Digitizing Cross-Border Real Estate Investments

Would you buy a house in a different city? How about in a different country? If I would have asked that question ten or even five years ago, chances would have been very good that almost all of you would have said, “no.” But today I can almost guarantee that some of you would consider it. In recent years, there has been tremendous growth in the volume of cross-border real estate transactions, a lot of which is due to the power of the internet.

I have seen this first hand. Each year our company, Tranio, processes around 20,000 inquiries for real estate worldwide. We have seen the change in the attitude of buyers. No longer are they afraid to look for expensive assets online. The luxury market seems to be the most common type of cross-border transaction: the number of online searches for property valued at over €1M have seen the most significant increase.

Even though the internet has helped to facilitate global purchases of real estate, the process still remains inefficient. Purchasing a property abroad entails buyers to overcome a staggering amount of obstacles. They review numerous websites searching for the best information on what and where to buy, communicate with different brokers and real estate agencies, travel to locations (most likely several times), liaise with lawyers, tax advisors, go through the compliance process with banks, and overcome countless organizational issues before closing a deal.

Even if all these efforts lead to a deal closing, the investor ends up losing a huge amount of time. Retail investors with smaller budgets (less than €1M) also take financial losses—transactional and management expenses which can amount up to 15% of the property value, making this scenario extremely expensive.

For example, according to our calculations, a buyer with a budget of approximately €500,000, who is looking to buy an apartment in Germany (Berlin, for example) could end up spending an average of 300 working hours during a period of six months on putting together a deal, without even taking into consideration the extra time needed for the management of the property and tax reporting.

What options do investors have?

It is becoming more obvious that the real estate industry will continue to experience a significant transformation in the coming years. People globally are increasingly receptive to buying larger properties online. Investors are no different. But, they will want to property investment process to resemble other types of investments like buying stocks on Robinhood. The main drivers for investors who look at cross-border real estate investments that we have seen are risk diversification, capital preservation, income in a stable currency, building up a decent retirement package and ultimately passing wealth on to heirs.

These digital platforms will have to differentiate themselves from existing real estate investment vehicles like investment trusts (REITs), publicly traded real estate funds or corporate bonds? They must allow for investing in individual projects with low transaction and administration costs, enabling the investor to choose and control where the money goes. The type of investor that likes to make an international real estate purchase is also one that likes to choose their destiny, one investment at a time.

Large platforms and professional management teams do have their advantages. They use an economy of scale that makes them incredibly efficient.  They have teams of people constantly providing a pipeline of deals, the ability to take advantage of favorable tax situations and an elevated ability to get financing, both traditional and non.

As international property sales through digital marketplaces becomes more popular, it will make it even more accessible to “average” investors. There has been a huge increase in “entry-level” investment. A popular German platform offers investment opportunities starting at €500. It does not currently have international purchases since it is only available only for German nationals, but it is a great example of where international marketplaces will soon be.

As for financing, solutions are arising there as well. Marketplaces are starting to offer bonds of companies that own real estate in order to benefit from the increased yields of a larger portfolio. We regularly see them offer options with yields as high as ten percent. In the future, I have no doubt that we see a robust marketplace for these shares.

If digital marketplaces keep growing at the speed that they are now then I believe that in three to five years as much as 20 percent of the international purchases could take place on a digital platform. Nothing is certain when you are working on investments between two countries. But what does seem to be certain is that investors are increasingly open to purchasing properties on-line and international purchases have a lot that can be streamlined through digital processes.

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