From individual to institutional investors: Trillions of prime Real Estate — out of reach
As we’ve already posted, one of the industry sectors most ripe for the introduction of new instruments for capital investment is real estate. For many reasons, some of which we’ve touched on, the real estate sector remains fragmented and is challenging to efficiently access for most investors — even the largest and most sophisticated institutional investors. The potential for blockchain solutions to this problem are enormous. But before going into that, in our next piece, its worth quickly looking more deeply into the idea that the real estate sector really is uniquely challenged.
The real estate sector is one of the most under-securitized sectors in most economies. As we’ve already shown, only a small fraction of the total universe of property is available for investment through the stock market in most countries. But how does this compare to all other industries? Is real estate really different?
An example — UK
Let’s use the UK as an example first. The annual total of all sales of goods and services by UK companies is roughly GBP 4 trillion. By comparison, the total annual volume of sales of goods and services by companies that are publicly traded in the UK is roughly GBP 2 trillion. These two numbers cannot be compared directly, as the UK listed sector includes non-UK companies and UK companies that have enormous exposure to international markets. Roughly 70% of the total revenues generated by FTSE 100 companies comes from activities outside the UK. And just over half the turnover of FTSE 250 segment (smaller companies) comes from outside the UK. Adjusting the total figure for these factors yields a total UK sales volume of around GBP 600 billion from the listed corporate sector — around 15% of the total amount of all measured commerce in the country.
Focusing on the UK property sector, it annually records around GBP 20 billion of rent paid to owners of office properties, another GBP 20 billion to owners of retail properties and a further GBP 50 billion of annual rent paid to owners of residential property. Rounding up for other sectors, it is estimated that total rents paid to landlords in the UK exceeds GBP 100 billion per year. By comparison, the total amount of rent collected by REITs listed on UK stock exchanges (almost all of which comes from assets located in the UK, but not exactly all) is roughly GBP 6 billion. Adjusting this for various factors, such as non-UK rents and including property companies that are publicly traded but not qualified as REITs the figure is estimated to be marginally higher, at GBP 7 billion. So the degree to which the property business (rent collection) is securitized on the stock market is roughly half the rate of the overall economy, when measured as a percentage of sales.
An example — USA
The figures are similar in the USA. The national economy generates roughly US$40 trillion of sales annually, including corporations (around US$30 trillion) and pass-through entities (a little over US$10 trillion). By comparison, the total revenue of all the companies traded on the major stock markets in the USA is approximately US$15 trillion. Of this, however, some 40% is generated internationally. As such, close to one quarter of all the commercial activity in the US belongs to publicly traded companies (in the US, excluding foreign companies operating in the USA). By comparison, it is widely estimated that under 15% of all the investment quality property in the US is owned by publicly traded companies (leaving out non-investment quality property). Therefore, the real estate sector is probably about one half as securitized into publicly traded companies as is the entire economy overall. (Also note, very little US real estate is owned by foreign publicly traded companies whereas foreign companies are significant players in other US domestic industry sectors).
Conclusion
In other countries the numbers point to even lower degree of securitization of the real estate sector versus the overall national averages. While the data is patchy and not consistent, our sense of things is that the rate of securitization of real estate in the EU overall, for example, is roughly one third to one quarter the level of securitization of the regional economy overall.
So, not only is the degree of securitization of the real estate sector quite low in absolute terms, as per our previous posts here, it is significantly lower than the rate of securitization of the overall economy — pointing to the unique set of challenges facing capital investment in the property sector. Some of those problems have already been highlighted. And we believe blockchain can have a particular advantage to the real estate sector, which is the largest single industry by total volume of capital invested in the global economy.
Final remarks on methodology
An aside for those readers who may be wondering why we chose to make the comparison based on percentage of total sales volume rather than in proportion to GDP or some other measure…we do not favour comparisons of equity market size to GDP, which we believe gives a dramatically misleading picture of the degree to which an economy’s capital markets are developed (developed in the sense of facilitating capital flows broadly to the local economy). Consider the example of Switzerland, one of the better illustrations. The total equity value of companies listed on the Swiss stock exchange is enormous relative to the national GDP (some 350% as compared to the advanced economy average of 100%). But this reflects mainly the fact that there are a small number of large Swiss companies with global operations. This market cap to GDP ratio in Switzerland provides no insight as to whether the Swiss corporate sector overall is owned privately or through the stock market. We do acknowledge that our approach is also far from perfect, for a number of reasons, but it does have the advantage of simplicity, insofar as the comparators are measuring the same variable — local sales revenue.
References
EPRA (2017). EPRA Total Markets Table. Available: https://www.epra.com/media/EPRA_Total_Markets_Table_-_June_2017_1499937766365.pdf. Last accessed 10th January 2020.
FTSE Russel (2017). The Global Sales Ratio, Global and Domestic Firms. Available: https://content.ftserussell.com/sites/default/files/research/the-global-sales-ratio_-global-and-domestic-firms-final_0.pdf. Last accessed 13th January 2020.
Gov.UK (2019). National Statistics: Business population estimates for the UK and regions: 2019 statistical release. Available: https://www.gov.uk/government/publications/business-population-estimates-2019/business-population-estimates-for-the-uk-and-regions-2019-statistical-release-html. Last accessed 07th January 2020.
The Guardian (2018). UK tenants paid record £50bn in rents in 2017. Available: https://www.theguardian.com/money/2018/feb/12/uk-tenants-paid-record-50bn-in-rents-in-2017. Last accessed 07th January 2020.
IBISWorld (2019). Sharing the wealth: Low interest rates have raised real estate values, benefiting the industry. Available: https://www.ibisworld.com/united-states/market-research-reports/real-estate-investment-trusts-industry/. Last accessed 08th January 2020.
IBISWorld (2019). Shifting foundations: A downturn in the property market is expected to lead to ongoing contraction. Available: https://www.ibisworld.com/united-kingdom/market-research-reports/real-estate-investment-trust-activities-industry/. Last accessed 13th January 2020.
Lundeen, Andrew; Pomerleau, Kyle (2014). Corporations Make Up 5 Percent of Businesses but Earn 62 Percent of Revenues. Available: https://taxfoundation.org/corporations-make-5-percent-businesses-earn-62-percent-revenues/. Last accessed 10th January 2020.
MarketScreener.com (2019). STOXX EUROPE 600 (SXXP). Available: https://www.marketscreener.com/STOXX-EUROPE-600-7477/news/Europe-s-listed-firms-expect-to-glean-514-billion-in-revenue-from-China-27945073/. Last accessed 08th January 2020.
Miah, Helal (2015). Analysis of the UK’s top 350 companies from The Share Centre. Available: https://www.share.com/siteassets/media/global/profit-watch/february-15/profitwatch-febfinal.pdf. Last accessed 10th January 2020.
Property Industry Analysis (2017). Property Data Report 2017. Available: https://propertyindustryalliance.org/property-data-report/. Last accessed 12th January 2020.
Siblis Research (2018). US Stock Market Total Earnings & Revenues. Available: http://siblisresearch.com/data/us-stock-market-earnings/. Last accessed 12th January 2020.
Silveblatt, Howard (2018). S&P 500® 2018: Global Sales: Year in review. Available: https://us.spindices.com/indexology/djia-and-sp-500/sp-500-global-sales. Last accessed 08th January 2020.
United States Census Bureau (2012). 2012 Enterprise Statistics Data. Available: https://www.census.gov/econ/esp/2012/esp2012.html. Last accessed 13th January 2020.
