The pros and cons of various ways of real estate investing.
Real estate is the world’s largest asset class, yet it is illiquid with high barriers to entry. At the same time, there remains immense demand from investors, large and small, to gain access to real estate returns. This dynamic has catalyzed a growing sub-industry of alternative real estate investment platforms. In this article, we will provide a comprehensive market landscape of available options and how Parcl is developing a differentiated real estate derivatives platform via blockchain rails.
REITs
REITs, or Real Estate Investment Trusts are companies that own or finance income-producing real estate across a range of property sectors. Many REITs are publicly traded and are particularly attractive to investors because of their dividend yields, given that the properties generate cash flows, a substantial portion of which is often returned to REIT holders.
The largest REITs operate in specialized real estate assets like industrial distribution (Prologis), Storage (Public Storage), and communication/data centers (American Tower, Crown Castle, & Equinix). Additionally, there are several large residential-focused REITs such as Equity Residential, AvalonBay, Realty Income, and Sun Communities. Generally speaking, REITs offer a real estate return profile for investors, but REIT holders have zero discretion regarding asset exposure (location, quality, etc.).
Further, for many of the publicly traded REITs, returns are most attributable to the REIT management teams’ decision-making, or ‘factor’ exposures such as monetary policy, value, or momentum, and therefore tend to have lower than expected correlation to real-time real estate market conditions.
Pros of Investing in REITs
- Liquid and tradable
- Transparent (regular & standardized regulatory filings)
- Yield generating (regular and substantial return of capital via dividends)
Cons of Investing in REITs
- No discretion over the assets the REIT invests in
- Indirect exposure to specific real estate categories, markets, or regions
- Lower than expected correlation to underlying real estate market conditions
Fractional Ownership (Traditional)
Fractional ownership is a real estate investment method that involves owning a portion of a property (or group of properties) and is attractive because it lowers the cost and time commitment for owners. The implementation process is typically as follows:
The platform creates an LLC per property and then provides members of the platform an option to purchase a slice of the equity. Subsequently, owners have a claim on the asset and its cash flows. In an adverse scenario, investors could be subject to capital calls.
The concept of fractional ownership has been around in some form or fashion for quite some time — for instance, timeshares (typically in vacation venues) are one flavor of fractional ownership though sometimes without a claim on the underlying property asset.
Over the last decade, there has been a move toward fractional ownership as a more passive financial investment versus active ownership, maintenance, and usage of a specific property. Platforms such as Fundrise, Crowdstreet, and Cadre, among others, have popped up to help offer more investors access to fractional ownership of real estate assets (commercial, multifamily, single family, rentals, etc.) with lower friction and a better user experience.
Pros of Traditional Fractional Ownership
- Direct proportional ownership of a specific real-world property (or properties)
- Low friction (not directly responsible for maintenance, property taxes, financing costs, etc.)
- Generates passive income (via cash flow distributions)
Cons of Traditional Fractional Ownership
- Limited liquidity
- Lack of breadth of offering (hyper-local, limited supply, etc.)
- Lower quality properties (ie. undesirable locations, distressed capital structures, etc.)
- Idiosyncratic risk (tenant management, maintenance, insurance, etc.)
- Potential for capital stack subordination
- In some cases, accreditation requirements
- Contributes to the ‘iBuyer problem’ - reducing real-world inventory and making it harder for first time home buyers to purchase a starter home
Fractional Ownership (Tradable Shares & Tokenized Shares)
A more recent iteration of fractional ownership are platforms that offer fractional ownership in conjunction with a secondary market to trade the equity of the property on an open market, almost always within their platform. These include RealT, Landa, Fintor, and Republic (Nada), to name a few. In simple terms, an LLC divides the equity of the underlying property (or properties) into shares, or in a blockchain-based iteration, tokens, and allows the shares to trade in a native marketplace.
To establish a liquid and tradable market, there is a need for an adequate breadth of offering. As such, the tradable share/token-modeled platforms tend to focus on residential housing (versus commercial) given substantially lower capital requirements. In principle, reaching an ‘adequate’ breadth of offering is possible. But a liquid market requires scale. It is highly challenging to establish institutional quality scale with individual physical properties.
Taking it a step further, we estimate that the average house price on these fractional ownership platforms with secondary marketplaces is approx. $150-250K (about half the median home value in the US). While a liquid fractional ownership platform is attractive in principle, we argue that persistent liquidity is no guarantee, and “market prices” can diverge from the underlying property ‘valuations’ based on supply and demand -i.e., there is no direct peg to the underlying home equity value.
For example, if a property is sold and the “market” price on the platform is higher than the implied equity value per share, traders could enter their position with a ‘paper loss’ despite buying at the prevailing market price. In short, the marketplace could be untethered to underlying supply/demand dynamics, and shares are trading at values uncorrelated to the underlying asset.
Pros of Blockchain Fractional Ownership:
- Direct proportional ownership of a real-world property (or properties)
- Low friction (not directly responsible for maintenance, property taxes, financing costs, etc.)
- Generates passive income
- Improved liquidity
Cons of Blockchain Fractional Ownership
- Lack of breadth of offering
- Limited supply of properties and of shares of specific properties
- Lower quality properties (ie. undesirable locations, distressed capital structures, etc.)
- Idiosyncratic risk (tenant management, maintenance, insurance, etc.)
- Secondary marketplace is untethered to underlying supply/demand dynamics; ie. no peg to property ‘valuation’
Metaverse (Virtual Land)
The metaverse is a collection of virtual worlds that house their own ecosystems. Within each ecosystem (like Decentraland or Roblox), there are micro-economies and currencies where users can buy and sell land, create storefronts and offer services in exchange for value. The metaverse is an emerging trend that has yet to reach mainstream adoption yet, but companies like Meta are investing 10’s of billions of dollars to bring this to the masses.
Within the most recent digital asset bear market, there has been a drastic price decline of nearly 85%, raising questions about the viability of investing in virtual lands.
Pros of Investing in the Metaverse
- Futuristic technology
- Opportunities to capture value within native ecosystems
- Gamification
- Fun
Cons of Investing in the Metaverse
- Infinite supply
- Limited user base
- Lack of robust marketplaces
- Little ‘valuation support’
Parcl is developing a real estate trading platform for the next generation
The Parcl Protocol 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.
The Parcl Protocol allows users to get exposure to real-world residential real estate markets with digital smart contract assets called ‘Parcls’. Parcls represent derivatives on underlying price feeds that track real-time price per square foot/meter in a wide range of the most recognizable geographical areas (major metros, cities, and neighborhoods) in North America and all over the world.
So, when you invest in a Parcl, you’re not buying actual land or even fractions of it — you’re buying a stake in a digital market that tracks real estate prices in a particular IRL city or neighborhood.
Join the waitlist and be one of the first to get early access to Parcl v2.
Pros of Investing on the Parcl Protocol
- Highly liquid
- Wide breadth of offering (IRL cities and neighborhoods from all over the world)
- No minimum investment
- Prices reflect real-time market conditions in underlying real estate markets
- Ability to get long OR short (hedge)
Cons of Investing on the Parcl Protocol
- No direct ownership interest in underlying properties
- Requires basic blockchain ecosystem knowledge
Shared content and posted charts are intended to be used for informational and educational purposes only. Parcl does not offer, and this information shall not be understood or construed as, financial advice or investment recommendations. The information provided is not a substitute for advice from an investment professional. Parcl does not accept liability for any financial loss or damages. For more information please see the terms of use.
