How Innovations in the Real Estate Market May Help Transform Real Estate into a More Liquid Investment Option

Portfolio liquidity refers to how easily an investor can sell assets without incurring a loss; illiquidity, meanwhile, refers to those assets that typically take longer to liquidate. Asking “How much liquidity should I have in my investment portfolio?” will almost always result in the answer “It depends.”

One source suggests that an allocation towards liquidity should be enough to cover six months of expenses, while Morningstar recommends liquidity allocations should evolve as investors’ needs change.

But some investors prefer to have higher percentages of liquidity on hand because it enables them to react — in real-time — to changing market conditions and new investment opportunities. For these investors, the greater the liquidity, the greater an investor’s flexibility, which may better position them to take advantage of attractive pricing.

Although longer-term, illiquid investments have their place in an investment strategy, illiquid assets can hinder an investor’s ability to react quickly, resulting in missed opportunities or suboptimal returns. A heavily illiquid portfolio can even increase portfolio risk — especially in times of economic turmoil — because illiquid assets may be more difficult to sell during market downturns without incurring losses.

The challenge for investors is to strike the right balance between liquidity and long-term, illiquid assets.

Finding that balance can help mitigate portfolio risk while ensuring enough capital is on hand if new opportunities come their way. (It should be noted that some investors must adhere to regulatory frameworks that require them to retain a certain percentage of liquidity in their portfolios.)

So what is a liquid investment? Since the definition of liquidity is how easily an investment can be converted to cash, the most extreme example of liquidity is cash. Money in a savings account is highly liquid; money in CDs and or money market funds can also be easily liquidated.

Non-liquid assets, on the other hand, are those assets that typically take longer to liquidate without incurring a loss. Unfavorable market conditions can temporarily render some stocks illiquid, while real estate is generally considered one of the most illiquid assets due to the timing involved in selling property.

However, the real estate paradigm is changing. For some investors — including institutional investors who often adhere to liquidity requirements —  real estate assets can be an attractive method of ensuring a portion of a portfolio remains liquid. That’s because borrowing against real estate may give them access to working capital.

But real estate investment trusts (REITs), and real estate tokenization have proven to be even more ground-breaking in enhancing real estate’s liquidity.

REITs can be traced back to the Eisenhower Era, but it wasn’t until the mid-1980s that they began capturing the attention of mainstream investors. In 1990, investors could choose from 120 listed REITs available in two countries; today there are about 940 listed REITs —  with a combined equity market capitalization of about $2 trillion — available worldwide.

Real estate tokenization is a much newer phenomenon, having come into the public’s eye on the back of blockchain technology. Nearly any asset — bonds, equities, works of art — can be tokenized, or fractionalized, and distributed to investors via decentralized blockchains. In the case of real estate, tokenization enables smaller investors with limited resources to participate in the real estate market. As of 2022, Boston Consulting Group estimated that tokenized real estate was valued at $2.7 billion. By 2030, Boston Consulting projects the tokenized real estate market could be valued at $16 trillion.

By making real estate investment opportunities available in these more innovative formats, stakeholders in private commercial real estate may be able to help create a more dynamic, resilient, and attractive market environment.

At Avestix Group, by blending innovative strategies with our deep market insight and global expertise, we’re at the forefront of participating in the new face of real estate investing. Our mission is to unearth exceptional real estate opportunities poised to deliver potentially robust returns and contribute to the communities they serve.