There’s nothing that makes the global market plummet like a pandemic. It’s clear that fear, panic and hysteria exacerbate the natural economic slowdown. While this is bad news for the majority of the businesses and many investors who got into the game when things were good, this is good news for anyone looking to jump into the market and get rich, provided they have liquid assets to invest.
This pandemic or any global crisis that creates a disruption on this level shows the need for tokenization. Tokenization would allow businesses to get a breather and the liquidity they need. The more liquid assets are, the more accurate is their price and the more likely they are to find investors or lenders in the time of need.
Now let’s talk about what is likely to happen to the real estate market.
Real Estate Remains the Best Asset to Survive the Slowdown
Source: Danneker & Associates
The above study compares inflation adjusted returns on various forms of investment from data in 16 advanced economies over the past 145 years. In the long term, real estate provides the highest and most stable return. While stocks and bonds have shorter bursts and cycles of prosperity, the best way to get through the downturn is to invest in real estate.
While the majority of high tech projects seeking funding have hit a snooze button, real estate projects must continue. The nature of the business does not allow property projects that have begun to be put on hold for very long. With less options for investment in the market, developers may resort to more expensive capital in order to finish the projects.
Rental income is vital
Rental income makes up half of real estate investment returns. Even in economic downturn people and businesses pay rent while appreciation may experience a hit. That’s why yielding real estate is likely to survive this period. Food and essentials-related retail and warehousing will thrive as consumers are stockpiling on supplies. Existing shopping malls and much of the hospitality industry will suffer. However, new projects in these subclasses have an opportunity to make some good profits because they will likely be up for sale when the economy recovers.
High-risk products are much more affected by the downturn
Source: Danneker & Associates
The news of the market crash causes hysteria with markets plunging even further. That’s why you have a great opportunity to earn profit from the misery in the market – people sell their stocks at a very low price in an effort to recoup some of their investment. Real estate returns (the ones depicted above are for residential projects), in contrast, are much more stable.
I am going to go ahead and address the elephant in the room – perhaps real estate returns are much more stable because real estate assets aren’t as liquid as stocks and can’t be sold off quickly in mass hysteria? Perhaps tokenization will assist mass hysteria to eradicate the stability of the return?
I thought about this possibility and while simulation models need to be built to provide a concrete proof that tokenization will not prompt a mass sell off of real estate in times of crisis, here’s my assessment:
- Property asset class is inherently different from equity in following ways:
- Its demand is based on the fact that people exist. They need a place to live, a place to work and a place to shop. The price of stocks, on the other hand, is based on product demand and while companies are in a growth stage, the main demand for their product in development is actually the demand for their stock and the expectation that it will turn into a successful product. If there’s a doubt the company will make it, the stock plummets.
- In real estate, if a project fails, most of the time, there’s still land that has value that will likely grow, post crisis. Companies’ highest value is in human resources. The first thing companies do during a crisis is lay off workers – the value actually goes down, not just the price of stock.
- Property has built-in cycles. Sometimes you can freeze the project to wait for the storm to pass. Companies don’t have this privilege. They have too much overhead and set monthly expenses.
- Tokenization of real estate will make property more liquid like stocks… However, when markets plummet and someone wants to sell their property, they still have an idea of its value. While company values are highly subjective (yes, despite some methodologies to evaluate companies, a lot of the value is based on both market projections and value of competing companies), property valuation has a very specific globally-recognized methodology. My assessment is that with tokenized assets, property prices will fluctuate 5-10% during economically stable times and 20-30% during crises. We won’t see 100x reduction in property stock prices like we see in stocks. Case in point: public REIT prices in the past 40 years:
As you can see the worst fluctuation in public real estate financial products was in 2008 during the great recession and the fluctuation was up to 30%.
- The final reason why we won’t see huge bull and huge runs in the real estate industry is the fundamental difference between real estate investors and stock investors. Property investors are not day traders. Yes, there will be liquidity in the market which will allow raising capital more efficiently and for the property investors to invest at any time throughout the cycle of the development based on their risk appetite. However, property investors understand that real estate is an asset class that provides limited yet stable returns and are investing in this asset class with the purpose of diversification and de-risking their portfolio. Therefore, they are less likely to sell off their property-based securities in the event of mass market hysteria out of fear of losing their savings and will do so when they really need the funds.
There’s even good news for savvy investors in the downturn!
It turns out that asset returns are not tied to the GDP. If anything, asset return growth rate negatively correlated with economic growth. Over time, returns on these asset classes tend to grow on average around double the speed of the country’s economy as a whole—measured by GDP (see chart below).”
Source: Danneker & Associates
On average, combined assets like stocks and bonds perform several times better than GDP growth. This is good news for investors who can grow their wealth and bad news for those who work for a living as their wages will not keep up with rising inflation and property prices. The wages are tied to the real economic growth while income from investment is tied to a variety of factors impacting the rate of return including the expectation of growth. Plus most tax systems favor investors over employees.
So what’s going to happen to my real estate portfolio?
What usually happens. It will bounce back. Be patient if you can. You may still be able to leverage your investment to obtain consumer loans in order to survive the slowdown. Or you may be able to leverage them to obtain loans to invest in new assets that are now available at a reduced price.
Traditionally, the more diversified your portfolio is, the better off your chances to survive the downturn. Tokenization enabled fractional investment and lowered the threshold to invest in AAA projects and landmarks. Now almost any property investor could own a diversified portfolio of assets with just a few hundred or dozens of dollars to invest. If you’re interested in learning more about investing in security tokens backed by property please fill out the form here.
What about my real estate project? What should I do to hedge against the risks?
Hedging or derisking is done through diversifying. If you diversify your capital strategy, you are likely to stay afloat. Diversifying your capital strategy involves increasing exposure to investors you may not have considered before, possibly lowering your thresholds, increasing transparency, making it easy to invest and creative marketing. Consider tokenization – you are opening the possibility for investors to sell their stakes when they need liquidity, providing a way for global investors to get involved and lowering barriers and minimum amounts to invest.
If you’d like to learn more about tokenization for your property project or fund, please fill out the form here.