Building a stock market for real estate

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.

High Five! The five fintech stories we’re following this week

5 trends we're tracking in finance

Not a great year for incumbent share prices

2016 hasn’t been kind to big bank share prices, which have plummeted by nearly half a trillion dollars since January. A number of issues are at play here – the Chinese economy, U.S. interest rates, oil prices, and yes, Brexit (more on that below). The concern is that these losses could trigger a cycle of bank executive inaction and bank employees selling their stock. 

Yes, we still need to talk about Brexit

Britain’s decision to leave the EU is still reverberating through the finance industry. The long-term impact of the Leave vote on UK finance/fintech is largely uncertain, though this has not stopped finance experts and reporters from adopting the dystopian lexicon of a young adult novel to describe Britain’s impending financial doom.

Whatever the gloomy short-term effects of the referendum, long-term the future doesn’t look so bleak: the $30b mega-merger between the London Stock Exchange and Deutsche Börse is still going ahead, and the two companies still expect to deliver cost savings and revenue synergies worth a combined $780m a year after five years.

New and improved

Thanks to the explosion of fintech, incumbents are no longer the only financial service providers in the economic pond. As a result, banks are being forced to deal with a new reality in which owning the entire value chain isn’t really such a good thing.

Some incumbents are rolling with the changes, not only by rebranding but by transforming the products they offer and the way in which they communicate with their clients. Travelex, a 40 year old foreign exchange company that realized that whatever the future of payments is, it ain’t cash, went through a massive redesign to make digital its core. Its first product, Supercard, frees its users from foreign transaction fess and unfavorable forex rates.

Stateside, national bank TCF Bank rolled out ZEO, a suite of services that partners with Western Union to provide quick and efficient access to and transfer of funds. For the unbanked, ZEO is a godsend – you don’t have to bank with TCF to use ZEO, but you still get the security of the bank and can get expert advice from a banker. 

Professional investors are tooling up

Professional investors are using new technology to make themselves relevant (and cool) once again. Point72 Asset Managements’s marketing weapon of choice is social media, and it’s using LinkedIn, Facebook, Google+, Glassdoor and soon Twitter to aggressively pursue traders.

Meanwhile, legendary hedge fund Renaissance Technology is taking on high speed traders through the patented the use of atomic clocks, which will sync orders to within a few billionths of a second. Talk about radioactive.

Alternative SMB financing solutions are becoming mainstream

The SMB online lending marketplace is heating up, with old and new players aiming for a piece of the SMB loan provision pie. On July 7th, online payment lead PayPal announced that it had provided $2 billion of funding to 90,000 SMBs globally through PayPal Working Capital – its small business finance program.

Though $2b and 90,000 SMBs might seem paltry compared to Wells Fargo’s $40b (of a 5-year $500b lending goal), these numbers show that PayPal is serious about entering the SMB loan market. What differentiates PayPal’s SMB loan model is that repayments are applied automatically as a fixed percentage of daily sales that the business owner selects in advance; thanks to this proportionate system, business owners don’t have to live in dread of their loans.

PayPal isn’t the only innovator trying to make itself heard in a space that’s becoming increasingly crowded. Credit mogul American Express will be rolling out a new online loan platform later this year, and from the release it sounds like they’re aiming to win the marketing battle with supply chain financing.

Orchard’s eagle-eye take on the online SMB/consumer loan market is that it’s an attractive and stable yield opportunity – no doubt we’ll see more incumbents jumping on this loan wagon in the near future.

The League of Extraordinary Brexit Projections

When it comes to predicting Brexit’s impact on UK finance, fintech, and London’s status as a hitherto virtually unchallenged European fintech hub, there’s a sense that media and fintech professionals are veering dangerously close to composing Young Adult fiction. Katniss Everdeen would feel right at home among the explosive adjectives that have been attached to the UK and London financial scenes ever since the UK narrowly voted to leave the European Union on June 23rd: “panic,” “fallout,” “kill,” “under threat,” and “huge hit,” to name just a choice few.

These fearsome adjectives are usually paired with conditional words, such as “might,” “could,” “will,” and “probably,” for the simple reason that it’s unclear exactly how, when, and to what extent Brexit will disrupt UK finance as we know it. Nevertheless, if you can forgive the adjective frenzy, you’ll find that a number of journalists and fintech specialists aren’t just reading their tea leaves or gnashing their teeth, and have come up with some compelling post-Brexit scenarios.

It all hinges on … bank passporting?

“So this is the key question…” financial blogger and chair of European networking forum the Financial Services Club, Chris Skinner writes in his blog, “Will Europe choose to ruin London, the British economy and Fintech by using the one card they hold that could possibly do that: removal of bank passporting?” Passporting means that as long as a bank is based in the UK or has a subsidiary there, it can provide services across the EU.

If the EU decides to leave passporting laws as they are, London fintech would remain largely unchanged. However, Skinner argues, if European leaders decide to punish the UK by removing Britain’s right to passporting, most banks will need to relocate to Europe, and the GDP, taxes, and employment in the UK would get pummeled.

Leading law firm, DLA Piper seconds Skinner’s passporting concerns, but is convinced that Brexit is more than a single-trick hat: in the coming months, Britain’s financial industry will have to come to terms with new EU regulations, relations, and legal frameworks, no matter what the EU decides to do about Britain’s passporting rights.

Will the last person to leave Britain please turn out the lights

Like all great epics, Britain’s EU referendum featured a struggle between two distinct forces. Whether or not voters understood just what they were voting on, fintech expert and investor Pascal Bouvier places the vote within the context of an ongoing battle between globalization (Bremain) with its young, educated, urban centers, and those nostalgic for Vera Lynn’s white cliffs of dover and the independent British nation-state (the Brexiters).

Bouvier tackles a wide range of fintech subcategories and explains why so many of them stand to benefit from at least partial relocation outside the UK post-Brexit. Bouvier’s analysis concedes that the ultimate Brexit impact will depend on if and how the EU and the UK are able to create an amicable relationship from the shambles of their marriage.

For Bouvier, it’s clear that Britain’s fintech offspring need the UK to swallow its pride and push collaboration with the EU:

Whatever the rollercoaster of Bremotions, Branger for some, Bregret for others, Brisapointment, Bronliness, Brictory, Bredemption – i am pushing corniness to its limit here I realize –  Fintech Brexistentialism tells me it is easier to influence an integrative movement from the inside than the outside.

Amazing (saving) grace

It would seem that the air of foreboding permeating Britain’s financial industry is far from misguided. Still, the tendency to employ overly ominous adjectives towards Brexit would seem premature. Though roboadvisor Betterment may have suspended all trading till noon the day after the referendum (and seriously angered a lot of their clients), after the Leave vote, UK company directors bought more shares of their own companies than at any time in over a decade.

Finance and fintech experts have also suggested that post-Brexit tax breaks could turn London into even more of a fintech magnet. Additionally, in a move to signal that all was fintech business as usual, London mayor Sadiq Kahn appointed fintech entrepreneur Rajesh Agrawal as the deputy mayor for business and enterprise.

And of course, in the meantime, former UK Prime Minister David Cameron has resigned, leaving someone else to deal with the hassle of invoking Article 50 and getting the Brexit ball rolling.

Before the vote, Dutch bank ING tried to predict the outcome of a Leave vote on the British finance industry. Its conclusion captures the spirit of what most financial experts have written about UK finance and fintech since the referendum: “Quantifying the impact from a possible Brexit is anything but easy.”

Photo credit: Gabriel Villena via Visual hunt / CC BY