For the past decade, Web2 and Web3 entrepreneurs have dreamt up a million ways to ‘fractionalize’ or ‘tokenize’ real estate, with the aim of making this asset class more accessible to investors. In practical terms, this means offering shares in real estate rental businesses with underlying property assets.
Whether via distributed ledger technology or Web2 backends, these investment platforms attempt to reduce transaction costs such that small-scale investments are feasible. The promise is that this could expand the pool of financially viable transactions between investors and real estate project sponsors. For instance, instead of it being cost prohibitive for a real estate sponsor to take checks of less than $1M, the sponsor could now accept as little as $1 at a time.
Compared with the imagined demand, adoption has been very poor. Fractionalized real estate makes up less than one basis point of the global $326T real estate market. Tokenization is even weaker: in 2023 Cointelegraph reported that there are 182 different real estate security tokens totaling just $194M in market cap. It’s clear things aren’t working. Here’s why:
- Limited liquidity: Investors in these products often struggle to access liquidity on a daily, weekly, or even yearly basis. Many of these investments offer no liquidity until the underlying real estate asset is sold, potentially 5–10 years after an initial investment. Secondary markets that do exist tend to be illiquid, forcing investors to accept significant losses if they can sell at all.
- High cost to diligence: All real estate transactions are unique and require significant time and effort for due diligence. This process is expensive, particularly in relation to the average investment, and most small investors can’t afford to thoroughly review each transaction or property in a fund.
- Limited diversification and scale: Fractional real estate investment opportunities are nearly always for a single rental property or a small, concentrated group of buildings. This means the investment is highly susceptible to single asset issues, including dependence on few or even just a single tenant. The burden is then on the investor to construct a balanced portfolio.
- Siloed investments: Each platform creates investment products trapped in its own walled-garden. Every interest is bespoke, as is often the technology for recording interests and transactions. Investors across multiple platforms must therefore maintain multiple accounts and invariably face challenges in aggregating portfolio information.
In contrast, the experience of a typical ETF investor is much more seamless:
- High liquidity: Investors benefit from liquid securities exchanges with regulated market makers, ensuring actionable buy and sell prices with narrow spreads.
- Lower cost diligence: Regulatory oversight and disclosure requirements provide investors with standardized, easy-to-interpret investment information.
- No asset-level diligence: ETF managers share their strategies and build diversified holdings, allowing investors to benefit from portfolio-level management and oversight.
- Integrated investment accounts: Investors require only one account — a brokerage account — to access their investments, simplifying the process compared to real estate crowdfunding platforms (whether Web2 or Web3).
Investing in real estate should be as easy as investing in ETFs. But to match the broad appeal and convenience of ETF investing, new approaches are needed. These strategies must incorporate new technologies and investment structures to eliminate the limitations hindering the growth of current real estate investment platforms. Fractionalization and tokenization themselves just aren’t going to cut it.
At Villcaso, we’re building a new way to invest in US real estate. For more information, reach out to hello@villcaso.com.
THIS IS NOT AN OFFER TO SELL SECURITIES. Information contained in this post is not an offer to sell securities or the solicitation of an offer to buy securities, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such jurisdiction.
