The Rise of the Real Property Electronic Market
In part one of our five part Forming the Future series, we explore the potential impact on the real property market by embracing the digital disruption emerging in this sector.
Real estate has traditionally been traded differently to other asset classes. The reasons for this are principally historical reflecting the importance of land ownership, the specificity and uniqueness of real property (such as location, built structures, market value and associated property rights) and the illiquid nature of the underlying asset.
Right now, a number of factors have coincided to offer the real property market the opportunity to fundamentally change the way it trades and realise significant benefits and value for everyone involved.
By converting the real property market to an electronic marketplace, we can treat property in ways similar to other asset classes traded electronically, such as securities or commodities releasing geographic, time and administration barriers.
The Electronic Marketplace
Like any other electronic market place, a future real property market place or exchange is where buyers and sellers announce their buying and selling intentions independent of geography and independent of synchronized participation.
In addition to this geographic and temporal independence, the buyers and sellers may have obtained information regarding price and competition from the market place or independent third party sources.
Figure 1: Future Real Property Market Place or Exchange1
The introduction of a real property market place or exchange is likely to give rise to new requirements (participating entities), transaction models, commercial opportunities, derivative asset classes, based on the normal transaction phases in electronic markets (see figure 2) below2.
Figure 2: Transaction Phases in Electronic Markets
- Highly Customizable: The evolution of a marketplace for the announcement of buying and selling intentions (transforms the buying and selling of property), dis- intermediating certain participants in the current model.
- Settlement: Integration with settlement structures (PEXA or PEXA like structures for international jurisdictions), incorporating financial institutions and practitioners (lawyers and conveyancing service providers) for settlement facilitation.
- Record: A scalable title recording system for asset ownership and rights (akin to an individual company’s share register or a Computershare like model as a services provider for registry services).
- New Information Services: Through the standardisation and reduction in specificity of property transactions, new information service provision opportunities to support buyers, sellers and involved parties (e.g. financiers, investors) through virtualised contextual information.
- New Asset Classes: Supports the evolution of new risk products - derivatives, liquidity, synthetic financial instruments - as the volume and coverage of real property market transactions increases.
- New Participants / Models: Reduces reliance on large balance sheet entities (such as banks) to manage risk between borrowers and lenders and supports new financing models and other large funds management entities (super funds), with the introduction of new participants.
- New Products: New risk management products to support new participants / participation models in settlement facilitation.
Setting the Foundations
New Zealand and every Australian state is preparing to replace its land titling systems between now and 2019. Each jurisdiction’s system is expected to cost between AUD$40 – 50m to replace.
But there is an opportunity to avoid replacing these multiple systems with a single system, future-proofed for the current and future needs of buyers, sellers, professionals, financial institutions and regulators.
The foundations for the electronic trading of Real Property have already been formed, and the revaluation of this public asset is expected to be between AUD $15 - $25bn.
Part two of the Forming our Future Series will review industry reform in the Australian real property market and the foundations that have been laid for a future national electronic real property market place.