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Will “SPACs” Affect Traditional Investing In Commercial Real Estate?

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According to research, in 2021, there were a total of 610 SPACs on the US stock exchange, with over $153.22 million raised. This represents a record activity level since the first SPAC was introduced to the US market.

SPAC stands for "special purpose acquisition company." It's a type of investment vehicle where it buys privately held companies. The goal for SPACs is to do an IPO (initial public offering) within 18-24 months, then distribute the cash back to investors.

But why did SPACs become so popular?

How SPACs work

SPACs are publicly traded, meaning that any individual can invest in them.

Here's how it works: a company or group of investors will come together and create a SPAC. The level of investment can vary, but there is always a minimum requirement in order to have a SPAC formed.

Once it is formed, the SPAC will advertise and raise money. They sell shares in that company at a set price and issue warrants for stocks. The goal is to raise funds from investors so they can buy other companies.

After the IPO, 100% of SPAC's holdings are private companies. The only way an investor receives money back is ‘if or when’ the SPAC makes an acquisition.

Depending on the SPAC, the time interval they need to make an acquisition can vary. If they fail to complete the transaction within the time frame, the SPAC will be dissolved, and the investors will get their money back.

SPAC benefits for investors

A major advantage to SPAC investors is the opportunity to invest in a private company without going through the extensive due diligence that would be required if they were doing it themselves. Getting this early access not only to private companies but also to real estate portfolios and assets can provide an opportunity for high returns.

A big reason why SPACs have become so popular is that they're relatively safer investments compared to crowdfunding. It's easier to accept investors from a regulatory perspective, and there are established rules that the investments need to follow. In addition, it's much faster than going through a traditional IPO process without the extra costs that come along with it.

SPAC in the real estate industry

Even though SPACs typically target high-growth companies, they can also acquire a real estate-related business and real estate in general. A famous example of this is the real estate startup Opendoor Labs that SPAC acquired in 2020.

Investing through SPACs is undeniably shifting the way people invest in real estate. By creating an easier avenue for investors to get access to both private companies and real estate, it can be expected that there will be more deals like this done in the future.

Conclusion

SPACs are companies formed to buy other companies in a faster, easier way than going through a traditional IPO. Despite their popularity, they have a limited time frame to purchase companies and must do so before they dissolve.

More specifically, SPACs can be used by real estate investors to get access to both private companies and the real estate industry at large. This is expected to impact how people invest in commercial real estate in the future.

 

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