Historically speaking, real estate has been among the world’s most profitable assets, as well as the most valuable, with a total value of $228 trillion. Despite its stability and value, a profitable property investment has traditionally required large sums of funds, access to information that is difficult to obtain, and substantial effort to manage the lengthy processes. This has meant that getting in on the ground floor of the most lucrative parts of real estate has largely been exclusive to highly connected institutional investors.
However, this dynamic is being overturned by a suite of new financial technologies, creating a transparent and accessible property market for investors and homeowners alike. Information abundance, effortless online investment platforms, and liquid marketplaces are upending real estate investment markets. In doing so, they are unlocking over $40 trillion in hidden value, and ushering in a world where one does not need (much) money to make money like a millionaire.
This transformation, though, goes beyond just how we invest in real estate – it is a fundamental redefinition of real estate. The analog asset classes of the past are making way for a fluid, high-tech approach to how we build, live in, work from, and travel to properties. The real estate of tomorrow is here, and there’s no going back.
A $40 Trillion Opportunity
Throughout real estate’s history, finding a worthwhile investment has been more difficult than with other asset classes, when it comes to curation, selection and especially management. A prospective investor had to gauge market trends, local dynamics, attain the proper paperwork – no easy task in a nation like India – and, most importantly, have the requisite capital to purchase a property. Even after a property purchase is completed, maintenance and resale have been substantial endeavors in their own right.
All of this meant that real estate was a fairly illiquid asset. Illiquidity, simply speaking, means that a given asset is relatively difficult to buy and sell – in technical terms, that it has a higher trading cost in the form of brokerage costs, opportunity costs, and so on. Stocks, for example, are very liquid, while massive industrial plants are among the most illiquid investments possible. Illiquid assets are valued at a lower price than a comparable liquid asset, as there is greater difficulty involved in selling the asset (and thus more risk if there are changes in the market). The specific illiquidity discount for real estate investments varies between asset classes, tending to be somewhere around 15-20% of the total asset.
Considering recent technological advances, this historic hindrance has transformed from a weakness of the sector into an immense opportunity. Due to real estate’s massive size, unlocking this discount represents $40 trillion in hidden value.
Keys to the Revolution
The internet has connected the planet and allowed investors across the globe to tap into a wealth of resources that was previously inaccessible, both in terms of raw information as well as technical expertise to process it, both within the country and across borders. As a result, the time and effort required to scrutinize an opportunity (for example, a shopping mall across the country) have decreased by an order of magnitude, while the ability to capitalize on such opportunities has increased by a similar order of magnitude.
Companies have identified the power of the internet to connect isolated pockets of supply and demand to create an efficient marketplace that unlocks hidden value. With a digital DNA that prioritizes convenience, transparency, and data-driven processes, these companies have revolutionized the financial industry in general, and real estate in specific. Competitive intensity in a free market is about closing gaps and creating gaps, and these technology firms have done just that – created gaps in terms of revolutionary new business models like Airbnb, now valued at $31 billion, and closed gaps in terms of fixing typical structural inefficiencies like slow and inaccurate flow of information through the organization. The sustainability of this FinTech revolution lies in the fact that customer-value has been placed at the center of every innovation in product or process. The single-minded focus on delivering long term value to the end users can be felt strongly in the real estate investment space. Individual investors can now not only access highly curated investment opportunities selected by domain experts but also enjoy an unprecedented level of service with a hassle-free, effortless process at the mere click of a button.
This is a huge step-change in an industry that has favored institutional investors with access to exclusive information, exclusive expertise, or both. Governments and regulators have recognized the power of this change and are modifying securities regulations and other financial bottlenecks to enable this revolution to maximize its inclusive potential and further drive this accelerating trend of democratization of the world’s largest asset class.
The Properties of Tomorrow
However, these three dynamics are revolutionizing more than just how we invest in real estate. Information abundance, effortless online transactions, and flexible ticket sizes have led to a fundamental evolution in terms of how we think about the spaces we live in, work at, and travel to. These technological advances have created a more fluid sense of how a space can be used, radically altering the traditional residential, commercial, and hospitality models in the process.
Historically speaking, residents would live in a house or apartment they owned, companies would buy or lease out an entire building, and tourists travelling to far-off lands would book a room in a large hotel. The need for specific, demarcated usage of a given property by a given tenant was driven by a scarcity of information, which has been rendered obsolete by the rise of the internet. As a result, a new type of real estate has emerged, driving an interconnected world and the desire for effortless flexibility.
This transformation is leaving no sector unaffected: In commercial real estate, co-working spaces are shattering the old, staid, corporate lease arrangement, giving everyone from four-man startups to international juggernauts unprecedented flexibility and cost-effectiveness. Companies can set up offices where they need to, when they need to, for as many people as they need to, without getting locked into intractable leases. This is right in line with the overall evolution of work – by 2020, 1.5 billion employees will be able to do their job without checking into an office.
The change is also affecting the oldest form of property: the home. The traditional notion of owning and living in a specific house or apartment is being challenged by the rise of co-living spaces, where multiple people share the same space. Driven by a change in the demographics of urban centers, this trend is beginning to heat up considerably, with coworking giant WeWork, valued at $16 billion, recently launching WeLive, its first foray into the co-living sector.
Hospitality has arguably been the most immediately impacted sector, with the hotel industry facing massive disruption in the form of the short-term rental market. Platforms like Airbnb have created seamless, transparent marketplaces that decentralize the traditional hotel model, empower homeowners with the ability to profit from their properties, and give travelers a vastly expanded array of options when choosing where to stay. Airbnb has grown exponentially over the past few years and is now worth 30% more than Hilton, its closest competitor.
Across sectors, the unlocking of real estate’s hidden value is underway in earnest as the industry moves towards a brighter, smoother future. Regardless of the specific asset class, location, or investment model, the end result is the same: a lower barrier to entry, increased available capital, and the creation of immense value for those who, looking to invest in real estate, find their slice of tomorrow and get in early. After all, $40 trillion is a lot of money to go around.