Rising Interest Rates and Real Estate: A Blockchain Perspective
Meridio is a platform empowering investors with fractional ownership of real estate assets using blockchain technology. In this article, Meridio discusses rising interest rates in the US, issues with REITs/renting, and how blockchain can improve the many ills plaguing the real estate industry as it stands today.
At an estimated $217 trillion, real estate is the single largest global asset class. It’s also notoriously illiquid. Getting in and out of properties is difficult for renters, owners, and investors alike. The Federal Reserve’s recent interest rate hikes — and unknown remaining hikes planned for this year — will only exacerbate the liquidity problem. Access to financing will likely constrict to levels we haven’t seen since the housing market crash in 2008. Not only will the cost of capital increase for institutional and private investors, but the economic chokehold could also slide down to prospective home buyers hoping to build a little equity.
Currently, real estate investment is largely limited to two options: either full ownership of a physical property, or real estate investment trusts (REITs), which were introduced in 1960 and have barely evolved since. Real estate is clearly starved for innovation, and the rate hikes are bringing this conundrum into high relief. It is time to question the dynamics of legacy real estate institutions, rethink the concept of ownership, and consider what it means to rent or invest in real estate. At Meridio, we’re excited about exploring new and interesting economic models that tokenized real estate can enable.
The Problem with REITs
For investors who want access to real estate investments and still stay liquid enough to trade, a REIT has traditionally been the instrument of choice. It allows investors to buy and trade shares from a portfolio of income-producing real estate. REITs, however, have their drawbacks. When you invest in a REIT, you’re investing in a group of unknown — and potentially underwater — assets with no claim to ownership, not to mention fees up to 10% on top. Moreover, REITs have failed to yield target returns this year. While the asset class recently has made a slight recovery, it remains in the red across the board YTD. Our obfuscatory, fee-ridden, and underperforming REIT model leaves a lot to be desired. The micro-panic brought on by recent fed hikes are the shake-up we need in order to rethink the real estate sector’s investment paradigm from the ground up.
Blockchain Technology and Real Estate
It’s no secret that blockchain technology is poised to disrupt real estate markets. Even as long ago (in blockchain progression) as 2016, a study showed over half (56%) of real estate investors believed blockchain would transform the industry (IBT). While it’s still unclear to some how exactly this will happen, our argument is that the disruption is already underway. ConsenSys has already assisted Dubai with a blockchain implementation to transition a paper-driven title process to a trusted and fully digitized platform. The concept is proven: blockchain is the ideal technological infrastructure for secure and transparent record-keeping, increasingly-liquid assets, and democratized access. In real estate, blockchain-driven fractionalization has the potential to transform our traditional understanding of renting, owning, and investing.
A blockchain-based real estate marketplace would allow participants to unitize, or “tokenize,” a physical property into almost infinite slices. This model of fractional ownership makes it possible to invest in a large basket of diverse properties, which statistically would have much more consistent returns than buying a single real estate property. Of course many investors, retail and institutional alike, may not want to do the busy work of researching and selecting a large amount of various properties. As the market matures, however, there is no reason someone couldn’t offer these services for a small fee. Investor pools could form with a REIT-like manager that does the diligence work and builds a portfolio of a variety of real estate tokens. This could give investors the same investment exposure as buying a REIT, except with a much smaller fee, more transparency into the underlying asset financials, automated frictionless payouts of rental income, and more freedom to enter and exit the investment.
The Future of Renting
There are many ways tokenized real estate would benefit investors, but it could also democratize access for regular homeowners and renters alike. 37% of American households today are occupied by renters, the highest it has been in over 50 years. This trend has dramatically increased in the last decade after the housing market crash in 2008, and will likely persist given interest rates will continue to rise in the foreseeable future.
Given this accelerating global trend — a propensity to rent rather than buy — another advantage of tokenized fractional ownership could be to allow renters to build up some equity in the asset. Enabling renters to buy tokens for their leased property can provide new attractive benefits. By reinvesting dividends back into the asset, one could incrementally build up equity in the property, creating a positive feedback loop that saves them an increasing amount of rent each month. Additionally, when a renter holds any amount of equity in their home, it creates a strong incentive to keep the property in good shape, undamaged and up to date. This would be beneficial to token holders, property managers, and all other parties involved, perhaps so much that landlords would even offer discounted rent to token holders. As global trends continue to shift towards renting due to the restrictive nature of buying and increasing cost of capital, blockchain applications will be able to offer new and creative renting models that help the end consumer.
Looking Ahead
Home ownership, a long pillar of the American Dream, seems increasingly reserved for the wealthy. Blockchain is helping us imagine a market that is liquid and sustainable enough for everyday investors, owners, and renters to also get a piece of the pie. This is only scratching the surface of the new economic models and benefits tokenized real estate can offer. At Meridio we are building a new technological framework for the real estate industry that will blur the lines between renting, owning, and investing. As a ConsenSys formation, we are already seeing how blockchain technology, and specifically Ethereum, has completely changed how we think about ownership and manage our personal property. The rising cost of capital will be a catalyst for change, it’s time real estate catches up with the 21st century. Blockchain is the innovation that will take us there.
Disclaimer: The views expressed by the author above do not necessarily represent the views of Consensys AG. ConsenSys is a decentralized community with ConsenSys Media being a platform for members to freely express their diverse ideas and perspectives. To learn more about ConsenSys and Ethereum, please visit our website.
