Real estate, the world’s oldest asset class: is it ripe for disruption?

by | Apr 26, 2022

As the global economy takes stock of its position post-pandemic, a recent report from McKinsey reveals a startling statistic. Two-thirds of net worth in the 10 countries that account for about 60% of global GDP, is in real estate.

The report also highlights that economic growth in advanced economies has been lacklustre over the past two decades, whilst balance sheets and net worth that have long tracked it have tripled in size.

Property investment has long been the preserve of those who have wealth, but a gold rush is in motion. Technology has opened up investment opportunities for retail investors through fractional online investment, disrupting the long-stagnant market.

A rapidly growing market shaking up property investment

The online real estate investment market is forecast to grow from $15bn to $300bn by 2027. Those who currently play within this market are the HNWI and mass affluent, many of whom understand the risks or use financial advisers which adds a layer of protection, and can protect themselves when it comes to online property investing.

As this asset class is opened to retail investors with lower barriers to entry at more affordable levels, it’s vital that the market is regulated and managed appropriately. The result should not only offer guidance for growing businesses but protection for the next generation of fractional investors. There needs to be transparency and process to trust in the due diligence carried out on behalf of those who co-invest in real estate projects.

The UK has always been a leader when it comes to supporting the growth and innovation of evolving markets, whilst also protecting retail investors from higher-risk investments. The FCA recently consulted industry experts on the promotion of “high-risk” investments as part of a clampdown on misleading marketing in alternative asset classes. The likes of investment-based crowdfunding and peer-to-peer lending agreements were under the spotlight.

The UK regulator is not here to shut down new investment opportunities but to create protection through transparency, something they excel at. This recent consultation into alternative asset classes should be seen as an opportunity to improve them as they grow, rather than allowing a few rogue players to manipulate new investment spaces, which is what leads to high profile failures and distrust within the alternatives space.

Why we need to learn lessons from UK fintech success

A recent example of the UK regulator understanding a new concept and embracing it is fintech. As it stands, the UK is not only the fintech hub of Europe but second only in size to the US. Investment into fintech here in the UK increased by over 200% last year, much of which was driven by investor interests off the back of new regulations in the sector.

Both Lord Hill’s Review of UK listings and the Kalifa Review of fintech helped pave the way for a clear regulatory roadmap for strengthening this sector. You only have to look at the rise of Open Banking, in which the UK regulator has been instrumental, bringing innovative new services to retail banking and benefiting consumers, businesses and the UK economy.

With the rapid growth of the property investment platform market, we should look to lead the world on regulation, making sure the UK becomes a leading hub, as the world’s oldest asset class is finally disrupted.

It’s not just the job of the regulator to identify a new asset class and regulate it, those within the industry must also be on the front foot, proposing protection and regulation for customers as that market grows. It’s important to remember that the FCA does not always have the bandwidth to implement immediate rules and changes as new platforms and opportunities emerge.

Crypto has been a case in point, for which there have already been calls for asset regulation in this space to protect users. The necessary frameworks are already being put in place, but those within the crypto space should be at the forefront of that regulatory process.

This will help the FCA to move quickly with any necessary regulation, and more importantly, it gives potential end-users confidence in the space, rather than allowing that market to run wild and make the mistakes that turn investors away.

Industry leaders are doing their bit – now it’s over to the regulators

For the property investment space, the wheels are already in motion. The Association of Real Estate Investment Platforms (AREIP) was recently launched to ensure investors can accurately evaluate investment opportunities and their associated risks.

The Association’s ultimate goal is to create common market standards and to build investor trust and liquidity. The founders of AREIP recognised early on that there was a need for transparency, trust and sensible regulation to set the foundations for long term sustainable growth and mainstream adoption within the property investment market as it continues to grow rapidly.

In the global capital markets, Bloomberg manages a database for securities descriptions and data, S&P provides the market with securities risk ratings, and a multitude of trading exchanges help connect market participants to generate liquidity.

Any emerging asset class should be aspiring to build similar models because if they believe the market opportunity is truly global, implementing the necessary framework now, rather than later, is vital. For the online property investment space, we have implemented the building blocks that will reassure and protect investors, not just in the UK, but globally, because we can see that the world’s oldest asset class is changing, for the better.

Written by Jatin Ondhia, CEO and Founder of Shojin Property Partners.




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