Real Estate Trading Instruments are an $8-10 Trillion Opportunity
The global market for derivatives and synthetic instruments is a massive one, but real estate is underrepresented. There is a huge opportunity for a liquid market that allows users to gain exposure to real-time restate prices. The Parcl Trading Platform was created, in large part, to address this opportunity.
The Parcl trading platform is a venue for gaining price exposure to high-value real estate markets from all over the world, leveraging digital assets and the power of the blockchain. Parcl is on the cutting edge of innovation in DeFi and Real Estate; bridging the gap between real-world real estate prices and synthetic digital assets.
Executive Summary
- What are derivatives or synthetics? Derivatives/synthetics are financial contracts such as futures, swaps, options, and similar instruments, that derive their value from an underlying asset, commodity, currency, or benchmark index
- What are the benefits of derivatives & synthetics? Derivatives and synthetics offer enhanced liquidity and an option to hedge instruments that don’t have a liquid spot market. They also allow for price speculation and synthetic investments on instruments where no spot market exists. Broadly speaking, these instruments can be an attractive tool for portfolio diversification and risk management.
- Why Real Estate needs liquid trading instruments: Real Estate trading instruments are underrepresented relative to total real estate asset value — we think it's at least an $8tr opportunity.
- The massive opportunity for a Real Estate trading platform; The Parcl trading platform is an essential venue for accessing real-time liquidity within the residential real estate market. Users can hedge, trade, speculate, and invest in the prices of the most recognizable real estate markets from all around the world.
Overview of Synthetic Instruments
Derivatives and synthetics are financial contracts such as futures, swaps, options, and similar instruments that derive their value from an underlying asset (stocks, bonds, etc.), commodity (gold, wheat, oil), currency, or benchmark index (S&P 500, Case Shiller, Parcl Price Feed). The price of a given derivative or synthetic is a function of price movements of the underlying asset, commodity or reference price. Derivatives and synthetics are usually leveraged instruments, which amplifies both risk and reward for market participants.
A real estate synthetic, for example, is a contract between two parties in which they agree to exchange payments based on the future price of a real estate related property, security, or index (the underlying). The party who agrees to buy the underlying at the specified price is said to be "long," while the party who agrees to sell it is said to be "short."
Derivatives originated primarily as a risk mitigation tool, allowing producers of goods & commodities to hedge their exposure to factors outside of their control (weather, war, famine, etc.). Over time, the derivatives market has expanded immensely in size (>$500tr notional, >$12tr net globally), breadth of offering, and motives of participants.
The two primary market participants are hedgers and speculators. Hedgers often own or hold the underlying, and intend to transfer future price risk to another party. Speculators take on risk, initiating positions based on their view of future price movements of the underlying. Speculators can be both long or short, and may or may not have a position in the underlying (if it’s even possible to do so).
What are the benefits of synthetic instruments?
- Hedging & Improved Liquidity
Derivatives and synthetics offer a venue for market participants to hedge or otherwise receive liquidity for their interest in an underlying asset, good, commodity, currency, security, or index. If you own or otherwise have exposure to an underlying and are worried about it depreciating in value, you could enter into a contract that will offset some or all potential losses. Often, these instruments add liquidity to an underlying that otherwise has low or sub-optimal liquidity in its spot market.
- Speculation & Synthetic Investments
Derivatives and synthetics also allow speculators to gain exposure to or invest in the price movements of assets, goods, commodities, or indices, that are otherwise difficult to gain exposure to, in a liquid manner.
- Portfolio Diversification
Derivatives and synthetics allow market participants to improve liquidity, improve portfolio diversification, and better manage risk. They also offer access to entire categories of assets, goods, or commodities that are otherwise difficult to access (high barriers to entry, external costs such as delivery & transport, etc.).
Real estate synthetics are underrepresented relative to asset value — we think its at least an $8tr opportunity
Notional derivatives exposure (the value of all underlying) is estimated to be over $500tr globally (some estimates as high as $1quadrillion), and net value (aggregate value of all contracts) is estimated to be greater than $12tr globally.
Global TAM: Real estate represents nearly $300tr of global wealth (as much as 75% or more of total global wealth!), with residential real estate representing over $250tr and commercial real estate representing over $35tr. The annual market size of real estate transactions is estimated to be >$10tr.
There is a market for real estate derivatives & similar instruments - including swaps on the National Council of Real Estate Investment Fiduciaries Property Index (NPI) and futures contracts for the Case Shiller Indices - but this market is niche & underutilized relative to real estate’s share of global wealth.
Derivatives on real estate related debt, such as Mortgage Backed Securities (MBS) and Credit Default Swaps (CDS) represent a much larger market (well >$10tr in notional value), but these instruments largely represent exposure to borrower quality & credit health versus direct exposure to underlying properties or real estate market prices. Several of these instruments were a critical point of failure in the 2007/2008 global financial crisis.
The real estate related problems that emerged in the GFC were in our view amplified by a lack of a direct spot market for real estate (real estate borrower risk & credit health is correlated to underlying real estate prices, however).
If the market for real estate synthetics were more robust & roughly matched real estate’s share of global wealth, the total addressable market (TAM) for real estate derivatives could be as large as $400tr in notional value or ~$8-10tr in net exposure.
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