Will Mitchell on Why Fractional Ownership is Bad for the US Retail Investors
At the CRETech Conference last week, Brad Griewe of Fifth Wall Ventures and Josh Stein of Harbor discussed the three main values of a fractional ownership of real estate as being:
- Liquidation Premium
- Opportunity for Foreign Investment in US Real Estate
- Real Estate As The Best Way to Generate Wealth
While the three items can provide value to existing real estate owners, the tokenization of real estate is bad for retail investors and makes real estate even less accessible for wealth generation.
The liquidation of an asset from a private asset to a public asset is a one-time event. Once it is public, the shares of the asset have already had the price of the liquidation premium priced in.
Similar to a stock IPO, once the stock is public, a retail investor does not gain any advantage in value from the liquidation premium. Additionally, private investors would need to compete with public investors to acquire real estate assets. This opposition will make it harder for private investors to purchase properties because, while they plan to keep the asset private, public investors plan to generate value by liquidating the property.
Opportunity for Foreign Investment in US Real Estate
Much of the increase in value in US real estate over the last decade has been the result of foreign investors looking to park money in the stable US dollar and economy. Making this access easier for foreign investors will drive up the demand for US real estate, while the supply will remain the same.
As a result, the cost of US real estate will continue to rise making it even harder for US retail investors to gain access as foreign investors are willing to accept much lower returns.
Real Estate As the Best Way to Generate Wealth
Historically, real estate has been a great way to generate wealth because of three items: it replaces an existing cost (rent), and it offers both a mortgage interest deduction and a principal reduction. When buying the fractional ownership of a building, the investor does not get any of the above.
As Stein was emphatic in noting, the assets currently being tokenized are debt free. Selling ownership in a building with debt is more complicated based on the proposed blockchain mechanics of tokenization. For example, if the property owner decided to tokenize 20% of the building, and now those tokens are on twenty different wallets, almost instantly he won't know who owns that 20% of the building. In the event of a foreclosure, it becomes challenging to inform any of the fractional investors.
In short, tokenizing and the partial ownership of real estate will make it more difficult for domestic investors to generate wealth through real estate. The liquidation premium and foreign investment will increase the cost of real estate making it hard for the next generation to acquire real estate, which is where they will gain access to the actual wealth creation. Luckily, as the tokenization of real estate is limited to assets without debt at this point, it should be awhile before this tokenization has an opportunity to gain widespread adoption.
About the Author
Will Mitchell is the co-founder and CEO of Contract Simply. As a former real estate developer, he oversaw $400M of construction loans while developing nearly 800 homes and millions of square feet of commercial real estate space. He presents as a thought leader on topics related CRETech, PropTech, FinTech, and RegTech. Will got his undergraduate degrees in Architecture and Structural Engineering from the University of Virginia and an MBA from the University of Texas. www.contractsimply.com
- Will Mitchell
- Contract Simply
- tokenization of real estate
- Liquidation Premium
- Fractional Ownership of Real Estate