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How Institutions Buying Real Estate Will Affect Consumers

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Modern economics has created a fairly simple and time-tested equation: if the risk-adjusted returns of a given investment are sufficiently attractive, capital flows towards it. In recent years, very few asset classes have had a better risk-adjusted return than real estate.

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Institutions are buying physical real estate; what are the implications

‍As a result, capital has flowed towards real estate in droves. This is, of course, of great interest to the average citizen because real estate tends to be the primary shelter for most individuals & families, as well as their primary source of wealth.

The implications of this are several-fold:

  1. Many existing homeowners are sitting (quite literally) on substantial paper gains.
  2. Housing supply/inventory is extraordinarily constrained, creating unusually high barriers to entry.
  3. Largely a result of #2, elevated prices are another significant barrier to prospective new home buyers.
  4. Investors - increasingly institutional investors - are beginning to compete with those same individual buyers for residential properties.

Why Are Institutions Buying Real Estate?

The last point is a topic that I would like to explore further. Why would institutional investors want to own physical real estate? Well, real estate is a non-correlated asset, and properties that are subsequently rented can generate strong and steady cash flows. These two attributes have made real estate among the most consistent investments and attractive inflation hedges of any asset class (inflation is at 39-year highs).

But why would institutions feel the need to own individual homes - and deal with the myriad operational complexities that come along with owning a physical property - in order to express this bet? Because there are very few viable alternatives.

REITs, Mortgage-Backed Securities, fractional ownership platforms, and private commercial real estate funds are among the relatively limited options available to investors of all sizes seeking real estate exposure.

Each has its benefits, but we argue that they have more significant drawbacks or deficiencies. Illiquidity, lack of breadth of offering, highly centralized investment decision making, and prohibitive capital commitments & transaction costs are among the most common issues in these types of investment products.

As a result, individual investors have ended up under indexed and priced out of real estate as an investment class, and some large investors have decided that the most efficient way to express their bet on real estate is to purchase significant quantities of individual residential properties.

In some cases, these properties even sit empty & unrented for years on end! This 'supply vortex' is large & growing larger, and it has many negative knock-on effects, the least of which is a persistent undersupply of homes to live in (and higher prices for those that do exist).

The resulting paradigm is one of the primary driving factors behind Parcl: investors large & small have a comparatively limited set of offerings to choose from when seeking a new real estate investment.

Making matters worse: among these limited options, large investors have far more resources to express their market views relative to individual home buyers or 'retail' investors. And when they do act on those views, it prices average folks out of the market for a place to shelter!

The Parcl protocol is a first-of-its-kind platform that will allow investors of any size to actively invest in real estate at the neighborhood level. Via Parcl, investors will be able to invest with broad or highly granular exposure to the price return of high-value real estate; their favorite neighborhoods, cities, or regions.

And thanks to Parcls blockchain-based trading system, they will also benefit from low transaction fees, no minimum investment, and near-immediate liquidity. For more detailed information on how this all works, read CEO Trevor Bacon's introductory post.

The Bottom Line

The TLDR (too long, didn't read) of it, though, is that we at Parcl are creating a custom data index that will underpin the price referenced by the Parcl smart contracts ('Parcls'). We think that this index will eventually become a prominent benchmark for pricing real estate at the neighborhood level.

Furthermore, we think that there has never been a better time to introduce a high fidelity real estate data source such as this, given recent developments in the real estate industry and their impact on consumer confidence.

The most prominent example of this is the scandal around Zillow's iBuying program (another institution buying individual homes) and their subsequent winding-down of that business initiative.


About the Author

Kellan Grenier is the COO of Parcl.