Openfinance Insights

Redesigning Real Estate with Digital Securities

Posted by Juan Hernandez on Jan 6, 2020 1:12:13 PM
Juan Hernandez
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We’ve all felt that hole burning in our wallets before, whether after the first paycheck at a new job or a hefty tax return. But what about when you have an extra $10,000 to spare? Have you ever turned that kind of money into a solid real estate investment? For all but lottery winners and the ultra-wealthy, the answer is likely a resounding “no.”

Diversification is essential for any portfolio, and real estate is a common way many investors choose to diversify their holdings. As of 2018, the commercial and residential real estate markets reached a combined value of $49 trillion– yet much of that value remains difficult to access because of prohibitively large offering sizes for real estate investments, which limits the number of participants. Typically, an investor needs a minimum of $100,000 to invest in a deal, putting these opportunities out of reach for most.

Fortunately, digital securities are changing that narrative. As digitization ushers in a new era for private securities, few areas are as well-suited for this transformation as real estate.

The Advantages of Fractional Ownership in Real Estate

The real estate market includes a broad range of investment opportunities, from individual properties to Real Estate Investment Trusts (REITs), which help explain the market’s overall size. But while investors have many ways to participate, the required dollar amounts have traditionally shut the average investor out of the majority of investments.

That’s changing with digital securities. These securities are a digital representation of assets like commercial real estate properties, a REIT, a natural resource or a venture capital fund. Simply put, while digital securities change the asset’s format, the underlying asset itself remains the same. That shift is making alternative assets like real estate much more accessible, creating a true secondary market that allows investors of all sizes to diversify their portfolios. In particular, real estate is an ideal candidate for fractional ownership through digital securities because:

  • There is a significant opportunity to unlock potential value. As the most common alternative asset around, real estate is also the most affected by the legacy inefficiencies in the market. Since there are so many types of real estate opportunities, the ability to diversify becomes even more important for investors.
  • Investors need greater flexibility. Traditionally, real estate holdings are very illiquid, requiring investors to hold them for up to a decade on average. Breaking investments up into smaller sizes makes them easier to buy and sell in the secondary market, which helps prevent investors from getting stuck in positions for years on end.
  • It’s relatively easy to value. Unlike private equity or venture capital, real estate is a tangible asset that you can see and touch. That means there are more transparent considerations around valuation relative to other alternatives like PE or VC transactions, making it easier to assess its true value and to divide it into smaller chunks.

For investors, the rise of digital securities is changing the bar dramatically for entering the market. Traditionally, investors had to put in five figures or more during the initial offering and most likely needed a personal connection to the deal. Now, platforms like Openfinance allow investors to browse, buy and sell shares at much lower, more attainable amounts.

As a result, investors can now afford new opportunities or spread their dollars across multiple investments, while global and non-accredited investors can participate in these deals for the first time. Real estate companies also stand to benefit, since a bigger pool of investors creates greater demand that can help to maximize valuations.

Growing Interest from Major Players

As more real estate issuers and sponsors recognize the value of secondary market investors, their interest in digital securities is growing. In one of the first signs of an uptick in digitized real estate investments, St. Regis’ Aspen Resort recently created its own Aspen Coin, which gives investors their own stake in the Aspen, Colorado, based hotel chain.

Additionally, Emaar, the real estate developer behind Burj Khalifa (the tallest building on Earth), is moving forward on developing its own digital security. The company hopes to launch an issuance project within the next several years projected at $2 billion, which means that investors from across the globe could claim a stake in projects just like Burj Khalifa.

With the digital securities marketplace entering a new phase of maturation, real estate is a perfect proving ground for these digital options. By creating more accessible, affordable offerings, digital securities have the power to level the playing field and unleash the full potential of the real estate market.

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