Artificial Intelligence will usher a new era for homeownership
Homeownership is aspirational. Not because it provides a roof over our heads but because it often qualifies wealth, stability and income. The status of “landowner” has always trumped all other disqualifications. Women were not given the right to vote till a century ago but “land owning” women were allowed an exception. However, today the home ownership rates in the UK & US are collapsing. The chances of owning a home in the UK has more than halved in the last 20 years. The wealth inequality between generations is widening. “Generation Rent” has taken root in most metropolitan cities and their income is mostly being allocated to Rent, Uber & Student Loans.
In 2008, after the subprime crisis, many single-family homes were left abandoned on the market in the US. Their values were diminished and the banks had the new problem of finding liquidity to the asset that had acted as the collateral of their underwriting. The opportunity gave rise to a new asset class-The single family rental unit. Institutional investors like Starwood , Blackstone & Colony Capital spun out their new subsidiaries and acquired large portfolios which were rented to families who could no longer own such homes. These companies created a stable rental income stream and then went public to provide a liquid form to an asset class which would otherwise have been stuck as an illiquid liability on the balance sheets of banks. Their thesis was not unique. It was opportunistic. The biggest problem of real estate is that it is illiquid and expensive. The asset is defined by the physical boundaries of its Title Plan and then valued for the location, bricks and income from within these boundaries. Real Estate is an inflation linked asset class. Any artificial manipulation in its value shakes the very foundation of its benefits. Trying to make real estate “affordable” means looking for a solution to its “illiquidity” and definition as a physical asset. Real Estate is big and fixed. This is the problem.
The Investment Asset
The aggregation of real estate into an income producing asset class was institutionalized by the legalization of REITs. Real Estate Investment Trusts or REITs were ordered by President Eisenhower under the “REIT Act” as part of the Cigar Excise Tax Extension of 1960. It gave investors an opportunity to invest in diversified income producing real estate in a tax efficient way. It was the beginning of democratizing of the exchange of a physical asset. In order to qualify, REITs are required to distribute 90% of their earnings in the form of dividends. Over 75% of their income generated must be from real estate related activities. In 1965 the first REIT went public. The REIT industry asset valuation increased from $1 Billion to over $20 Billion in 1975. The advent of “mortgage REITS” now allowed for the both equity and debt components to be traded on the public market allowing to benefit from the income streams of real estate without actually holding the physical asset. By the 1990s the REIT structure had become the preferred mode of holding any income producing asset in real estate. The rest of the world followed suit by legalizing REITs. In 1992, the Omnibus Budget Act by Bill Clinton allowed pension plans to now invest in REITs. By allowing pension funds to now participate in REITs, the real estate asset was now allowed to sit within the retirement portfolios of the general population. You may not own a property but somewhere in your pension scheme sits a part of real estate yield. This concept that one can own a part of the return from real estate without owning the physical asset continued to evolve into the 2000s. The low-cost investment option came in the form of REIT ETFs. An ETF or an exchange traded fund is a basket of assets that’s replicates an index in ownership and returns. It is a smaller ticket low management vehicle for mostly retail investors. By converting the physical asset into a tradable and exchangeable asset , REITs have played a giant role in their short 50 year lifespan in taking a step in making real estate accessible to all. In 2016 the equity market cap of REITs passed $1 Trillion. The trend towards the institutionalization of real estate is not going anywhere. In fact it is only going to get bigger. But this scale provides additional challenges.
The Operational Asset
“Managing the home” is something most of us experience every day. Traditionally the woman’s job was to ensure that all household chores were taken care off. The electric bill & mortgage letters were opened and kept before the husband to write the cheques. The garden was pruned and the house was always warm to welcome the children from school and the husband from work. The traditional woman is in fact a property manager. The man still decided when to refinance and to buy or sell, so that makes him the asset manager. Now imagine being the couple with 50,000 homes. The operation of a REIT is exactly that. A large landlord is not just responsible for counting the zeros on the rent collected every month. They are also required to perform multiple tasks. Their roles include that of trading, maintenance, administration, leasing, accounting, advertising, security, janitorial, construction and not to mention equity management. However, the rent that is collected or the “market value” of the asset is not linked to the cost of these operations. It is driven by market forces of demand and supply.
In order to make real estate a tradable asset it needs to be delinked from its operations and converted into a tradable commodity. The 1991 real estate crash in the US was the first real downturn that the REITs faced since their inception 30 years ago. The REIT stock prices decreased well before the decline in the price of the private real estate and similarly the recovery was seen in the share prices before any change in the actual asset value was seen. The market forces were priced in completely in separation to the way the portfolio of assets was run. The need for “efficiency” is not based on just doing a good job but around the concept of decoupling expenses from the trading forces of the market. The idea that Artificial Intelligence is critical to Real Estate is based within this theory. The potential of AI to automate the role of trading, maintenance, administration, leasing, accounting, marketing, and equity management allows for a world where the operations of the asset is in fact predictable and static. The potential of AI allows for a the create of a scalable and predictable cost of trading.
If today the whole world decided to contribute all the real estate in the world into one large pool and accepted equivalent parts of the pool as a securitized asset, it will still need someone to manage this global portfolio. And similar to every condominium owner, your investment will be stuck with unpredictable and every increasing costs of managing not just one but multiple assets. The biggest barrier to the conversion of real estate into a liquid asset class is its crisis of management and the only possible solution requires investment into AI.
The New Asset
In the first half of the 20th century, most large estates were split into smaller parts. The large homes were slowly converted into apartments. Today these apartments are being converted into rooms and dorms. The disruption that is caused by the new incumbents like Airbnb & WeWork is an indication of a market demand for a liquid and tradable asset class. While the idea of co-working and shared living represent the demand for user flexibility, it is also linked to the structure of ownership of real estate. Globally the ownership of real estate can be broken down into “institutional ownership” or “strata ownership”. The institutional owner is a landlord that owns the whole building or estate and everything within its “Title” is the landlord’s responsibility. The income generated in owned by them and so are the responsibilities and expenses. The “Strata” owners represent portfolios that are made of legal entities which may not be physically joined. When investors buy properties in a Condominium, they are buying the right to own the physical space within the confines of walls of an apartment or house. The management of strata ownership models often result in the birth of “aggregators” who assist in bringing scale to operations. These aggregators today our agents , property & asset managers. In strata ownership, you can even have multiple stakeholders coordinating between the ground lease, block owner & apartment owner. For real estate to be securitized into tradable parts, it needs to be a stable asset without any leakages. Traditionally long term leases represented this stability. This guaranteed income stream reduced the market risk and the terms of the lease often mitigated operational risk. But the advent of shorter leases and flexibility requires pricing to be live time and optimized but at the same time reducing if not maintaining steady the operating costs of doing so.
The future of real estate will be heavily driven by the investment we make into automation today. In a world where the asset can be managed using the scalability of artificial intelligence and built with factory driven automated processes, the trading of real estate will no longer need separation of leases and titles. The use of technology to create virtual tokens and a marketplace can create a new form of securitization for the asset class. When people talk about the need for AI & Blockchain in real estate, they are often referring to the possibility of this world where real estate ownership and income streams become easily accessible to all. The new asset class would be exchange traded tokens possibly authenticated by Blockchain technology. There tokens would represent your room or a quarter of the room that you live in in addition to a small office space in New York. The “rent’ or “income” paid to have the right to park your bed in a room will be linked to your ownership of real estate tokens. And when you pack up that dorm room and move to your first home, you would trade your token and buy new ones to upgrade to your first studio apartment and the exchange would result in gains or losses.
By embracing Artificial Intelligence and its ability to make real estate liquid and accessible, we can give new definition to homeownership and create a new generation of real estate securitization.
About the Author
Tripty Arya is the founder of Travtus - an AI driven solution for property management. Travtus is the home of “Adam” an automated bot which can take calls, texts & chats with all stakeholders to coordinate interactions. She has trained as an Architect at Cornell University and has an MBA from Columbia University. In her 10 years of experience in the Real Estate industry, Tripty has developed residential projects in Mumbai and run a construction company in Singapore before making London the home base for her pursuits in technology.