Improving Market Liquidity in Different Models of Real Estate Securitisation

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Improving Market Liquidity in Different Models of Real Estate Securitisation

Introduction

Real estate is a large part of the economy, but it is usually hard to buy and sell quickly because properties take time to sell and are expensive. This problem is called poor market liquidity. To fix this, financial experts use a method called real estate securitisation. This means turning real estate assets, like mortgages or properties, into financial products that can be bought and sold on the market. This report looks at different types of real estate securitisation and how well they improve market liquidity.

What is Market Liquidity and Why is it Important?

Market liquidity means how easily assets can be sold for cash without losing value. Real estate is usually not very liquid because selling a property takes weeks or months. Low liquidity makes investing difficult and can cause prices to fall quickly in a crisis. Improving liquidity helps investors buy or sell easily, attracting more investment and stabilising the market.

Different Models of Real Estate Securitisation

1. Residential Mortgage-Backed Securities (RMBS):
   These are created by bundling many home loans together and selling them as a single financial product. Investors can buy parts of these bundles, allowing more people to invest in housing markets without owning a property directly. RMBS improve liquidity by breaking large loans into smaller, tradable units.

2. Commercial Mortgage-Backed Securities (CMBS):
   Similar to RMBS, but these involve loans on commercial properties like offices and shops. CMBS help investors get access to commercial real estate and add liquidity by creating a market for these loans.

3. Real Estate Investment Trusts (REITs):
   REITs are companies that own or finance income-producing real estate. They are traded on stock markets, so investors can buy or sell shares easily. REITs increase liquidity by allowing small investors to participate in large real estate projects and trade shares quickly.

4. Covered Bonds and Other Debt Instruments:
   Covered bonds are backed by mortgages but stay on banks’ balance sheets, offering more security to investors. These bonds add liquidity to the mortgage market but are less tradable than RMBS or REITs.

How Effective Are These Models at Improving Market Liquidity?

• RMBS and CMBS significantly improve liquidity by turning big, illiquid loans into smaller tradable securities. However, during the 2008 financial crisis, RMBS markets froze, showing risks in this model.

• REITs are very effective at improving liquidity because they trade like stocks, giving investors quick access to real estate investments.

• Covered bonds provide safer investments but are less liquid than RMBS or REITs.

Each model has strengths and weaknesses, but overall, securitisation improves market liquidity by making real estate investments easier to buy and sell.