Fractional Ownership of Real Estate
Fractional ownership of real estate refers to a type of ownership where people pool their funds in order to own a share or fraction of a property. Instead of owning the entire property outright, each owner holds a percentage interest in the real estate. This enables smaller investors to access real estate as an asset class and share the benefits and responsibilities of ownership (such as maintenance, taxes and use of the property) but also enjoy any capital gains and rental income from the property. Fractional ownership can take different forms, for example time-share, or equity sharing which is typically via a fund or a token. Fractional ownership can also provide several benefits, such as lower costs and greater access to high-end properties and can allow owners to diversify their real estate investments without having to commit to a large financial outlay for a single property. The most common form of fractional real estate ownership is via real estate investment trusts (REITs) which are typically quoted on a stock exchange; and by far the biggest REIT market globally is in the US.
US REIT market*(as at Q32022)
The JOBS Act is a US law passed by the Obama administration back in 2012 with the goal of encouraging small business growth and job creation. The legislation approved a huge $ 550 billion plan to invest in America’s public transport infrastructure to help improve roads, bridges and internet speeds (as well as numerous other projects) so creating a slew of jobs for the US economy. The Act included several provisions that impacted real estate, and since 2012 has enabled the creation of crowdfunding platforms for real estate investment. Prior to the Act, only accredited investors (those with a net worth of over $1 million or an annual income of over $200,000) were allowed to invest in private real estate offerings. However, the Act has allowed for platforms to pool funds from both accredited and non-accredited investors for real estate investment purposes. As a result of the Act, the number of people who could pool their funds and invest in real estate has risen from 499 to 2,000. Furthermore, it has created new opportunities for real estate developers and sponsors to raise capital through Regulation A+ and Regulation D offerings; Regulation A+ allows issuers to raise up to $50 million in a public offering whilst Regulation D allows issuers to raise unlimited funds in a private placement offering. These provisions have made it easier for real estate developers and sponsors to raise capital. Overall, the JOBS Act has opened up new avenues for real estate investment and made it easier for small investors to participate in the property market, leading to firms such as:
- Fundrise - offers access to investors from as little as $10 and Fundrise manages $ 2.8 billion on behalf of 300,000 investors.
- Reality Mogul- which has $1billion on its platform.
- Crowdstreet- gives access to commercial real estate opportunities.
- YieldEstate - investments start from $2,500and the platform has $3billion of real estate assets.
- EquityMultiple- “has achieved historical returns of 18.7%, with a totalcapitalisation of projects participated of $4.3+ billion”.
Outside of the US, the Swiss have established a number of crowdfunding platforms focused on real estate, including:
- Beedoo - a platform proposing investment solutions to invest directly in the real economy.
- Foxstone - a Swiss real estate crowdfunding platform.
- crowdhouse.ch and Bricks & Bytes AG provide the first real estate crowdfunding platform in Switzerland.
Another way for smaller investors to gain access to property is by tokenising real estate, a process whereby investors can own a small percentage of a building or a real estate fund via a token. The process of tokenising real estate involves converting the ownership rights of a property, or the property fund, into digital tokens which can then be traded on a blockchain-powered platform. Each token represents a fraction of the ownership of the underlying asset, with the total number of tokens representing the entire property or the fund. Much like crowdfunding, tokenisation of real estate can offer several benefits such as increased liquidity, fractional ownership and reduced transaction costs. Typically, it enables smaller investors to access real estate investments which historically they otherwise would not have been able to do. Tokenisation also eliminates the need for intermediaries (such as brokers and custodians) which can reduce transaction costs and increase efficiency. The summary below highlights several differences in tokenised ownership compared to physically owning a property.
Tokenisationversus direct ownership real estate
However, the current value of real estate-backed tokens is thought to be worth $200millioncompared to the total value of real estate globally which, according to Savills, is over $326trillion. Examples of firms which have tokenized real estate include:
- Herox- in Australia
- Digishares- in Denmark
- Taurus- in Switzerland
- Bricktrade - in the UK
- Tokeny - in Luxembourg
- Honeybricks- in the US.
In discussions with barrister Jeremy Barnett he said: “The main obstacle to the development of the market in tokenised real estate assets has been the lack of liquidity which makes the high cost of legal and regulatory work difficult to justify. The establishment of issuers (eg Tokeny) exchanges (eg Archax) and post-trade market infrastructure providers (eg Montis) will help create the liquidity necessary to bring about institutional investment in the near term."
Fractional ownership of real estate has evolved considerably since the first REIT in the 1960s and the first timeshare, which was in 1963. Tokenisation looks to build on the success of REITs by creating a way in which to own and trade fractional ownership on digital exchanges which are open to a global audience of potential investors 24/7. There still remains a relatively small number of tokenised real estate projects but, as legislation and regulations become clearer in different jurisdictions across the world, we could well see new real estate as well as existing REITs and other types of property funds either converting to fully tokenised or at least initially offering a digital share class on an existing real estate portfolio. Given that residential property accounts for 80%of the total value of global real estate and that many homeowners are capital-rich but income-poor, equity release offers an attractive market for tokenisation of people's homes. The ability to unlock a % of your home to an investor and not be required to pay interest on the money released but to share in the rise or fall in the value of your home, is, for many an attractive proposition. However, will tokenisation be able to effectively unlock what could be a huge market globally and arguably make real estate more democratic and liquid?