Real estate has long been a cornerstone of investment portfolios, but direct ownership can be illiquid, capital-intensive, and administratively complex. Securitization offers a powerful solution, transforming the economic benefits of a physical property into freely transferable securities. This process not only unlocks capital but also provides a flexible and efficient way to manage real estate investments.

At its core, securitization involves issuing financial instruments (securities) that are backed by and linked to an underlying asset — in this case, real estate. The income generated by the property flows directly to the holders of these securities. This structure offers several key advantages:

• Capital & Diversification: It allows property owners to raise capital and enables investors to diversify their holdings by gaining exposure to real estate without purchasing entire properties.
• Ease of Ownership: Investors can hold these assets in a standard brokerage or private banking account, bypassing the complexities of title registration, transfer taxes, and legal paperwork associated with direct property transactions.
• Tax & Privacy: Since the underlying asset doesn’t change hands when the securities are traded, securitization can be an effective tax planning tool. Furthermore, it enhances privacy, as the public property register lists a Special Purpose Vehicle (SPV), i.e., the company issuing securities, as the owner, not the individual investors.

The Traditional Route: REITs and Investment Funds

The most well-known method for securitizing real estate is the Real Estate Investment Trust (REIT) or a real estate investment fund. REITs pool capital from many investors to acquire and professionally manage a portfolio of income-generating properties. They have been instrumental in making real estate accessible to a broader range of investors, particularly in public markets.

However, the fund structure, especially for smaller or private arrangements, comes with significant drawbacks. The regulatory landscape has become increasingly burdensome over the past two decades. In most jurisdictions, a fund must appoint a licensed asset management company, an administrator, and an auditor. This framework, while suitable for large retail funds, can impose unnecessary costs and administrative complexity on private deals. Regulations, particularly in the European Union, are notoriously strict, creating high barriers to entry for smaller asset managers and favouring large, established financial institutions.

A Modern Alternative: SPV-Based Securitization

Fortunately, a more direct and flexible alternative to the fund structure exists and is well-established in the finance industry. Real estate can be securitized by having it owned by a Special Purpose Vehicle (SPV), which then issues securities directly backed by the property.

This modern approach bypasses the cumbersome regulatory requirements of an investment fund while achieving the same core objectives. The SPV can issue various types of securities tailored to specific investor needs, including:

• Asset-Backed Notes
• Underlying-Linked Notes
• Portfolio-Linked Notes
• Sukuk (for Shariah-compliant investing).

These instruments offer a direct link to the performance of the underlying real estate asset without the heavy overhead of a traditional fund structure.

On a side note, it is important to structure the securities linked to real estate in such a way that this arrangement will not fall under the definition of a “collective investment scheme” which would entail a heavy regulatory burden. Depending on the issuance and distribution jurisdiction this may or may not be easy to do.

Global Issuance and Accessibility

The issuance of real estate-backed securities can be arranged in leading financial centers. Switzerland, for example, is a prime location for such issuances. You do not need a Swiss SPV to issue securities in Switzerland; all that is required is a local payment agent (typically, a broker or a bank) to secure the link with major depositories like SIX-SIS, Euroclear, and Clearstream. This infrastructure allows investors worldwide to hold the securities in their regular investment accounts. Other major financial centres, such as UK and EU countries may be a viable option too, but watch out for their regulation of collective investment schemes and asset management business (Switzerland created a specific exception for certain asset-linked securities to treat them as structured financial products and not collective investment schemes; other countries may require deeper structuring to avoid the regulatory trap).

For Shariah-compliant investors, SPVs in major offshore jurisdictions (such as the Cayman Islands) may be used, and the issuance itself may be arranged in primary financial centres, such as Switzerland or UK. A notable and developing hub for the issuance of Islamic investment certificates, or sukuk, is the Kyrgyz Republic, which has cultivated a supportive legislative environment for these instruments. Our firm is proud to be the leading advisor on Islamic issuances in that country.

What can be packaged into a security?

Traditionally, the immovable asset most appealing for mass investment is income-generating (rental) real estate. It is more or less easy to value, and mass investors love current income. Most real estate investment funds focus their investment declarations on this type of immovables.

In contrast, real estate development projects are not so frequently packaged into funds or securities. The reasons are obvious: they are by definition illiquid, and the commercial success of the development is not guaranteed until it is sold out or rented out. However, this type of assets has seen its fair share of securitizations, too. Throughout our history we have arranged securities issues to finance real estate in Europe, UK, UAE and a few popular holiday destinations, such as Thailand and Bali (Indonesia). All of these issues were private, with a limited number of investors. As an observation, it is much easier to sell to investors a serial real estate development project (e.g., student housing near a university) than a standalone development, such as an office building.