Investing in Commercial Real Estate

The positives of the real estate market can be summed up in two words: low risk, high reward. For decades, real estate at large has been one of the best performing asset classes for investors to hold within their portfolios, offering them diversity, reliable profit, and the gifts of leverage and diversification without incurring much risk. Most of those things drew me to the space after my exit from Vungle, and they’re ongoing benefits of the work I do to build and optimize the Zain Ventures portfolio. But the drawbacks of real estate investment are equally real, and have existed alongside the positives for the duration of those decades. Slow in technological uptake, exclusive to high-capital activity, largely illiquid assets—these and other headaches are part of the game of real estate investing. Or, at least, they have been part of the game. And a decade ago, almost any investor would have expected them to persist as the inevitable realities of an otherwise optimal asset class. But decentralized finance (DeFi) and its quick rise is positioned to change almost all of that. Following are my two cents on the major changes we can look forward to in the short and long term as real estate continues to transform under the new God of decentralization. From The Bottom Up: The Universal Impact of Lower Overhead. Imagine a big game of telephone. Now imagine that a sizable transaction—comprising what could be most of an individual’s net worth—needs to travel clearly and without mistake from the first person down to the last. This is just one form of trust as it relates to the business of real estate, and the telephone game metaphor is more or less how the industry has worked. Within each real estate deal, whether a sale, acquisition, a like-kind exchange or otherwise, a series of intermediaries make important things happen. Lenders need to vet the buyers, sellers need to engage an agent to bring the property to market, lawyers need to oversee agreements made at every stage. Envision the ballooning of the process, and the associated delays, with larger deals—major construction projects that build up entire neighborhoods all at once. To understand the potential impact of blockchain technology as it relates to real estate, imagine that telephone game a little differently. If an encoded, open-source, completely trustworthy entity took over for the people—the brokers, companies, banks, attorneys, and even government legislators—how would the deal then change? First, incredible amounts of capital that normally flow to those intermediary entities would be freed up to be used in other ways. Second, the time it takes for transactions to take place would be a fraction of the previous rate. Third, and maybe most importantly, all of this would be done through coded, unchangeable processes—the system wouldn’t ask us to dispense with any more trust. Looking even further, smart contracts can be pre-programmed to enact the next part of the deal once certain conditions are met. Faster, better, and less expensive deals will be the inevitable result; it’s a future fast approaching, one that I’m really excited about. Tokenization as a Path to Consumer-Centric Finance. The reduction of deal infrastructure is one of the earliest and most notable offerings that decentralized finance could bring to real estate. The next most important offering will come from tokenization; a by-product of the move to blockchain technology as the spine of real estate investing. The invention of digital tokens, which exist on the blockchain and represent data, is positioned to disrupt all industry processes. An asset, like a title, can be properly abstracted through the use of a token; tokens are viable representations of property ownership, or of shares of property ownership, within the blockchain system. Importantly, this means tokens can be traded uniformly from anywhere in the world. Because they’re real and defendable, investors can borrow real money against the digital token, and access the building’s equity without the traditionally impossible underwriting process. The same theory can be applied to raising capital. Tokenization can empower smaller groups of institutional investors to pool their money and open liquidity options to even smaller retail investors who want to be part of a deal. Without any central or regulating entity—even without banks—capital can be raised and allocated according to the vote of the group, the DAO, or the governing program in place. While fundraising was always open to group activity, blockchain-supported raises allow for a new level of trust building between non-related parties; we’re seeing people from all over the world come together and share a new level of faith in the blockchain, allowing them to get bigger things done faster to everyone’s benefit. Fractional Ownership: What It Means, Why It Matters. The same tokenization theory can open up pathways for smaller investors to own shares of a building; tokens can represent a division of assets, like property titles, that have been previously indivisible. This means retail investors can have more access to all kinds of real estate deals, joining for a square foot of a corporate building, a room in a duplex, or a plot of land in a big carbon sink forest. Fractional ownership represents a democracy of opportunity, and a move toward liquidity in a traditionally illiquid field; forces that are known to increase investment activity and create massive economic value for society at large. Trust, transparency, and speed are the three pillars that make the promise of decentralized finance one that can’t be ignored. Already, new value has been created through the presence of blockchain-enabled DeFi in the real estate space. The extent to which banks adopt and embrace the level of streamlined automation and trust-free transactions that the blockchain enables will be the extent to which they continue to be involved in the future of real estate. And for investors, both established and just starting out, taking an early interest, asking questions, and reading widely will be the best bet for continued relevance and proper market positioning in a future that’s set to be very different within the next exciting decade.

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