Part 6 - Perspectives on Banking - Transformation of Property, to be Fit for the 21st Century.

Allow me to describe a future state where Property is managed in a new Digital Property Ecosystem through Blockchain DLT, whereby the Function of Global property Investment, Borrowing, Purchase and Sale are dematerialised, resulting in a societal evolution with regards how we think about and engage with property. Wow! ... you must be kidding?!, … No, … read on!

This is a vision of a Global Property Market that has real time functionality, access, liquidity, divisibility, fungibility and immutability, enabling transformative growth in retail and Institutional activity.? Specifically, the transformation of the small borrower and investor experience journeys, and the building of a new property asset class for Institutional and private Investors, all of which will compliment and/or disintermediate current providers and channels, leading to new enhanced value creation.

Background: I’m going to allow more numbers and metrics for this bit! ?The Global Property market is the largest Asset Class in the World and is the largest store of wealth, at about $325 trillion, is more valuable than all global equities and debt securities combined, and equates to almost 4 times Global GDP, (Saville Research Sept 2021). Residential is by far the largest real estate sector, accounting for 79% of all global real estate value, ($256 trillion). ?Ten countries, (US, Japan, Germany, France, UK, China, South Korea Canada Italy and Australia) make up 75% of the Global Residential total. 43% of Residential Property Wealth is concentrated in Europe and North America, despite being home to only 17% of Global Population.

Residential Property, notwithstanding some significantly volatile periods, has increased in value substantially over the past 20 years, e.g. 207% nominal increase in the UK. ?Over the past 5 years the US, German, French and UK markets have increased by 56%, 44%, 26% and 25% in nominal terms.

Property transactions are notoriously slow and bureaucratic. ?The legal and financial processes around property ownership and trading are cumbersome and drawn out, almost entirely paper based and requiring significant number of parties, Lawyers/notaries, real estate agents, brokers, banks, public sector (property registration) etc. ?There are often significant inefficiencies, “re-do’s”, and poor documentation recording and security. ?Transaction documentation can be shared with many involved people/parties, often through non-protected links and communication channels. ?It can take three months to get a full mortgage approval from a Bank in the UK or US, and it takes c.12 weeks on average to sell a property in Europe or the US. ?The cost of transacting in property can be as high as c.10% of the purchase price in some particularly inefficient markets.?

Although REIT’s, and Property ETF’s continue to grow in scale and importance they are only part of the solution to increasing investment opportunities in Property. ?The global REIT market is estimated at c.$2trillion (EY 2021), with c40 countries around the world with either mature or emerging REIT investment vehicles. ?However, REIT market size at 0.6% of global property markets leaves enormous potential for more and other investment vehicles and approaches, particularly ones that are more specific on individual properties and geographies.

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Cultural disposition towards Property and wealth locked in Property assets. Property ownership is regarded as a very important goal, or aspiration in most Global societies/cultures. ??Land and religious wars over centuries have established a strong societal mindset about the importance of Property, “a man’s home is his castle” was a popular refrain, of course, today it is and should be “a person’s home is their castle!”.? The family home is typically seen as the primary vehicle of inheritance and the family home continues to be held in the family if at all possible.

This cultural disposition, when combined with the bureaucracy and timelines around property transactions results in a very illiquid market relative to other asset classes.? This in part results in many billions of unrealised or passive equity in Global and European Residential Property.

For example, the UK Residential Property Market alone is estimated to be c.￡8.7 trillion. It is very difficult to ascertain the free equity in this market, but typically c.40% of homes have a mortgage. ?Excluding all mortgaged properties leaves over ￡5 trillion of “wealth” in Residential Property. ?This is a very crude calculation but suffices to make the point that there is a vast equity quantum, which is passive and illiquid in the UK, and to a greater or lesser extent in every other European country.

Pensions Deficits, Societal change, longevity

The EU will have 35 million fewer workers by 2050, and almost 50 million more pensioners. ?Over 60's will account for c.33% of the population and the OECD estimates that pension costs will mop up an unaffordable 12% of GDP. ??The increase in population and increased life expectancy (doubled globally over past 100 years, for example in Europe over the past 20 years life expectancy has increased from 77.6 years to 80.1 years (European Commission - March ‘23) adds to the pension problem. ??Past mistakes where State pension schemes were underfunded, combined with misguided reductions in retirement ages and insufficient private pension formation leave us in a difficult position in many developed and developing economies.

17% of adults over 55 in the UK have no private pension savings, and the proliferation of Defined Contribution schemes over Defined Benefit Schemes in the past 30 years results in personal responsibility for retirement provision and the significant concern over quality of life in retirement.

Again, this brings the untapped equity in the housing markets to the fore as part of the solution.?

So,

-The Global Property market is enormous, much of this is unleveraged, people are living longer, public and private pensions are not sufficient to fund the gap, while property remains very/relatively illiquid and culturally regarded as “last option” to liquify. So, what should we do?