The rise of the private investor in real estate

The rising influence and participation of the 'average' investor is here to stay as access to information and markets empowers the individual

March 23, 2021

The debut listing on the International Property Securities Exchange (IPSX) in London and its ambition to create a liquid market for single assets is indicative of a larger structural change in the accessibility of real estate for non-institutional investors. The SEC's recent rule change modernizing private placement rules also represents a step change in the industry towards more inclusive and accessible private capital markets. The rising influence and participation of the 'average' investor is here to stay as access to information and markets empowers the individual.

Removing the barriers to investing

The retail investor revolution with the rise of Reddit and Robinhood traders is perhaps a signal of what we can expect to see one day in private real estate. In the same way that technology and access to information has reduced the barriers of investing in public markets, we are also seeing the same in private markets. As an example, the SEC is actively exploring how they can expand retail access to private markets given the number of listed companies has decreased 39% in the past 25 years. Investors are increasingly looking for opportunities to outperform the public markets, and private real estate (amongst others) is a beneficiary of this.

Increased transparency and access

Crowdfunding and syndication in private real estate, while still in its infancy, has the knock-on-effect of educating and creating awareness amongst the investor community. A great example is CrowdStreet in the US or BrickVest in Europe. Since launching in 2014, CrowdStreet has closed 473 commercial real estate investment offerings and raised $1.7B through its online platform. Whilst it may seem insignificant, this is a drastic change in a short period of time and they are not alone. The key here is that real estate has historically been an opaque asset class with little transparency. As the ease of sourcing, analyzing and comparing improves, it will continue to enable investment in real estate for a wider investor population. 

Impact of social influence

One of the side effects of wider access and a decentralized investor population is the impact of social influence and information transmission. As I alluded to earlier, the Reddit traders short squeeze is a prime example of this. Herd behavior is present in private markets and leads to euphoria and risk-on behavior in the same way as public markets. The key difference though, is that real estate has a time lag. In a highly cyclical asset class like real estate, this herd behavior can quickly lead to imbalance in supply and demand. You only have to run your eyes through a forum like BiggerPockets to witness the real estate frenzy that exists around 'fix and flip' or 'wholesaling'.

Popularization of real estate syndication

Real estate has always been a wealth builder. With greater access to capital we are now seeing the reincarnation of the "Mom-and-Pop Investor" into the "Mum-and-Pop GP"; or the popularization of real estate syndication. In behavioral science there is a term called the familiarity principle. It describes our tendency to develop preferences for things simply because we are familiar with them. As real estate becomes increasingly accessible for a wider investor population, it will be interesting to see how the familiarity principle plays out. People love bricks and mortar, and I expect to see increased allocations to real estate, but investors need to make sure investment discipline is maintained.

The importance of an investment framework

On that note, Koda Capital (a private wealth management company) recently published a paper I enjoyed called ‘Seizing the Opportunity – A Technology Entrepreneurs Perspective’. The paper stresses the importance of having an investment framework: a plan that helps avoid mistakes, provides structure, discipline and governance. With increased access, and availability of capital and opportunities, investors need to apply a structured approach to managing their wealth. One of the reasons private investors like private real estate is due to the control. Similarly, an investment framework ensures that control is maintained, emotional pressure is removed and that a bigger picture plan is in place for growing multi-generational wealth.

The illiquidity premium is reduced

Real estate is described as an asset class with high asymmetry of information and low liquidity, which allows investors to earn high returns. As more capital moves into real estate, this information gap is closing and there is less "illiquidity premium" than before. On the upside, the ease of raising capital has enabled access for many new investors and created new real estate business models. Innovation around fractional ownership, securitization of assets and more modern regulation will continue to enable access for a wider pool of investors. This in time will also create more liquidity options for owners of real estate and we will see higher trading volumes.

As private real estate become more efficient and inclusive, I wonder what happens to its correlation with traditional assets. I got into real estate because I enjoyed the long term illiquid nature of it and had seen how short term sentiment can impact public markets. I hope we can find a happy medium!