I've recently had the pleasure to attend a number of Blockchain conferences, where I met with some start-ups who are looking to ‘Tokenize Real Estate’. The idea is to solve some of the key problems investors and property developers face when investing in commercial real estate, primarily the limited access, the fees imposed by third parties, and the lack of transparency and liquidity.
The way people hold and transfer assets may change dramatically in the near future. Whether it’s real estate, equity, derivatives, commodities, art or even debt, the ownership on these ‘assets’ may be recorded on a distributed ledger (Blockchain) and represented by security tokens. The importance of the Blockchain is made evident by the opinion of 800 executives and IT experts at the World Economic Forum, 50% of whom said they believe more than 10% of the global GDP will be stored on the Blockchain by 2025.
The recent introduction of security tokens has gained a huge interest in the Blockchain space. Unlike utility tokens, which provide its holders access to an application, a product, or a service and are used in token sales and initial coin offerings; security tokens derive their value from real assets. A key principle for security tokens is to fractionalise assets such as real estate and allow these investments to become more
liquid. Essentially security tokens are an investment contract, like stocks, bonds, and private equity investments, and are considered a ‘security’ if there is an expectation of profits from the investment (e.g. price appreciation, revenue share, dividends etc.).
Advantages of a security token
Historically, commercial real estate investments have only been accessible to high-net worth investors, property developers, real estate funds and institutional investors. The premise of security tokens will give retail investors direct access to different commercial real estate asset types, while benefiting from any dividends (rental income) and price appreciation. Additionally, property developers can raise capital from a new class of investors - retail investors, who could co-invest with reputable property developers. Currently, real estate investment can’t be easily transferred from one party to the next, the system is slow, expensive, and tedious. Blockchain technology will hopefully create secondary markets for registered securities on Security Token Exchanges. In Asia, few firms are building the infrastructure which will allow investors to exchange real estate ownership as easy as it is to trade common stocks.
Disadvantages with security tokens
The main problem with issuing security tokens is, that it's an early technology which is trying to enter a highly regulated environment. At the moment there are too many uncertainties of how the technology would work in the real world, coupled with the current
lack of liquidity in secondary markets, and not to mention – security token exchanges are just being built. Additionally, some countries’ regulators prohibit the sale of securities to independent, retail investors (as a part of their investor-protection policies), so
investors need to carefully examine security-token offerings to find out whether or not they are allowed to participate.
Security tokens and the real estate landscape
In New York, Fluidity (the team behind Airswap), a company providing technology services to registered broker-dealers, partnered with Propellr Securities, to tokenize the first residential development which was recently appraised for USD 30 million. Propellr is a FINRA registered broker-dealer who uses its financial and capital markets expertise to offer and sell traditional and tokenized securities under what is known as Reg D rule 506(c), meaning that the issuer must take reasonable steps to verify that every
investor is accredited.
A key value proposition these firms see in the tokenization of real estate assets is, they don’t require a bank or third party to be involved in the financing of the project. Tokens represent the debt which can be traded as private securities. If the token holders sell the shares, the purchaser can preserve the token on the Blockchain, or “cash out”, thereby dissolving these tokens altogether. This theoretically would produce more liquidity in a notoriously illiquid market.
That said, we are in the beginning stages of ‘tokenizing real estate’, and for this concept to truly bring value to investors and property developers, collaboration between incumbent real estate firms, Blockchain developers, lawyers and certainly regulatory bodies, is key to move the technology forward in a compliant and efficient manner.
If you would like to know more about PropTech, Blockchain, Cryptocurrencies and the impact these technologies will have in the real estate industry, contact Philip Pang at firstname.lastname@example.org.
About Philip Pang
Philip is an Associate Director with the Office Services team in Hong Kong. He advises multinational and local companies in all aspects of real estate, but has a key focus on coworking operators, hedge funds, and asset management occupiers. Philip is also a mentor for Colliers Techstars PropTech Accelerator, a programme looking to develop and bring to market new PropTech initiatives.
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