Tokenising Real Estate
Tokenisation uses Blockchain to enable different ownership models. The purpose of this article is to provide a non-technical person with an understanding of the technology, it’s possible uses and impacts on the real estate industry.
Two key challenges of the real estate market for the last 400 years when compared to other investment asset classes are the slow pace of transactions (it takes ages for ownership to be transferred) and liquidity (the purchase price is so large that only a limited market of buyers exists).
There have been many innovations over the years (Such as Private Equity Funds, securitisation and REITS) that have sought to address these issues but the Proptech community thinks it has a better solution that could dramatically change fund raising and transactions. After reading this readers should be able to make their own judgement about the technology.
What does Tokenisation of Real Estate mean?
Tokenisation is the process of representing and managing ownership of real assets digitaly using blockchain technology.
There are a few parts to how it works:
• Infrastructure – the Exchange that allows you to acquire, register, trade and liquidate tokens and the underlying legal model. Trading without an exchange is possible as the blockchain can be used to do what the exchange does. But then you run into more compliance issues and a much more limited ability to trade tokens which affects pricing
• Tokens – setting up the tokens themselves and linking them to the underlying asset legally so that no further registration process is needed.
• Transactions – ensuring the transfer of tokens can be done easily, securely and in a timely manner and that the exchange includes the ability to sell your tokens as they are not something you can put in the bank.
• Compliance – tokens are another way of representing ownership – that’s all they do and as such they are subject to the same security regulations as any other investment instrument
Why is Tokenisation important?
Many start-ups have been promoting this model. Several exchanges have been created and a few regulators have provided limited approvals for these models to be used. Investors are receiving offers and starting to look at how they can be of benefit. The tokenisation model, will create a reason for change and will impact on fund raising and investment management platforms
Tokenisation of Real Estate investments is about changing the way ownership of an asset is represented. It’s proposed that this change in ownership model will open up how the purchase of the asset is funded and how ownership is transferred. Basically, if ownership can be broken down into smaller portions in an online market that is tradeable 24/7 then there are more people who can afford to buy a portion which means that those smaller portions will be easier to sell, creating a more liquid market.
Similarly, if those smaller portions can be transferred safely from one owner to another faster and more reliably then this creates greater access and liquidity. With the ability to tokenise an asset, this would create a much more granular investment model where investors could basically build their own portfolio by selecting tokens in different assets and with the benefits of blockchain, hold their own portfolio. This is the value proposition for tokenising real estate investments. But it must be done in a way to comply with current market regulations on public or private investment schemes depending on how it is structured
How can the real estate industry benefit from tokenisation?
This is an entirely “never done before” activity so we don’t know what we don’t know. There are potential benefits – but also potential risks. You can tokenise an asset, you can tokenise a fund or just part of an asset or fund. There will be many innovations in how this new model is applied. For a GP, the primary benefit could be in providing an alternative stream of investment funds from a different type of investor. Some models seen recently have had 20% of equity moved into a tokenised structure.
Possibly LP’s and GP’s could bring in a specialist Tokenisation provider to add to the funding model and bring the necessary expertise that is needed The table overleaf outlines some comparables across different aspects of the operation model.
What should real estate professionals do next?
As the momentum of this new funding model grows, there is little doubt that LP’s and GP’s will need to understand this alternative better. Possibly make use of it to remain competitive and to expand funding sources. With the specialist skills needed, bringing in exchange operators to work with you on tokenisation would be a necessary step.
To create the necessary infrastructure internally would require significant effort so again – bringing in experienced help may be the answer.The ANREV technology and Innovation Working Group can provide up to date details on specific developments in this space including introductions to some of the organisations promoting these solutions
