We've been hearing about the benefits of fractional real estate ownership for nearly a decade now. The idea of fractional ownership carried the promise of democratizing access to a traditionally limited investment class by allowing small investors to pool their capital. The model aimed to open up the lucrative real estate market to private investors, offering them a way to diversify their portfolios and enter a potentially high-return asset class. Despite its potential, the journey of fractional ownership has been fraught with many challenges and some notable failures.
One of the most well-known failures in the space is PeerStreet, a real estate loan marketplace that filed for Chapter 11 bankruptcy. Despite backing from big names like Michael Burry and venture capitalists like Andreessen Horowitz, PeerStreet failed to gain enough traction to remain solvent. Founded in 2014, PeerStreet aggregated loans for renovations and resales, but eventually collapsed under financial pressure, putting thousands of investors who had deposited funds on the platform at risk. This high-profile failure has also called into question the entire real estate crowdfunding industry.
This year has already seen many casualties: Here, a startup that offered investments in short-term vacation rentals, filed for bankruptcy in January. Despite securing $5 million in funding from notable investors like Fiat Ventures and Joe Montana's Liquid 2 Ventures, Here shut down after rising interest rates, tough economic times, and mounting financial losses made it impossible to maintain the platform.
LEX Markets also formally closed this year after a dismal 2023. The platform entered the market too early, lacked demand from issuers and investors, and was exacerbated by rising interest rates, according to Ben Haber, co-founder of Monark, the company that acquired LEX Markets' assets and IP. The company appeared to have an advantage over other fractional ownership platforms when it partnered with the Nasdaq stock exchange to list its building. Ultimately, the consumer-facing model ran into regulatory hurdles, and efforts to partner with major brokerage platforms fell through due to a lack of asset supply.
The story around fractional ownership platforms isn't all doom and gloom. Yieldstreet's acquisition of Cadre signals a sign of success in the space. Initially valued at $800 million, Cadre has faced declining valuation and operational issues, but its combination with Yieldstreet could help it recover by tapping into a broader investor base. Meanwhile, Fundrise stands out for its successful model of actively investing in real estate projects, particularly in rental housing communities in the Sunbelt, and then offering fractional investments. Backed by a large credit facility from JP Morgan, the company's model points to a promising path for the future of fractional real estate investing.
While there have been some failures in this space, including PeerStreet, Here, and LEX, the success of Fundrise and Yieldstreet's possible revival of Cadre suggests that the model is not yet dead. The future of real estate fractional investment will depend on strengthening regulatory frameworks, technological advances, and growing interest in commercial real estate assets by private investors. As with many technologies, the early failures of fractional ownership may ultimately pave the way for future success.
Asset and Investment Management
Expanding the reach of companies, funds and syndicates in the complex real estate industry
Real estate investment firms are grappling with increased competition and investor uncertainty in today's market. To address these challenges, InvestNext has emerged as a platform aimed at simplifying the syndication process. By offering a customizable investor portal, tools to facilitate deals, and fund management capabilities, firms can focus on growing their portfolio and building investor relationships, rather than administrative tasks.
Investor Relations is New Frontier for AI
Artificial intelligence, specifically generative AI (GenAI), is impacting investor relations in the commercial real estate sector. GenAI is now being used for a variety of purposes, including summarization algorithms, investor chatbots, and platforms such as JLL GPT. While some people prefer human interaction, AI chatbots are becoming more advanced and able to mimic human behavior, which may change user preferences. AI is expected to enhance the role of investor relations, not replace it, but make the industry more competitive.
DAO for Real Estate Investment Management
In real estate investing, the concept of decentralized autonomous organizations (DAOs) is gaining popularity. DAOs operate through blockchain technology and democratic voting and have the potential to enable group ownership of assets, especially in real estate. DAOs offer decentralized decision-making but also carry risks, such as security vulnerabilities. Conducting thorough code audits is essential, and DAOs may benefit from oversight by a management team to ensure responsible handling of investments.
Part-Time Job
🕵️ Going Private: Blackstone plans to acquire publicly traded Apartment Income REIT and take it private, similar to its BREIT fund.
🤝 If you can't win: Large commercial real estate companies are increasing their investments in tech startups in an effort to win the tech arms race.
🛠️ Build Your Home: Hines, a commercial real estate developer and owner, has built a proprietary asset management platform to build deeper relationships with investors.
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