Real Estate Investment Slumps during COVID; How Tokenization and Liquidity can Enhance your Offering
The COVID 19 pandemic is a black swan event that has disrupted the entire global economy. While a vaccine may be available in early 2021, the long-term economic impact of the virus will be felt for many years.
Many companies have realized that their businesses can continue to operate successfully with employees working remotely. At the same time, other companies, such as retail properties and restaurants, are struggling to survive as lockdowns and safety precautions keep customers away. But it’s not just commercial real estate that will be aected; if work-from-home trends continue we will likely see a shift in residential real estate demand from cities to suburbs and exurbs. Many companies and investors are already adjusting their business strategies with these considerations in mind.
To assess the extent of the impact so far, Texture Capital analyzed SEC regulatory lings on private investments in the real estate sector for Q2 2020 and compared this to previous quarters going back to 2010. Deal value in Q2 2020 stood at $8.5bn down from an average of $12.3bn in the prior four quarters – a 31% decrease.
Source: Texture Capital analysis of SEC EDGAR filings
In addition, we found that the number of deals in the second quarter dropped even more from an average of 503 for the prior four quarters down to just 266 - a decrease of 44%.
Source: Texture Capital analysis of SEC EDGAR filings
Within real estate, the biggest contributor to the large drop off in private investing was the REIT (Real Estate Investment Trust) sector, which saw an 84% reduction in investment activity. REITS are tax advantaged investment funds popular with institutional and high net worth investors. The slump in capital flowing into these vehicles is a clear indication that real estate investors and fund managers were very unwilling to put money to work in Q2.
Another segment that saw a big drop was Commercial real estate, where investments dropped by 54% in the quarter. It is hardly surprising that with many offices and stores closed or at limited capacity, developers and allocators are hesitant to commit to new projects, until there is greater clarity around future demand.
Looking to the Future
Against this background of uncertainty, real estate investors will reconfigure their investment strategies to reflect the new risk paradigm. With an unpredictable outlook for real estate, investors appear increasingly-keen to have early liquidity options available as they consider new investments as opposed to tying up their capital up for 5 – 10 years (as can be typical in real estate deals). To mitigate this, real estate companies should consider issuing Digital Securities recorded on blockchain.
This process, sometimes known as ‘tokenization’, creates a digital ledger of ownership, and can program in regulatory compliance protocols using smart contracts, removing frictions and creating secondary market liquidity.
Furthermore, the benefits of tokenization extend beyond the real estate sector making this strategy appealing to a broad array of issuers and investors.
To learn more about tokenization and how it could help your business, please reach out at info@texture.capital.