The reasoning behind Rent Rolls
As discussed in our previous articles our long term goal at Konkrete is to build a many to many platform for decentralized securities. Where many different offerings for value creation are able to attract the investors and execute their operations in a decentralized and programmable manner.
However a many to many platform does not happen on day 1. In the early days you make one transaction happen, then another and eventually take it to scale. The success of the platform is intrinsically linked to the distribution it has, and in early days it does not have the distribution.
Classic marketplace chicken and egg problem.
We have to offer our own products to start with, and build up distribution on the back of it before opening the platform to the wider public. Detailed reasoning again can be found here.
As a platform we will be judged by the following key metric:
Number of unique investors investing every month
However in order to have an increasing trend on the above metric we need to offer investment products that are designed to scale.
The key attributes of any investment products we should offer are:
- Controllable outcomes to investors
- Short sales cycle, higher transaction velocity
- Transaction size and ability to underwrite enough transactions to get the platform to take off velocity
- High return and relatively safe
- Scalable through use of technology and capital
- Sticky and cumulative revenues
- Undue advantage in execution
- Lower complexity
- Revenue generation should be faster and front loaded
Any investment products we offer will have to score highly on the benchmarks we have set for ourselves.
There are atleast 4 different investment products which we are working on and which are in various stages of development. We have already started work on LADDER whose details you can find here.
The challenge with LADDER is while we are getting a number of leads coming through from both the developer and the investor side, it is a fairly complex transaction. A buyer needs to be matched with a development of his choice and then he needs to secure borrowing at a high LVR. LADDER will continue to be a part of our mid to long term strategy and we will continue to chip away at it, but given the stage we as a business are in, we need to focus on more lower hanging fruit.
The second asset we are looking at it is Rent Rolls.
A Rent Roll is essentially the property management rights held by a real estate agency over a collection of properties.
Real estate agents typically charge 5–8% of the rents generated by an investment property to manage it on behalf of the land lords. Agents will often manage hundreds and even thousands of properties, the management of which gives them steady cash flows. They will often buy and sell these rent rolls among themselves. Astute investors can also buy these and have agents to manage it on their behalf. This is a stable and high income producing asset which pays like clockwork every month in a predictable manner.
However till date this has also been the preserve of people in the know and moves within closed circles. We are opening this blue chip asset class to the wider public for the first time via the Rent Roll Investment Trust. We buy rent rolls and manage them on behalf of our investors (using partner management companies) and distribute the income generated on a monthly basis. By allowing many investors to come together to buy one rent roll we are able to bring the minimum cheque size significantly lower.
We also use our scale, technology and process improvements to continuously drive down costs and pass the increased profits to investors in the form of share price growth. We have already identified several inefficiencies that can be eliminated through use of technology partner companies like Bricks and Agents which can substantially reduce the operational costs.
And our use of the Konkrete blockchain infrastructure to distribute the investment means real time liquidity.
A Rent Roll Investment Trust is truly comparable to a commercial REIT. The management rights are a linear function of the rents and get paid as the rents come in. And we can have a similar 50–60% leverage from a Bank on it just like you would on a commercial property. It also lends itself to capital gain through improved efficiencies of operations as discussed above.
Except unlike a commercial property we do not need millions of dollars to get started and can control the process end to end to give outcomes to investors in a predictable way.
Virtual Assets and Real Assets
Real estate is the most tangible of all assets. You can touch and feel it and the return you can generate from it is quite predictable. Institutional investors love tangible assets with a predictable long term return. With that regards it also requires a large amount of capital to get started. Good thing you can also borrow significant portions of its total value.
If you think about business as a machine and you are in the business of owning real estate and renting it out, then your input (or cost of goods) has a hard floor. You cannot use the same amount of money and resources to magically come up more real estate as time passes. Yes you can develop real estate, and that is a different type of investment, but in general tangible assets can only generate linear returns with respect to the investment that goes into it.
Another example is a solar panel. It can generate you returns based on the electricity that goes into it. But there is a hard ceiling to what it can generate, and there is a hard floor to what it costs to make them. Yes costs are going down and efficiencies are creeping up, but the progress is only incremental in the grand scheme of things. Good yield producing asset for sure, but not something which can scale via the application of capital and technology. If your rate of return was x% per panel, it will be close to x% whether it was 100 panels or 1000. Note that I said close as some fixed costs will amortize better with large numbers. Again the difference is only marginal over large numbers.
Software on the other hand is a different beast. Once created it can serve 1 person or 1000 or a million. Code is infinitely replicable without additional (significant costs). Microsoft makes a ton of money because the word software it has built can be used by an unlimited number of people without them having to put additional effort per new user.
The marginal cost approaches zero in virtual assets while in tangible assets the marginal costs do not change significantly with scale.
You want an asset that scales with capital and tech and its marginal cost of growth dip towards zero.
However the challenge with virtual assets is given their intangible nature predicting their use case is harder.
With real estate the utility is clear. If you build houses in a certain area, you can predict with a degree of certainty what they will sell for given the market conditions and what they will rent for.
Same with solar panels. You know how much electricity they will generate and what it will sell for.
Software however in the early stages is a hit or miss. A number of software ventures fail as they are unable to predict with a degree of certainty the utility they will have. The product market fit often is not there.
Investing in software is a high risk high return game played best by people who have strong understanding of the domain as well as the ability to wear significant capital losses.
Rent Roll on the other hand is a unique virtual asset. It has predictable stable outcomes, features it shares with tangible assets. And you can optimize its operational costs and increase profitability via use of technology. Marginal operating costs can dip down via use of tech and capital.
However it has one more significant ace up its sleeve. A Rent Roll is commonly valued at a multiple of the revenue it generates. For eg: 3X revenues is quite common. For a reasonably decent management it generates a 33% profit margin after costs. Which leads to a yield of around 10%.
Nothing too bad or too great.
But the return is a function of its operating costs and acquisition costs. While there are limits to the optimization you can do to reduce operating costs, you can however significantly drop down acquisition costs.
If instead of buying rent rolls from others, you can convince land lords to switch management to you as you are offering better service, lower costs etc, then your acquisition costs drop down from a few thousand per property to often 10 times less. The better you get at organic acquisition without having to buy it from the market, the better your profitability gets.
Return on investment is a function of the capital invested. If you can reduce the capital invested for acquisition the higher the rate of return.
Use of online marketing and direct acquisition channels such as call centers can easily pay for themselves many times over in this fashion.
Rent Rolls are thus a unique asset class that generate solid returns in a predictable manner and have the potential for operational optimization as well as significant increase in capital growth.
Eventually Rent Rolls, the LADDER fund etc will all form part of a basket of assets that would generate regular high income which would serve as the gateway investment for new investors on to the platform. Once investors see regular predictable income coming in, and as they become more knowledgeable about investing in general, they would be encouraged to try other opportunities (including 3rd party ones) that generate higher capital gain and are a bit illiquid.
Seeing regular returns coming back in a short time frame would also mean that investors are likely to refer their friends and help grow the distribution.
A high yield investment offering that we can control and bring to the market within our current resources and scale/optimize in the long run is going to be our key strategy to build investor distribution over the next few months.