RealVantage on creating bite-sized real estate investments

This article is sponsored by RealVantage.

Commercial real estate is one of the biggest asset classes but could become much bigger if investments were open to a broader range of capital, allowing private investors to gain access to larger lot sizes and more opportunistic deals. Fractional real estate investment managers offer smaller ticket sizes to retail investors, enabling them to take part in development, investment and lending deals at a much larger scale than they could achieve individually.

Singapore-headquartered investment manager RealVantage is creating a global real estate investment ecosystem to connect individual investors and institutional real estate partners. Keith Ong, co-founder and chief executive officer, explains how fractional investment can open up the sector to a wider range of investors and become a valuable capital source for private real estate managers.

What is fractional real estate investment?

The concept is no different from a traditional private real estate fund. However, we break each investment down into smaller pieces compared with an institutional real estate fund, which will require several million dollars as a minimum investment.

There are different ways of structuring these investments, but fundamentally, the difference is that the minimum investment is lower. Investors also invest in individual deals rather than providing blind pools of capital, but there is no reason why such investments cannot be aggregated into a fund rather than a single transaction.

How does this make real estate more democratic? Who are the target investors?

In theory, such investments can be open to investors prepared to commit to as little as $50-$100. However, RealVantage targets experienced investors with a minimum ticket size of $25,000. Our records show that family offices are investing more than $500,000 per deal, while non-family offices average more than $100,000. We target investors from the ‘mass affluent’ to high-net-worth levels – people who are prosperous and have a certain level of knowledge about real estate and investing, but who cannot reach the minimum ticket size required by a typical private equity fund.

Investors benefit through direct access to quality deals, with full transparency and traceability in legal ownership in every project. We handle all the heavy lifting on the sourcing, due diligence, structuring, tax optimization, monitoring, cash management and more.

How do these investments compare with real estate investment trusts or private equity funds?

REITs are a fantastic instrument for investors but their performance is affected by the wider capital markets, not just the underlying real estate. Additionally, they only invest in core real estate with a fairly narrow return range.

As well as the minimum ticket size barrier with REITs, private equity fund investors also typically invest in blind pools rather than particular projects. We give investors full discretion to invest in individual projects, which allows them to make their own choices for their real estate portfolio.

Of course, it is also possible that an aggregation of fractional real estate investments could be invested into a real estate private equity fund, with a manager such as RealVantage acting as the LP on behalf of its investors.

What sort of deals can be undertaken through fractional real estate investment?

Many types of investment are possible. We divide our deals into income and equity. For income deals, we tend to provide senior or mezzanine loans to a developer or fund manager.

For example, we recently provided a mezzanine facility to a fund managed by a London-based firm, backed by a portfolio of UK retail warehouses. This will provide income for two to two-and-a-half years until the loan is repaid.

On the equity side, for example, we have entered into a joint venture with Greystar to build 247 rental apartments in Phoenix, Arizona, with a build, lease and sell strategy. With all these deals, we work with a local manager or operating partner. Our focus is in the US, UK, Australia, Singapore and Hong Kong, but such deals can work in any market.

How difficult is it to manage thousands of investors?

If you have a robust platform and the right technology, it is not as hard as you might think. We have 4,000 investors and growing, but that does not mean we have queries from these guys every day.

We have automated a lot of our processes, so the onboarding and know-your-client processes are all automated. We also provide investors with plenty of information on a regular basis, so they do not need to deal with us in person. So, while we do organize investor events, I have not met three-quarters of our investors.

The cycle of investor onboarding and the growth of the investor pool is very different to private equity real estate fundraising. We are constantly adding new investors and investments so are continually building, rather than having periodical capital raising cycles for closed-ended funds.

Can fractional real estate investors trade their stakes? Are there ways to add liquidity?

We have found the demand for liquidity to be minimal. We facilitate buyer-seller matching among platform members for any investors who wish to exit, but only a tiny fraction request this. We offer a range of deals with duration periods anywhere from one to five years, so investors can build portfolios with deals of varying duration periods.

Investors understand it is a mid- to long-term investment, and they are happy to park their money with us. We make it clear that real estate is not like equities; value takes time to be created. It takes time to build a building. The key to a well-structured portfolio is diversification and we can offer fractional, bite-sized investment quanta that are realized almost every year.

How important is it for a manager of fractional investments to be regulated?

While there is a lot of demand for investments in real estate, there is also a bit of a stigma attached to real estate investments or platforms like ours. In Singapore, and I am sure elsewhere, over the years there have been scams and unregulated platforms which have gone bust, and people have lost a lot of money. So I think it is vital that investors work with platforms which have the relevant licenses.

We are regulated in Singapore, which is very stringent. We have to submit monthly and quarterly reports as well as be audited every year. It is quite a bit of compliance work, and we have three full-time staff working on it, but it is an important safeguard and reassurance for investors.

What is the growth potential for fractional real estate investment?

There is a gap that hasn’t been properly addressed. I worked as an investment manager investing on a global scale for large pension funds, but as individuals we had little chance to invest in those sorts of deals because we didn’t have access or enough capital.

“Real estate is not like equities; value takes time to be created”

Most private investors who wish to invest in commercial real estate cannot swallow the lot sizes, so there is a huge amount of capital which wants to get into institutional-grade commercial real estate but cannot do so.

Managers such as Blackstone have realized this and raised substantial sums, although with a million-dollar minimum investment. There is still a huge pool of untapped capital out there.

There is also a big opportunity here for managers to work with companies such as RealVantage to raise capital for their funds. Many traditional managers are still put off by the idea of accepting this type of investment because they worry about managing hundreds of investors. However, that is what firms such as ours do, and the manager only has to deal with us.

Fractional real estate investing is really in its infancy in Asia. We have a lot of investors who want access to these deals and to diversify their capital. I don’t see anybody here who is dominant in this area.

If you look elsewhere, in the US for example, there are large players which have done very well in that country, but we are targeting the entire globe. It is a sector which will continue to grow strongly.

Will the use of blockchain and tokenization be significant in this sector?

With a lack of demand for liquidity, I don’t see a significant demand for tokenization. We are not an exchange and do not offer tokens, nor do we intend to.

There are benefits to the blockchain technology: the immutability of blockchain means you cannot erase records and your tokens can be easily transferred to another party. I see potential benefits for real estate more widely, not just investments. However, I still believe there are key things which need to be ironed out, first of which is the question of ownership.

We use simple LP/GP structures where investors come in as shareholders of a company which owns the property, so you can trace your legal ownership all the way down to the asset. However, with regards to tokenization, the question is what do you really own? And, of course, you need liquid exchanges for liquidity, a theoretically liquid token is not enough.

However, I also believe that it is not the technology which is important, but the real estate and the real estate investment. We spend time curating the deals, working on due diligence, underwriting numbers, negotiating contracts to make sure managers do not short-change the investors. For investors, it is much more important to have good investments and good managers than the latest technology.