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Real estate has been a staple of institutional portfolios for almost 150 years but for private investors, exposure to this asset class has been more limited. They have often been limited to their own residence and perhaps second homes, holiday homes or buy-to-let. Exposure to certain kinds of real-estate has also been available to private investors via a variety of fund structures and investment companies.
Over the last ten years, debt and equity crowdfunding, has given retail investors access to a wider range of real estate assets than was previously accessible.
On the equity side, firms like Property Partner and others allow investors to buy shares in SPVs that own income generating properties.
There are also a plethora of companies (CapitalRise, CrowdProperty, The House Crowd, Assetz Capital to name but a few) that offer access to peer-to-peer agreements or debt based securities that lend money to fund property development as debt based securities.
Initially these platforms offered investments into individual securities but many now offer a portfolio or discretionary management offering, making it easier for investors to diversify their investments.
Crowdfunding as a sector grew by 35% year-on-year to reach £6.19bn in 2017, driven primarily by the ease of access for private investors and the attractive returns in a low interest rate environment.
However, before the advent of crowdfunding, most investors got exposure through more traditional funds. Real estate funds that are traded on a stock market have been in existence in a variety of guises since the early twentieth century, providing exposure to both retail and commercial real estate.
In the UK, listed real estate funds can be structured as open ended funds (eg a Unit Trust or an OEIC) or as closed ended investment companies (eg a REIT). Property Unit Trusts gained traction in the 1970s and REITs were introduced in the UK in 2007, and many RE investment companies have transitioned to this structure.
The advantage of a listed structure is primarily accessibility and liquidity. Trading in these funds’ instruments is as convenient as trading any other fund and there is at least theoretical liquidity.
The challenge for these funds comes when investor sentiment results in the instrument price being materially different from the net asset value (NAV) of the fund. Ultimately these assets are priced according to market demand rather than the value of the assets. For a closed-ended fund this can result in trading at a large discount or premium. For open ended funds, if investors sell, the manager has to redeem the position and cancel the shares. This requires the fund to have sufficient cash, otherwise assets may have to be sold. In 2017 UK REITs traded at a 22% discount due to Brexit uncertainty. More recently a number of listed open ended property funds had to be gated due to a heavy flow of redemption requests.
Whilst listed real estate structures offer ease of accessibility, it’s clear that there are issues trying to offer daily liquidity when the underlying assets are fundamentally illiquid. The FCA is currently investigating these challenges, especially in the light of the recent gating of open ended funds.
Funds are seen as having benefits over single-security investments because of the diversification of the assets and the experience the investment manager brings to the asset selection.
If listed real estate products are problematic, what private structures exist that give investors the benefits of diversification and active management of a fund but without the pricing volatility seen in listed instruments?
Private real estate funds raised $135bn globally in 2019. Typically these funds are available only to institutional investors and have multi-million dollar minimum investment tickets. They may take many structural forms (eg limited partnerships, open ended funds etc) but are generally inaccessible to private investors because:
These private fund structures have a number of favourable characteristics compared with their listed counterparts:
Many are observing a sea change in the demands of private investors who are looking to allocate capital akin to an institution and therefore want access to these private assets.
“Private individuals: the ‘elephant in the room’, as the mass affluent around the world would like to increase their investment in private capital if only the structures and vehicles (and regulation) permitted; technology will help.”
Mark O’Hare, CEO Prequin
“We have observed a shift in the high-net-worth private client space, with investors and their advisors more focused on investing like institutions: pursuing a long-term asset allocation decision when constructing portfolios”
Allan Swaringen, CEO JLL Income Property Trust
Given this demand from private clients to access private funds, what can crowdfunding teach us about how to make private assets available to private investors?
Crowdfunding has made it easy for investors to participate, and the use of online platforms has been the major driver of this. Now investors can access crowdfunding assets as easily as listed assets. This ease of access, has been a key factor that has driven the adoption of crowdfunding.
Investors in unlisted funds do not have access to an online investment journey which hinders private investors from readily accessing these opportunities.
Crowdfunding platforms have invested in the technology needed to automate as much of the investment journey as possible. This has allowed them to capitalise on the ‘online first’ experience that is increasingly expected but also means that the manual aspect of the operational burden remains manageable.
Many private fund managers are geared up to serving institutional and quasi-institutional investors. Serving private investors comes with a different set of challenges. Inevitably the number of investors increases whilst the size of investments decreases meaning that systems need to be in place to efficiently onboard investors, manage clients’ funds, process payment transactions and provide ongoing reporting.
Whilst private funds will likely never be available to the mass market in the way that crowdfunding products are, technology will be the key to ensuring that managers can provide a premium service to private investors at scale.
Private funds invariably have reduced liquidity due to their structures and also because there are no market places or trading venues. Institutions typically arrange secondary market trades directly between buyer and seller and inform the manager after settling.
Crowdfunding platforms (notably Property Partner) have used technology to create an online secondary market that allows buyers and sellers to place orders akin to a traditional trading venue – in fact Property Partner is a registered MTF.
Unlisted funds will need to similarly expose secondary markets to give private investors the opportunity to exit their position should their investment objectives change.
Providing a secondary market is no guarantee of liquidity, but providing a readily accessible market place is the first step in generating demand and attracting private investments.
Private assets offer investors characteristics not available in mainstream assets and increasingly private investors are seeking exposure to these opportunities.
Investment managers are looking for ways to make their products more readily available but do not have the infrastructure to manage the differing demands of supporting private investors.
Crowdfunding has demonstrated the change in investor behaviour that can occur when technology and innovative product design are combined. There are a number of lessons that can be applied to private funds that will hopefully result in benefits for both private investors and fund managers.
Goji’s mission is to make it as easy for private investors to access private assets as their mainstream counterparts. We serve the industry by providing platform technology and services that:
Goji works with over 30 managers with over 20,000 investors and £400mil assets under administration across the private asset space.