Business of Fintech
Building a stock market for real estate
- Investments can’t get much less liquid than a building, pushing new investors away from the asset class.
- Property Partner is trying to create liquidity in private real estate investments.
It's common knowledge that one of the best ways to develop wealth is by investing in real estate. One big drawback to real estate investing is liquidity. Investments can’t get much less liquid than a building, and the inability to exit quickly has pushed many new investors away from the asset class. There are REITs available on the public market, but they provide investors with little control. Property Partner is trying to create liquidity in private real estate investments. The London-based real estate platform provides a marketplace for investors to buy fractional shares in single and multifamily residences in England. Customers can browse the site and invest as little as £50 in income-producing properties. £36 million has been invested through the platform since January of 2015, with an average annual yield of 3%. Users are issued shares when they fund a property, allowing investors to take those same shares and put them up for sale on the site’s secondary market. “Property Partner’s ambition is to become a global stock exchange for property investment,” said Mark Weedon, head of institutional investment. “Our unique secondary market gives current investors the security to sell and new investors to jump into an established deal.” Selling shares early generally means discounted prices, but according to Weedon, most secondary market sales have been at or above current market price. The platform experienced its biggest test in June of 2016 with the Brexit announcement. Weedon was interested in seeing what the results of the instability would be, and if there would be a selloff in the secondary market. “The referendum was a good test for the platform,” he said. “Properties sold right after the Brexit were selling at a similar value to before the event. It was encouraging that the marketplace behaved in a similar way to the underlying property market, a stable asset class that’s sticky in terms of price.” The secondary market feature is great, but just because a marketplace exists doesn’t mean you can sell at the push of a button. Someone still needs to buy the stock. There needs to be interest on both the buy and sell side of the secondary market for it to become a "global stock exchange". The site is also not open to U.S. investors, which sorta takes the word global out of the description. The yields are also a little difficult to swallow. With more real estate crowdfunding platforms opening, there are more and more opportunities for investments. Some sites offer similar assets with yields that are between 2-3x those on Property Partner. Properties on the platform also have a 12 percent management fee on gross revenue. The money may go to a third party management company which, according to Weedon, is standard for the English market, but still doesn’t change that that’s a high fee for residential property management. The lack of liquidity in crowdfunding investments is one of the biggest learning curves unfamiliar investors have to deal with. Investors in crowdfunding platforms don't always understand that the investor-investment bond is stronger than most marriages; it's tough to divorce a crowdfunding investment. Other crowdfunding platforms have tried to develop secondary markets, without much success. Marketplace lender Prosper is shutting down its secondary market. EquityZen is working to provide an active marketplace for startup employees to sell their private shares. NASDAQ bought SecondMarket to try and help improve startup share liquidity, but there's not much traction here. The secondary market security blanket may help bring investors to the site, and creating an exchange for real estate may be a winning formula that people are waiting for. But like other attempts at secondary markets, it's unclear if Property Partner will have enough volume to create a sustainable exchange. If investors value liquidity over ROI, a secondary market may offset the lower yields that come with investing in Property Partner.