The Unfulfilled Potential of Fractional Real Estate Investment Platforms

By Franco Faraudo

We have heard about the benefits of fractional real estate ownership for almost a decade now. The idea of fractional ownership came with a promise to democratize access to a traditionally exclusive investment class by enabling smaller investors to pool resources. This model aimed to open the lucrative real estate market to retail investors, offering a way to diversify portfolios and tap into a potentially high-return asset class. Despite its potential, the journey of fractional ownership has been fraught with challenges and a few notable failures.

One of the more well-known failures in this space was PeerStreet, a real estate debt marketplace that declared Chapter 11 bankruptcy. Despite backing from prominent figures, including Michael Burry and venture capitalists like Andreessen Horowitz, PeerStreet was unable to gain enough traction to remain solvent. Founded in 2014, PeerStreet aggregated fix-and-flip loans but ultimately crumbled under financial pressures, jeopardizing thousands of investors who entrusted their money to the platform. Its high-profile failure also casts doubt on the entire real estate crowdfunding industry.

This year has already seen its share of casualties, too. Here, a startup that offered investments in short-term vacation rentals, collapsed in January. Despite securing $5 million in funding from notable investors such as Fiat Ventures and Joe Montana’s Liquid 2 Ventures, Here shut down due to unsustainable platform maintenance amidst rising interest rates, challenging economic conditions, and mounting financial losses.

LEX Markets also officially shut down this year after a disastrous 2023. According to Ben Haber, Co-Founder of Monark, the company that acquired the LEX Markets assets and IP, the platform struggled with premature market entry and a lack of demand from issuers and investors, exacerbated by rising interest rates. The company seemed to have an advantage over other fractional ownership platforms when it partnered with the Nasdaq stock exchange to list its buildings. In the end, its consumer-facing model met regulatory obstacles, and efforts to partner with larger brokerage platforms failed due to an insufficient supply of assets.

Not all stories of fractional ownership platforms are bleak. Cadre’s acquisition by Yieldstreet offers a glimpse of success in the space. Originally valued at $800 million, Cadre faced declining valuations and operational issues, but its integration with Yieldstreet might allow it to harness a broader investor base to aid in its recovery. Meanwhile, Fundrise stands out with its success in its model of actively investing in real estate projects, particularly in build-for-rent communities across the Sun Belt, and then offering fractional investments. Their model, supported by a significant credit facility from J.P. Morgan, offers a promising path forward in fractional real estate investment.

While the sector has seen its share of failures, like those of PeerStreet, Here, and LEX, the success of Fundrise and the potential revitalization of Cadre by Yieldstreet suggest the model is not dead yet. The future of fractional real estate investment will likely hinge on enhanced regulatory frameworks, technological advancements, and more interest in commercial real estate assets from retail investors. Like many technologies, the early failures of fractional ownership may eventually pave the way for future success.

Asset and Investment Management

Scaling Your Firm, Fund, or Syndicate in a Complex Real Estate Landscape

Real estate investment firms grapple with intensified 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 providing customizable investor portals, tools for promoting deals, and features for fund administration, firms can focus on scaling portfolios and building investor relationships rather than administrative tasks.

Investor Relations Is the New Frontier for AI

Artificial Intelligence, particularly Generative AI (GenAI), is having an impact on investor relations within the commercial real estate sector. GenAI is currently being used for various purposes such as summarization algorithms, investor chatbots, and platforms like JLL GPT. Although some people still prefer human interaction, AI chatbots are becoming more advanced and are able to mimic human behavior, which could potentially change user preferences. It is expected that AI will enhance and not replace investor relations roles, making the industry more competitive.

The DAO of Real Estate Investment Management

The concept of Decentralized Autonomous Organizations (DAOs) is gaining popularity in real estate investment. DAOs operate through blockchain technology and democratic voting. They have the potential to enable group ownership of assets, especially in real estate. While DAOs offer decentralized decision-making, they also pose risks, such as security vulnerabilities. It is essential to conduct thorough code auditing, and DAOs may benefit from oversight by management teams to ensure the responsible handling of investments.

Bytes

🕵️ Going private: Blackstone has purchased the publicly traded Apartment Income REIT with plans to make the company private, much like its BREIT fund.

🤝 If you can’t beat ‘em: Large commercial real estate firms are increasingly investing in tech startups to help them win the technology arms race.

🛠️ Home built: Commercial real estate developer and owner Hines has built their very own wealth management platform to help develop a deeper relationship with its investors.

Thank you for reading the Propmodo Technology Newsletter! I’d love your feedback, ideas, and tips: franco@propmodo.com.

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