The Global Alternatives Prop-X exchange is set to launch in Q2 or Q3 2017. What led up to development of the exchange?
Interest in property derivatives is essentially being driven by a lack of liquidity. If you consider real estate as an asset class, the actual allocation is quite significant from an institutional fund manager’s perspective, but there isn’t a liquid way of accessing the marketplace.
This isn’t a new issue, and we have seen property derivatives products in the past. If a fund manager is looking to invest in a physical product, there is typically a long timeframe between starting the process and actually owning the asset, and prices can move in the interim, while the manager is making a determination on assets.
The idea is that a manager can use these products as a proxy in the interim, gaining exposure through derivatives until such a time as he gets into the physical asset itself. Another angle is to consider the likelihood of the value of commercial property dropping. Managers could use this kind of product to hedge themselves. Those products are still out there. They don’t trade a huge amount, but there is interest and that is increasing.
Prop-X will list securities originated by Global Alternatives’s Property Crowd platform. Crowdfunding itself, and the idea of crowdfunding in property, effectively shows the market is broken. We have been focusing on bridging loan financing, and in an ideal world, that would be a service provided by the banks. Currently it’s not, and I don’t see any way around that at the moment.
Given the amount of money banks have taken on board from the government and other sources, and other capital adequacy concerns on top of that, I don’t see them having either the risk appetite or the ability to do a lot of the things they used to.
Someone has to pick up the slack. In traditional markets such as cash equities and bonds, high-frequency or algorithmic traders would generally have stepped up.
However, property remains an illiquid asset class, simply because the physical asset takes so long to move.
Are there other ways the industry can get around this?
Perhaps in the long term. There are things that should come into play to move the industry forward in this regard, whether that’s earlystage financial technology firms working on conveyancing—which should only take a day, not six weeks—or putting land registry on a blockchain. There are a whole ream of things the industry could be doing, but we’re starting from a point to building liquidity into the marketplace.
The way to do that is to find new sources of funds that want to allocate assets to real estate and need a different vehicle in order to do that. The vehicle we’re seeing now is going back to the syndicated loan market, which saw banks running various different loans to the institutional space.
For real estate, we can bring this down to a lower level, allowing either crowd or institutional money to come in. Longerterm, we would see the bigger institutions getting involved, but they will need to see more liquidity first.
Where does the Property Crowd platform come into it?
Property Crowd was a starting point from which to get more people involved in crowdfunding deals, akin to primary issuance. So Prop-X is a natural extension of that, as it offers secondary market liquidity. We are looking at extending the model to institutions that can gradually build it out for larger transactions and larger deals.
That way, instead of just sourcing from a crowd, you’re sourcing institutional money and offering the opportunity for institutions to pivot if they need to.
Even traditional real estate buyers are looking for tactical asset allocation. If we use the derivatives example, perhaps a firm doesn’t want to fully get out of its position in London offices, but wants to be involved in shopping centres in the North East of England for a given period of time. Having the ability to do that on a short-term basis, and to get in and out of a position tactically, could be very valuable.
There was an issue with property funds following the UK’s vote to exit the EU—they had to close their doors because they didn’t have the liquidity available to pay out. If they had had something liquid alongside their property funds they may not have been in that position. The ability for tactical asset allocation over a period of time is immense and, given the size of the real estate market, there should be much more flexibility.
Is this something you saw a demand in the market for?
From my personal experience of the derivatives market, to get oldschool property guys to move into derivatives can be a long hard slog, but Prop-X is something of a halfway point for them, because at least there is still a physical asset involved. Moving forward, the principle will be there, and we can see what kind of other asset classes we can apply the theory to.
Real estate should be the first, because it’s the biggest, but there are other asset classes that may be a bit esoteric to some investors but have a huge amount of money in them and that need liquidity.
The demand is definitely there.