of casualties, too. Here, a startup that offered investments in short-term vacation rentals, collapsed in January. Despite securing $5 million in funding from notable investors such as Fiat Ventures and Joe Montana’s Liquid 2 Ventures, Here shut down due to unsustainable platform maintenance amidst rising interest rates, challenging economic conditions, and mounting financial losses.
LEX Markets also officially shut down this year after a disastrous 2023. According to Ben Haber, Co-Founder of Monark, the company that acquired the LEX Markets assets and IP, the platform struggled with premature market entry and a lack of demand from issuers and investors, exacerbated by rising interest rates. The company seemed to have an advantage over other fractional ownership platforms when it partnered with the Nasdaq stock exchange to list its buildings. In the end, its consumer-facing model met regulatory obstacles, and efforts to partner with larger brokerage platforms failed due to an insufficient supply of assets.
Not all stories of fractional ownership platforms are bleak. Cadre’s acquisition by Yieldstreet offers a glimpse of success in the space. Originally valued at $800 million, Cadre faced declining valuations and operational issues, but its integration with Yieldstreet might allow it to harness a broader investor base to aid in its recovery. Meanwhile, Fundrise stands out with its success in its model of actively investing in real estate projects, particularly in build-for-rent communities across the Sun Belt, and then offering fractional investments. Their model, supported by a significant credit facility from J.P. Morgan, offers a promising path forward in fractional real estate investment.
While the sector has seen its share of failures, like those of PeerStreet, Here, and LEX, the success of Fundrise and the potential revitalization of Cadre by Yieldstreet suggest the model is not dead yet. The future of fractional real estate investment will likely hinge on enhanced regulatory frameworks, technological advancements, and more interest in commercial real estate assets from retail investors. Like many technologies, the early failures of fractional ownership may eventually pave the way for future success.
Asset and Investment Management
Scaling Your Firm, Fund, or Syndicate in a Complex Real Estate Landscape
Real estate investment firms grapple with intensified competition and investor uncertainty in today’s market. To address these challenges, InvestNext has emerged as a platform aimed at simplifying the syndication process. By providing customizable investor portals, tools for promoting deals, and features for fund administration, firms can focus on scaling portfolios and building investor relationships rather than administrative tasks.
Investor Relations Is the New Frontier for AI
Artificial Intelligence, particularly Generative AI (GenAI), is having an impact on investor relations within the commercial real estate sector. GenAI is currently being used for various purposes such as summarization algorithms, investor chatbots, and platforms like JLL GPT. Although some people still prefer human interaction, AI chatbots are becoming more advanced and are able to mimic human behavior, which could potentially change user preferences. It is expected that AI will enhance and not replace investor relations roles, making the industry more competitive.
The DAO of Real Estate Investment Management
The concept of Decentralized Autonomous Organizations (DAOs) is gaining popularity in real estate investment. DAOs operate through blockchain technology and democratic voting. They have the potential to enable group ownership of assets, especially in real estate. While DAOs offer decentralized decision-making, they also pose risks, such as security vulnerabilities. It is essential to conduct thorough code auditing, and DAOs may benefit from oversight by management teams to ensure the responsible handling of investments.
Bytes
🕵️ Going private: Blackstone has purchased the publicly traded Apartment Income REIT with plans to make the company private, much like its BREIT fund.
🤝 If you can’t beat ‘em: Large commercial real estate firms are increasingly investing in tech startups to help them win the technology arms race.
🛠️ Home built: Commercial real estate developer and owner Hines has built their very own wealth management platform to help develop a deeper relationship with its investors.
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When cryptocurrency first came out, most people had little to no idea about what it actually was and/or what it could do. Now, Bitcoin and cryptocurrencies have been in the news for years, and it seems like even the least technical investors casually mention that they invest in “crypto” without thinking twice about it. But just when the world was finally able to understand terms like tokenization and distributed ledgers, there is a new application of cryptocurrency technology that is as important as it is confusing.
By now, you have likely heard the term DAO, but you may not understand exactly what it means. DAO (pronounced as “dow” as in the Dow Jones Industrial Average) stands for decentralized autonomous organization. It describes an organization that is run by a community with no centralized leadership and is based on blockchain technology. Instead of relying on a leadership team, these organizations operate according to rules dictated by smart contracts– think of these as automated “if this, then that” rules that execute code or transactions when conditions are met. No single person or entity controls a DAO; instead, it is controlled by the vote of the people who are part of it, with voting power and ownership represented by tokens.
There are many applications for DAOs, some of which probably have not even been invented yet. But currently, one of the main ways that it is being used is to allow for the group ownership of an asset. The first DAOs were focused on the digital world. In 2016, the founder of Ethereum, Vitalik Buterin, started a DAO for crowdfunding startups. But now, people are focusing DAOs on physical assets like real estate.
In November of 2021, a group of around 6,000 individuals bought 40 acres of land in Wyoming. Rather than doing so through a fund or corporation, they did so through a DAO. They chose Wyoming because it was the first state in the nation to grant legal company status to DAOs. This structure allowed every person in the organization to vote on the future strategic decisions of the investment without the need to pay an administrator.
Since then, real estate DAOs have started to become more sophisticated. Recently a company called GoKey launched a DAO controlled cryptocurrency that adjusts its price based on relevant real estate price indexes. This helps alleviate the ongoing problem that real estate tokens have with pricing. When investments are made up of a small group of investors and are not on an open exchange, they are susceptible to large price fluctuations with every transaction. If one person decides to sell at a low price it can effectively tank the market price of a token. By tracking a price index, tokens can adjust their price (and, therefore, the price of the asset that they represent) even when no transactions are taking place. It can help to moderate the fluctuations during liquidity events since the last transaction would not be the only factor affecting the market price calculation.
The dream that the inventors of DAO technology were pursuing was a fully decentralized organization. While this utopian idea sounds great, it can also be risky. The founder of Ethereum found that out shortly after he started the first DAO. Just three months after the revolutionary DAO project started, a group of hackers was able to find their way into the digital wallet where funds were being stored and steal $60 million worth of tokens. Smart contracts, when poorly written, can be exploited, as in the Ethereum hack. This emphasizes the need for thorough auditing of any DAO code. This incident was the reason behind a “fork” in the Ethereum coin that was made to help pay back stolen funds to investors.
The power of a DAO can certainly be harnessed to build a truly decentralized organization, but that isn’t the only way it can be used. The functionality of smart contracts and democratic voting of a DAO can also be used by investors on their own backend. Even with trustless technology, selecting trustworthy members and managers (if needed) is crucial to avoiding internal problems within a DAO. Most investors might understand crypto, or even own some digital currency, but that doesn’t mean they are necessarily ready for a DAO.
While democratic in principle, DAOs can be prone to slow decision-making or sometimes fall under the disproportionate influence of a few large token holders. Maybe these technologies will first be harnessed by savvy investment managers to help make their jobs easier and give added transparency and liquidity to their LPs. DAOs are part of the future of real estate investment, but maybe first, they need to be controlled by a management team before they can be given free rein over people’s hard-earned money.
The Indian real estate sector is undergoing a monumental shift, with innovative models throwing open gates to an asset class confined to ultra HNIs and seasoned investors. As emerging alternatives like REITs, fractional ownership platforms and real estate crowdfunding disrupt traditional paradigms; they carve out a niche for millennials and first-time investors through lower entry barriers, steady returns and transparency.
The Rise of REITs
“In the face of escalating real estate prices per square foot, alternative investment avenues such as REITs, fractional ownership, and discounted bank-financed properties are emerging as robust options. Moreover, they introduce sachet-sized investment options, potentially enticing millennials to engage with real estate as an investment category,” says Sridhar Samudrala, Founder, Hecta.
REITs (real estate investment trusts) allow small-ticket investors to own fractions of income-generating real estate assets. Although new in India
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Data indicates over 700 million sq. ft. of grade A office stock in India is REIT-compliant, revealing immense potential for commercial REITs going forward. Moreover, experts believe the concept of smaller REITs is gaining traction. In the US, SMREITs (small-cap REITs) possessing real estate assets worth only $50-500 million flourish despite lower trading volumes.
Introducing SMREITS in India with a threshold of just ₹50 crore can draw increased retail participation in under-served niches like affordable housing. “The alternative route is known to offer substantial returns on low-cost investments,” affirmsHarish Fabiani, Chairman, IndiaLand Group.Clearly, REITs are reforming traditional realty investing across the risk-return spectrum.
Fractional Ownership
Options for co-investing in luxury properties are also expanding rapidly through fractional ownership platforms. By purchasing shares in hotel rooms, resort villas or office spaces starting from just ₹10-25 lakh, small-ticket investors can now own fractions of expensive assets earning high rental yields, which was earlier out of reach. Holding periods, returns on investment and occupancy guarantees vary across deals. Industry
Widening the Canvas
Vishal Raheja, Founder & MD, InvestoXpert.com, says, “In the dynamic landscape of real estate investment, exploring alternative vehicles such as REITs and crowdfunding opens new avenues for diversification. These alternatives offer flexibility, liquidity, and potential for attractive returns.”
Real estate crowdfunding platforms are fast emerging too – pooling micro-investments in vetted projects. Lower volatility versus equities, passive income potential and inflation-beating characteristics establish real estate as portfolio ballast. “Amidst the evolving landscape of real estate investment, investors are increasingly turning to alternative vehicles for diversification and opportunity,” informsMrinaal Mittal, Director, Unity Group.
Clearly, reimagining realty investment to accommodate diverse risk appetites and ticket sizes is transforming wealth creation pathways.
As technology