Welcome to the brave new world of tokenisation where clumsy paper trails are a thing of the past and real estate investment is liquid, transparent, and, above all, inclusionary
In the few years it has captured the public imagination, the tokenisation of securities has ushered in use cases ranging from the cerebral (movies, letting investors partake in box office earnings) to the cultured (Andy Warhol and Claude Monet paintings, split into thousands of shares worth USD20 apiece), the altruistic (trees, converted into assets existing on blockchain) and the ridiculous (human beings, tokenising themselves).
But real estate remains the most mercantile of them all. With a global asset value of USD228tn, property remains subject to transacting in ungainly portions and thereby suited to unlocking by tokenisation.
As Covid-19 lays property markets to waste worldwide, tokenisation gives real estate the lifeline it has thrown other asset classes: liquidity.
In April, digital transfer agent Vertalo and security token trading platform tZERO inked a deal that would tokenise USD300m in real estate, following a move by trading platform Polymath and commercial real estate marketplace Red Swan to tokenise USD2.2bn in US properties.
Asian economies have become unlikely early adopters of tokenisation, publishing legal frameworks that would unleash tokenised securities, security token offerings (STO), cryptocurrencies, and the myriad offshoots of blockchain technology.
“The pandemic has certainly been one of the reasons why everything’s going digital,” reflects Julian Kwan, CEO of Singapore-based digital securities firm InvestaX. “The tokenisation industry started in 2017 with really poor-quality projects. And then in 2018 through 2019, there wasn’t the kind of infrastructure needed to be able to facilitate growth in the industry. Now that it’s sorted, it’s still growing.”
Tokenisation of real estate, in the simplest sense, involves getting the equity or debt share of a building—if not a fund that owns real estate—and giving it to investors as security-sensitive records, tokens, in lieu of tangible titles and other paper interests. The process births the asset’s digital twin on the blockchain: a database or long log of actions powered by distributed ledger technology (DLT) that is decentralised enough to be read and written by multiple organisations.
“The whole point of tokenisation is to use a digital ledger. Paperwork is slow, cumbersome, and costs a lot of money. You need lawyers all the time. You need to store the paper. No one knows what everyone else has. Paper looks like problems on problems,” says Kwan. From an investor’s point of view, he adds, “I don’t think there are major disadvantages to tokenisation other than spending more time to understand how it works.”
Comprehending tech can be a challenge to some. But then so is the process of paddling through the coterie of intermediaries that comprise traditional real estate transactions.
When real estate is tokenised, it is coded into the blockchain as smart contracts, automating such steps as compliance, document verification, escrow, and trading. Blockchain bypasses a need for property managers, lawyers, banks, and other middlemen, with all their attendant fees and charges.
Investors in tokenised real estate share in the equity upside because it is so cost-effective. What tokenisation is doing is it’s bringing elements of public-listed REITs to private real estate—tradeability, transparency, liquidity
Not beholden to any institution, blockchain is the perfect, hack-proof antidote to opaqueness, the infallible recordkeeper. All parties to a transaction see time stamps, contractual obligations, and other details on every level of the transaction, preventing default by parties.
“A scenario where you don’t have human interaction with verifying documents and other information improves efficiency in governance,” says Paul Volodarsky, senior associate for DFDL Thailand and Vietnam, and PropertyGuru Vietnam Property Awards judge. “It also helps to remove potential corruption issues that may arise when dealing with asset classes like real estate.”
Every year, some USD1.6tn are laundered in real estate, most of which can be traced back to developing countries, according to the UN Office on Drugs and Crime. “There can be selective disclosure of certain information without disclosing other information, affording all parties involved the transparency they need while still protecting privacy of participants,” reassures Florian Spiegl, co-founder of FinFabrik, a Chinese blockchain startup.
By eliminating or reducing legal and brokerage fees, appraisals, inspections, and other transaction costs, tokenised property is more cost-effective than similar investment instruments like real estate investment trusts (REIT). As with REIT, tokenisation fractionalises real estate into a predestined number of shares, only that it requires lower upfront capital, reducing barriers to entry.
Governments worldwide are recognising the need to store title records on blockchain’s uncompromisable ledgers. The UK’s Digital Street research project last year developed a prototype that digitally transfers a property to the Corda blockchain platform—automatically updating the UK Land Register.
Tokenisation in its current form has more success, however, with STOs—securities that are native to the blockchain and do not reference ownership on paper—as well as managed real estate funds like private equity real estate.
“The real value of tokenisation isn’t in putting a house on the blockchain; it’s in putting shares of real estate assets in token form that can be traded freely, and you don’t have to wait 10 years,” explains Kwan. “Whether the building is on or off the blockchain makes no difference.”
Such is the increasing universality of blockchain that it has called into question policymaking of the last few years. In 2019, Chinese strongman Xi Jinping highlighted the technology’s “important role”, a remarkable turnaround from the country’s ban on virtual currencies since 2017.
China could have taken a cue from open-minded neighbours. In September, digital asset platform operator Fund Bloc collaborated with Woori Global Asset Management on a blockchain-based real estate fund service in South Korea.
In October, tokenisation specialist Securitize—backed by Sony Financial Ventures, Nomura and MUFG—teamed up with advertising firm Lifull and real estate agency Enjoyworks to launch the first STO for retail investors in Japan, starting with a tokenised retirement housing project in the town of Hayama.
Developer Lead Real Estate also used blockchain to bankroll the construction of condominiums and hotels en route to what would have been the Japanese Olympics.
With blockchain-backed assets dawning on Asia comes tech-friendly regulations, led by Taiwan which released the “world’s first STO laws” in 2019.
Elevated Returns (ER)—the asset digitisation firm famous for tokenising the $18m St Regis Resort in Aspen, Colorado—is bullish on Thailand, where structures for crypto-asset taxation and a framework for businesses trafficking in blockchain technology have been enshrined into law since 2018.
This year, the Thai Securities and Exchange Commission (SEC) issued a licence to ER’s digital asset exchange platform, ERX—the sixth platform to get one in the kingdom. ERX aims to tokenise $1bn worth of property in Southeast Asia. In October, Thailand also issued the world’s first government savings bond, valued at $1.6bn, on a blockchain platform developed by IBM.
Most of the initial take-up in tokenised securities among ASEAN nations will likely come out of Singapore, given its mature policies and technological ecosystem for digital ledgering, experts maintain.
As early as 2016, the Monetary Authority of Singapore, along with a DLT company, and a consortium of financial institutions, began a proof-of-concept project to conduct interbank payments via blockchain. Soon, the country will be tokenising its Variable Capital Company (SVCC) legislation structure, paving the way for onshore investment vehicles that could rival opaque tax havens such as the Cayman Islands and the British Virgin Islands.
“Countries like Singapore don’t need new laws,” says Kwan. “We’re going to maybe alter and change our laws as we move forward. But to get the industry started, we don’t need anything new.”
The possibilities at the intersection of blockchain and the built environment are as infinite as land is finite on earth. The value of real-world assets today amounts to $256tn, an illiquid planet of profitable financial instruments waiting to be tapped by DLT. In this framework, a paperless world could just be the missing link to the democratisation of real estate investment.
“If you think about the capital markets, the public markets, every significant expansion of capital was from new technology,” says Kwan. “So now blockchain and tokenisation are going to dramatically change the private markets, private equity, real estate venture capital. It’s going to completely explode.”
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