Navigating the digital frontier for REITs

Real estate investing was brought to the masses when President Eisenhower signed legislation establishing real estate investment trusts. For the first time, individuals could invest in lucrative commercial real estate sectors like they do in stocks, without directly owning or managing the properties involved. Today, the democratization of real estate investing is being driven by technology.

Proptech and fintech advancements are making it easier than ever to invest in real estate, but new opportunities come with additional complexity and new forms of risk that inexperienced investors may not be ready to handle. The ease of online platforms and crowdfunding can give a false security about the complexity, nuance and regulations inherent in real estate investing, leading some individuals to invest without fully understanding the market, potentially exposing themselves to financial losses if they do not know how to use the new tools.

Technology has emerged as a guiding light illuminating the way toward democratized real estate investing. With the advent of innovative technologies, doors are opening for a more inclusive investor community. Online platforms and investment apps provide users with comprehensive market insights, while crowdfunding platforms allow individuals to pool resources, and blockchain technology adds an extra layer of transparency and security. In this digital era, technology is a catalyst reshaping the landscape of real estate investment by inviting new participants to partake in the wealth-building potential of this traditionally exclusive realm.

Proptech firms see funding

The fractionalization of real estate ownership is a leading force behind real estate democratization, allowing individuals to own a piece of a property or portfolio. Instead of owning shares in a REIT that owns the assets, fractional ownership allows investors to directly own a portion of the property, giving investors more direct control during decision-making. While REITs offer higher liquidity, fractional ownership – enabled by online platforms like Fractional, Arrived and RoofStock – offers the potential for higher returns and higher risk.

$240m

Amount fintech start-up Roofstock raised for its shared rental home platform, at a valuation of $1.9bn

210,000

Number of active investors reported by fractional real estate ownership platform Fundrise, with an AUM
of $2.4bn

Serious money is getting behind the platforms. Amazon mogul Jeff Bezos’s personal investment company, Bezos Expeditions, is backing Arrived, which raised $25 million in a recent Series A round. Roofstock also raised $240 million at a $1.9 billion valuation. Fundrise, a fractional ownership platform with a focus on commercial real estate investing, reports 210,000 active investors and $2.4 billion in assets under management.

Reducing the capital requirements for real estate investing does not reduce risk, though. While individual investors may have less money in the game, the same investment principles apply no matter the capital allocation. Due diligence first starts with researching the crowdfunding platforms’ track record, regulatory compliance and reporting processes. Just because processes are easier thanks to advances in technology does not mean investors should take the risks associated any less seriously.

Some platforms, like Cadre, are working to provide users with the information they need to better understand commercial real estate investing, offering educational resources to fill in the knowledge gaps of amateur investors.

“I founded Cadre to expand access to premier real estate investments. With a tax-advantaged structure, lower investment minimums and a strategy focused on delivering yield with lower volatility, our fund is positioned to [help] more investors achieve better financial futures than ever before,” says Ryan Williams, Cadre’s founder and executive chairman.

Crowdfunding investment can still be costly. Many fractional ownership platforms have a variety of fees that can eat into profits, but success is still possible.

Fractional ownership platform Arrived is reporting total returns ranging from -18-136 percent across 329 properties. Annualized rental income is far more moderate, ranging from 2-8 percent. It is important to note that of the 329 properties on the Arrived platform, 52 depreciated since being acquired.

Big data, bigger solutions

Distributed ledger technology is furthering democratization by breaking down barriers in real estate investing. The transparency and security provided by blockchain ensures trust and accountability in property transactions. Leveling the commercial real estate investment playing field with blockchain technology and digital currencies allows a more diverse group of investors to participate in the real estate sector.

New property management software and related platforms are streamlining tasks such as rent collection, maintenance scheduling and tenant communication, giving investors the tools they need to automate the daily operations of their portfolios. Data analytics and reporting software provide real-time insights into property performance, occupancy rates and financial data, allowing investors to make more informed decisions. Instead of relying on REITs with built out operational teams, investors can seamlessly become operators themselves by integrating this technology.

Last year, over $4 billion was invested into AI-powered proptech, according to research by global brokerage services firm JLL. AI was ranked among the top 3 technologies expected to have the greatest impact on real estate over the next three years, JLL’s 2023 Global Real Estate Technology Survey found.

“The vast quantities of data generated throughout the digital revolution can now be harnessed and analyzed by AI to produce powerful insights that shape the future of real estate,” JLL chief technology officer Yao Morin says.

“The vast quantities of data generated throughout the digital revolution can now be harnessed and analyzed by AI to produce powerful insights that shape the future of real estate”

Yao Morin
JLL

Worryingly, the report found that while AI is poised to transform real estate investment, few professionals fully understand the technology. AI-powered solutions are already being implemented across real estate sectors to help sort documents and standardize data across portfolios. Complex AI algorithms are used in price modeling and prediction for rents and investment forecasting. AI can even mine so-called Internet of Things data from on-site sensors for automated facility management.

Some say the use of AI may be working against the democratization of real estate investing in its current state. The human and technological resources needed to leverage AI are still incredibly expensive, requiring immense computing power and skilled professionals who are in high demand, making it primarily a tool for major players that can afford the costs.

Browser-based tools can help boost individual productivity, but harnessing the power of AI-based data analytics for investment management is still emerging and limited in application. Though there is great potential for transformation, further iterations of AI tools are needed to turn the technology into a force of democratization.

Innovations in fractional ownership and streamlined property management systems are giving individual investors tools to have more direct control over their investments. While blockchain technology and digital currencies are lowering traditional investment barriers, further development and accessibility of AI-powered tools are needed. Tools themselves, however efficacious, are a way to amplify investor knowledge and insight, not replace it.