Illiquidity is the number one risk factor for unlisted real estate investment, and the lack of an appropriate theory and performance metric for quantitatively pricing liquidity risk poses a major challenge to making real estate decisions.
Due to their heterogeneity and information opacity, among other things, real estate typically cannot be instantly traded at any time an investor wants. The inability to trade out of a position when needed is a significant source of liquidity risk.
So it is necessary to note that the concept of illiquidity in this real estate market differs from the illiquidity of listed assets. Generally speaking, the research accepts two definitions of illiquidity. In the listed market where trading is instantaneous among market participants, liquidity is typically measured by the price discount (e.g., the bid-ask spread) necessary for an immediate sale (Amihud and Mendelson, 1986).
On the other hand, in real estate markets where infrequent trading is conducted through a lengthy search process, liquidity is measured by the expected time necessary to sell an asset near its fair market value, the so-called “Time-on-Market” (Lippman and McCall, 1986). Hence, a real estate investor meets price and liquidity risks (as the uncertainty of time-on-market).
So, investors and Digital companies face two challenges to improve liquidity in real estate :
-To set up a range of metrics based on Time on Market indicator to have a better view of liquidity risk (to bring more clarity to this market and to be fairly compared to other asset classes) ;
– To reduce the Time on Market thanks to present Big Data analytics (to fairly price the real property), matching technology (to identify adequat purchasers, to list the appropriate searched properties…). Some companies are able to valuate your property and to trade instantaneously (as in stock markets) proposing a discounted bid to the seller : the discount is the certainty Time on Market price. First step on liquidity path for this asset class!