Institutional investors and crowdfunding are coming
- Institutional investors have recently come under fire for eating up market share in real estate.
- Meanwhile, crowdfunding platforms have promised to democratize housing markets for retail investors.
- Two industry experts have shared their thoughts on what’s really going on behind the scenes.
Real estate has been a hot commodity over the past couple of years, largely due to the massive influx of institutional investors into the housing market. Along with the rise of these deep-pocketed investors, there has been a surge in popularity for real estate crowdfunding platformswhich allow smaller, non-accredited investors to get in on the action as well.
But as investors and wealthier work-from-home transplants from metropolitan areas have flocked to suburban housing markets, fears that market premises will be overpriced have grown. These investors may also contribute to the housing shortage currently facing the United States, postponing the dream of home ownership for many Americans.
Insider asked two real estate experts to share their thoughts on how the mix of institutional investors and crowdfunding investment platforms has affected the housing market — and what the implications will be for potential homeowners.
“Investors went wild”
According to independents housing market analyst John Wake, the pandemic-induced era of easy money has brewed the perfect storm for a land grab in the housing market. The catch, however, was that instead of the average Joe buying his first home, the floodgates were opened for a massive deluge of investors seeking new assets after the stock market sold off in early 2020.
“My impression of all of this is a bit like investors have gone nuts,” Wake told Insider in a recent interview. He believes the most important trend in today’s housing market is the sheer amount of capital looking for new homes.
The influx of these institutional investors has only exacerbated the massive imbalance between supply and demand real estate market is currently facing, Wake said.
“The supply of housing is growing more slowly than the supply of gold globally. So when you get slightly increased demand from investors, that has a disproportionate impact on prices and then pushes people out,” he explained.
Wake also thinks institutional investors are more inclined to hold on to their properties, which is why he isn’t optimistic that supply will catch up with demand anytime soon. In previous housing market booms, such as the growing market bubble in 2005, mom and pop investors would sell their properties as soon as prices peaked, creating a glut of inventory over the next two years.
“I don’t think we’ll have those foreclosures this time unless there’s a bomb buried in the funding from those institutional investors,” he said.
A new entry into a crowded housing market
While institutional investors have certainly strengthened their presence in recent years, individual investors have nevertheless been able to penetrate the housing market thanks to a new investment strategy: crowdfunding.
Crowdfunding platforms such as Fundrise have grown in popularity due to their promises that with just a few dollars, investors can earn big returns in one of the hottest asset classes in the market today. Wake thinks it’s certainly opportunistic – people tend to act whenever there’s good news – but he’s worried about the long-term effects of this trend, particularly if it continues to destabilize global markets. accommodation like Phoenix.
Funding from institutional investors can also be confusing at times, with Fundrise appears to be paying too much for its build-to-let communities. But when calculating the value of these neighborhoods as a de facto apartment complex rather than individual homes, the math works in favor of the platform.
Wake says there’s also plenty of room for error because this method of asset valuation is so new. For example, there is a lot of risk in calculating rents if investors simply extrapolate rent increases on the assumption that rents would continue to rise indefinitely.
“But what if they don’t? It’s a totally different scenario than we had last time, because rents didn’t go up at all in 2005 and 2006,” he said. he declared. “So now to skyrocket them – it makes this time different. It changes the math.”
Retail investors may be taking on more risk than they think
Tomasz Piskorski, a real estate professor at Columbia University Business School, is more optimistic about investors — including crowdfunding platforms — and their impact on the housing market.
“There’s this thing about blaming institutional investors for driving up prices,” he told Insider in a recent interview. “They’re buying single-family homes and converting them to rentals, pushing back some people’s dream of homeownership.”
“I don’t think institutional investors or crowdfunding platforms have a large and meaningful impact on prices…not in relation to low interest rates, migration trends, the impacts of working from home on prices,” continued Piskorski. “It all depends on the acquisition price.”
Piskorski says institutional investors might value a home more than a single-family owner because they can create more value for those properties through professional management.
For example, owners who own multiple properties might not find as much value in their vacation homes if they don’t spend the majority of their time there. But if a professional real estate company can instead buy that property and rent it out most of the time, the efficiency of the asset could be maximized, Piskorski pointed out.
“Professional rental companies are in some ways bringing more efficiency and they could help with affordability issues due to very high mortgage rates right now. A lot of people just can’t afford to buy a house; they could have a lot of financing costs,” he explained. . “It’s good that there are companies that offer single-family rentals.”
In fact, Piskorski thinks an influx of professional management might be just what housing markets need right now, given that the more than 10 million single-family units currently offered for rent in the United States are ” generally very badly managed” in terms of maintenance requests. and other factors. “I think single-family rental businesses are helpful responses to market needs,” he said.
Piskorski said rentals also help mitigate some of the potential risks of home ownership, such as property devaluation in the event of an economic downturn. Additionally, he views crowdfunding as an alternative option for retail investors who may not be able to invest in the real estate market using traditional methods, which may include barriers to entry such as requiring investor accreditation.
To understand why, Piskorski delved into the history of crowdfunding. “In 2012, real estate prices were still very depressed and it was not easy to obtain a lot of institutional capital to invest. The idea was therefore to provide an alternative source of financing to encourage public investments in the ‘real estate,’ he said. Explain.
Crowdfunding has a plethora of benefits, including being both a cheaper and easier source of funding for real estate projects, and allowing these platforms to buy and operate properties at a lower cost than a single investor. And on paper, it’s about providing a public service by democratizing access to private equity.
But historically, private equity and crowdfunding returns have on average underperformed the public REIT market, especially when factoring in fees, Piskorski said. He’s also concerned about the so-called “lemon market” – essentially, that some crowdfunding platforms will get the lowest bids that institutional buyers won’t invest in.
According to Piskorski, crowdfunding platforms could potentially pose a lot of risk to a small investor, who might not have the financial sophistication to fully understand and monitor their investments. The industry itself also lacks regulation, so companies are able to promise high returns while disclosing very little information.
“Just to be very clear, I wouldn’t want to come across as someone who is against crowdfunding…I think there are some very legitimate companies out there,” Piskorski said. “But again, if you were to ask me honestly as an economist what the problem is, I wouldn’t say it’s on the asset side. It’s more about whether these companies are delivering a fair return to a diverse base of retail investors given that there is very limited oversight and disclosure regarding the quality of the transactions they enter into.”