Real estate is about as traditional an asset as there is, but even so, it is not insulated from digital transformation. Over the last few decades, it has been common to describe internet changes as Web 1.0, Web 2.0, and now Web3. Web 1.0 was the great opening of the information superhighway where users mostly received content. Web 2.0 marked the shift to the more user-generated content that dominates today. Web3 describes a vision of the internet where people participate in governance and ownership through DAOs and “smart contracts” undergirded by blockchain technology. It is not clear where we lost the ‘.0’ this time around and these changes are still very much a work in progress.
It hasn’t helped to understand this potential transformation that much of the public perception about these shifts is caught up in the cryptocurrency roller coaster. All cryptocurrency is blockchain, but not all blockchain is cryptocurrency. A connected process is that the increasing number of internet-enabled devices creating data over the last few decades led to the rise of “big data” analytics.
Digital twins of brick-and-mortar buildings and fractionalised real estate ownership are two current developments supported by these immense technological changes. Real-world applications of exciting technologies with uncertain outcomes, possibly presenting opportunities for forward-thinking family offices.
Digital Twins (and the Metaverse)
Digital twins are digital replicas of physical objects. These range from the human brain, and complex mechanical devices to buildings. Leading technology companies like AWS and Microsoft have created software tools to create digital twins, pitched as ways to aid efficiency and operations in complex systems. Digital twin technology is currently being deployed as a tool to digitally model, aggregate, and visualise data through “big data analytics” to better understand processes like energy consumption or lighting use patterns in a large building. This trend ties into the growth of IoT (Internet of Things) and its application in urban environments with the goal of creating smart cities. It is also aiding efficiency efforts in large real estate developments.
There is separate, distinct use of the term digital twin in real estate. 3D architectural renderings and visualisations have long been an important part of the design process and commercial engagement in real estate development. Digital twins take this process to the next level by creating fully immersive experiences of existing or planned buildings that people can navigate with virtual reality (VR) headsets. The digital versions of projects could be used to attract investors at the planning stage to facilitate sales before construction is completed or be maintained to remotely assist sales through the property’s life. People commonly purchase properties sight unseen. This requires significant trust on the part of buyers. Property inspections and transacting through highly regarded brokers help alleviate investment concerns while exploring a property through its digital twin might provide buyers with a much better sense of a property than the selection of curated photographs in a real estate listing.
A more speculative approach is to host digital twins of physical properties and real estate listings in the Metaverse. The Metaverse, which takes its name from Neal Stephenson’s 1992 cyberpunk masterpiece Snow Crash, is a virtual reality environment that allows people to interact in a virtual world. This is new and evolving technology and there is not a single Metaverse, but several competing commercial platforms. Surely, not all of the platforms will survive. The space has seen significant investment by companies staking claim to their brand and physical assets in the digital realm. It has also been pilloried to the point that Mark Zuckerberg recently changed his creepy avatar.
Developers of the future might build and sell both the digital and physical versions of the property at the same time. Ownership of the digital version might be noted with an NFT through a transaction conducted in cryptocurrency concurrently with the traditional transaction and title changes of the physical property. If, for instance, a piece of commercial property is located on a high street busy with foot traffic, the value of the digital property might increase in a similar fashion as the physical property. An indication of this development are the firms currently setting up retail shops in the metaverse.
Surely, the fear of missing out is at least partially driving current investment in the metaverse. Time will reveal the ultimate result of the currently deployed real-world uses of digital twins and the more speculative and public-facing technology of the metaverse.
Fractionalised real estate
Another, related development in the real estate market is creating opportunities for individuals to purchase shares of individual properties through fractionalised real estate. Startups are entering the market, often claiming to democratise property ownership. The primary pain point that they seek to address for retail investors is that investing in property has high capital entry requirements, is largely illiquid, has high transaction costs, and has burdensome operating and maintenance costs; problems similar to large investors, just at a smaller scale.
Firms entering this space have distinct business models and value propositions. One startup leverages social media features to help match investment partners and then provides supporting infrastructure to purchase and manage properties. Other firms take a blockchain approach where investors might deposit cryptocurrency tokens or stable coins into a liquidity pool that is then used to lend fiat currency to real estate investors to generate yield for the initial investment. Another model is crowdfunded real estate investing. Here, firms identify properties and develop business prospectuses for each property that includes a yield estimate for investors. Potential investors may evaluate and invest in individual properties with low minimum buy-ins. Firms then handle transactions and property management. The startups offer different levels of due diligence on the investments created on their platforms and the firms have different levels of skin in the game of each investment depending on their business models.
Fractionalised real estate ownership may be a significant development as it adds another player to the crowded marketplace. It also creates possible opportunities for family offices with large real estate portfolios to draw on new sources of financing. Property owners might tokenise their real estate assets and then sell the tokens as shares to reduce their debt burden from traditional lenders with low-cost liquidity from new investors. Investors would earn yield based on the income generated by the properties, but would not have ownership or voting rights similar to those with listed equities.
Discussions about technology often focus on it in isolation, rather than the way that people shape its use and, ultimately, the technology itself. For our purposes, it is crucial to discuss the ways in which people are deploying rapidly evolving technology where the ultimate use case is far from certain. Digital twins of brick-and-mortar buildings and fractionalised real estate shares are real-world applications of big data analytics, the Metaverse, and blockchain of potential value to family offices. Each draws on technology with varying degrees of maturity and the business case is far from certain.