Real Estate needs more accessibility
People have been locked out of the stability gained from Real Estate as home prices rise and salaries decrease. At the same time, many online communities formed around investing in crypto and the stock market, but none in this market.
The existing market
The European real estate market has been experiencing significant growth in the last decade: the investment volume in the European real estate market reached €234.8 billion in 2021 bringing the market to an estimated value of €1.6 trillion in 2021. At the same time, data shows that it has become more and more inaccessible to the population because the ratio of house prices to incomes has increased by 50% or more in some countries since the early 2000s.
In Milan, in the 1960s a worker could have bought an apartment in a residential neighborhood for ~7x his annual salary, in 2020 this number increased to 21x.
From an economic perspective, as interest rates rise, prices increase and wealth gaps widen, property ownership is perceived as a luxury. In fact, home ownership and affordability are at their lowest level in over 30 years. People are losing their purchasing power: people are struggling with stagnant (at best) wage growth: even in the USA, after adjusting for inflation, an average employed adult made 1.2% less in 2016 than they did in 2005. In Italy, the average salary decreased by 2.9% in the last 30 years. In these countries, while the average wage remained the same, the price of houses continued to increase. If more is needed, there is another key macro factor playing an important role: the total number of homes available for sale in the USA has fallen by more than 60% in the last 5 years, in Europe the situation is similar.
At the same time, people still believe strongly in the value of homeownership: nearly three-quarters of Americans say owning a home is the highest measure of achievement in life and 72% of millennials are interested in buying a home but think that can’t afford one. This has led to the so-called “Home-fantasy”. As homeownership becomes less of a reality and more of an illusion, many spend hours daydreaming about the security and stability that they could have if they could buy a home, by scrolling house marketplaces and listing websites.
Current market trends
In this macro environment, there are companies at the intersection of fintech and proptech that are trying to streamline the fragmented and long process of purchasing a home to make it easier and cheaper to buy a home. Then there are digital mortgage brokerages that minimize the need for intermediaries, others are enabling transactions that simply could not occur before with new financing products such as rent-to-own models, and securities such as fractional ownership:
- IBuyer model
Instant home buyer companies, let parties save time and money while buying and selling properties. With the value proposition of allowing home-sellers to close in days instead of months, Opendoor inspired the launch of similar models across the globe (Offerpad, Knock, Casavo, IMMO). In southern Europe especially, where the agents still play an important role in the market, iBuyers could offer a marketplace model to allow home buyers to find properties without brokers. We think that the business model is based on tight margins and it is operationally complex and financially inefficient: assuming 100 transactions a month, for example, the company will pay more than 5M in annual interest alone (assuming 250k property value) and feed its financial needs with hundreds of millions just in the credit facility. - Online lenders & mortgages
It takes about 30 days to finalize a mortgage in the USA, up to 120 days in Italy, and it requires strict qualifications and many in-person visits at the banks. Several companies are leading the way in revolutionizing the way we buy and finance homes. By leveraging cutting-edge technology, these companies are streamlining the mortgage process, making it faster, more efficient, and more accessible than ever before. Better, one of the most prominent fintech startups in the mortgage industry is using technology to simplify the mortgage application and approval process. Morty uses algorithms and machine learning to analyze borrower data and make lending decisions in real-time. - Rent to own and down payment
Other companies are disrupting other aspects of the homeownership journey, these are down-payment and rent-to-own models. Startups like Unison are offering new ways for borrowers to access back the funds they needed for the down payment in exchange for a share of the home’s appreciation. This enables borrowers to access a larger down payment, which can help them qualify for better mortgage terms and lower their monthly payments. Divvy Homes offers a rent-to-own model where renters can gradually build up equity in a home over time. Rent-to-own companies like Landis enable renters to build equity in a home while they rent. We believe these models are beneficial to those who can not afford to buy a home, thus we envision a large adoption among the younger generation. - Fractional ownership
Fractional ownership allows multiple investors to own a portion or fraction of a property, providing them with the opportunity to benefit from income and appreciation without the full cost and responsibility of ownership. In the last years, many platforms emerged, such as Fintor, Brxs, Arrived, Fundrise, with the ambition to encourage small investors to allocate capital in a hardly-accessible asset class.
We think that if coupled with an educational angle, these platforms could promote savings among young generations and shorten the years before buying a home.
Our investment theses
Homeownership, as it stands today, is not feasible for younger generations nor is it aligned with their lifestyle. Many young people turn to rent, which is even less affordable than buying a home because of their low purchasing power and house shortage. We believe there will be large companies built on new ownership models that adjust to this new reality and fill the large void in today’s market. To this extent, fractional ownership has the potential to make the market more accessible and inclusive to the masses. It can enable younger generations to build the down payment they need to buy their future home, something that has become increasingly challenging in today’s housing market. Moreover, we believe it can be a powerful tool for improving the financial condition of the underserved, the key is its ability to empower younger generations and enable them to take an active role. By democratizing access to real estate investment opportunities, fractional ownership can help to create a more equitable and inclusive housing market.
At the same time, rent-to-own can be a great option for renters who want to become homeowners but may not have the funds or credit history to qualify for a mortgage right away. By building equity in the home while they rent, tenants can improve their financial situation and increase their chances of qualifying for a mortgage in the future. Models such as Homeward are also making Real Estate more accessible. While these models are not without their risks and downsides, such as the huge amount of capital required, their potential impact on the housing market and society as a whole is significant.
If used responsibly, these models have the potential to create a more inclusive and equitable housing market that benefits everyone.
