Tokenisation, real estate’s most exciting frontier

With its massive potential to democratise real estate investment, tokenisation is one of the most exciting new frontiers in the industry

Global accountancy firm Moore Global recently stated that even if just 0.5% of the USD280 trillion global property market was tokenised in the next five years, it would become a USD1.4 trillion market. jdross75/Shutterstock

The peaks of Aspen may be a far cry from Bangkok’s high-rise downtown. But for Stephane De Baets, the investment climate is just as appealing.

Since relocating to Colorado from the Thai capital, where he spent the best part of 25 years in finance, the Belgian entrepreneur and CEO of Elevated Returns has established himself as a pioneer of blockchain-based real estate investment.

De Baets initially founded the digital asset management firm while still in Bangkok to acquire the iconic St. Regis Aspen Resort. It was a bold move but not out of place for a seasoned investor with a USD500 million-plus portfolio spanning real estate and hospitality assets, including Chef’s Club, a global restaurant group featuring some of the world’s best chefs.

But the real game-changer came in 2018 when De Baets launched the digital security Aspen Coin, distributing tokens representing USD18 million in fractionalised ownership in the five-star resort. It was the world’s first real estate security token offering.

“The property remains private. But through tokenisation, you create an instrument so that anyone can buy without going through due diligence or document review,” he says. “Now we’re going one step further and allowing them to receive cashback on their stay, which is very significant because it means anyone who owns a certain number of tokens is treated as an owner.

“I think all securities will be digital in the future, I believe we will have new forms of investments, and people will begin selling the rights to utilities,” De Baets adds. “That’s where the innovation will be powerful.”

Plans have been hatched to tokenise multi-million-dollar properties in prized locations like Manhattan in New York. stockelements/Shutterstock

Global accountancy firm Moore Global recently stated that even if just 0.5% of the USD280-trillion global property market was tokenised in the next five years, it would become a USD1.4 trillion market. But tokenisation, which is still in its nascent stage, remains a relatively unknown quantity for most individual real estate investors.

Simply put, it is the breaking down of a usually large and single unit of real estate into multiple and smaller units, and in this case, represented by tokens. It works in the same way as the digitisation of physical artwork. The token represents the ownership information of the asset, recorded on a blockchain.

Details such as ownership, construction plans, the location, and investor rights are mapped in digital form and recorded in a smart contract—essentially programmed actions of real-world contracts and operational process actions on the blockchain. The property’s value is then distributed among a fixed number of tokens and issued to investors. After the initial issue, these can be listed on a digital exchange for secondary market trading and resold by investors.

“In a nutshell, tokenisation solves several problems at a go,” explains Rani Kaur, head of strategy and business management for global South Asia and Middle East businesses at Bank of Singapore. “It reduces entry barriers and democratises access to new markets for smaller investors.”

Fractional ownership of real estate isn’t exactly new. In the early 1960s, real estate investment trusts (REITs) were established to attract investors and change the illiquid status of real estate. Tokenised real estate is different from REITs in that they are open to anyone and usually have no minimum investment amount. Real estate tokens also provide an option for a more specific investment linked to a particular property, whereas REITs allow investing in a pool of various real estate assets.

“All these features increase flexibility in real estate investment,” Kaur adds. “As an investor, it enables anyone to own a part of a trophy property and enjoy the economic benefit of such ownership, as well as the status of being recognised as an ‘owner’.

The pandemic has sped up the digitalisation of real estate practices and led to a proliferation of proptech companies. giggsy25/Shutterstock

“The benefit for the developer is you target your customer with a cheaper and more efficient way of unlocking value for fractions of traditionally ‘out-of-reach’ real estate investments.”

But since Elevated Returns’ landmark offering, there have been just as many tokenisation failures. Perhaps the most notable was the high-profile joint venture between tech startup Fluidity and broker-dealer Propellr, which planned to tokenise a USD30-million Manhattan condo in 2018. The project was quietly shelved a year later, with both companies stating that the market wasn’t ready.

Indeed, potential token bubbles—like those recently witnessed with non-fungible tokens or NFTs—can be high risk and, at best speculative. A tremendous amount of work needs to be done to iron out the legal, regulatory and taxation fronts, with stamp duty, investor protections and the enforcement of smart contracts, for instance, yet to be formalised. Security issues like scams, fraud and theft have not yet been eradicated from the blockchain. Therefore, investors require a strong knowledge of how things work on the distributed ledger.

It does alter how real estate will be owned, managed, and transacted around the globe. The benefits of the technology in simplifying complex, manual processes and driving scale at lower costs are a given

“The biggest concern to be addressed for real estate tokens is the lack of clear legislation,” according to Ryan Thoo, director of consumer marketing at PropertyGuru Group. “Without that, complications will arise, and disputes will be difficult to solve. We need to work closely with key stakeholders of the real estate ecosystem, including policymakers, central banks, and housing associations, to ensure regulatory composability, sustainability, and safe consumer adoption.”

Ecosystems in Asia are already gathering momentum, with increasing collaborations between real estate developers, digital exchanges, investment management companies and proptech and fintech firms. In 2021, Singapore Exchange-backed digital securities platform ADDX and the Middle East investment management firm Investcorp tokenised a private real estate fund focused on the Sun Belt in the US (the country’s southern portion), with half of the USD150-million fundraised via tokens. Hong Kong-based tech firm Liquefy, meanwhile, recently announced a USD1-billion tokenisation partnership with a consortium of Gulf families, including a USD600-million hotel in London.

Developer lead real estate used blockchain to bankroll the construction of condos and hotels in anticipation of the Tokyo Olympics. StreetVJ/Shutterstock

As with many digital landscapes over the last couple of years, the pandemic was inevitably a catalyst for rising interest amongst investors. “Consumers have become more comfortable transacting online,” adds Thoo. “They will soon adopt the sale and purchase of fractionalised properties in the form of tokens, as we have for cryptocurrencies.”

The pandemic also uncovered the structural challenges of operating and investing in real estate. It sped up the digitalisation of real estate practices and transformation of traditional property players and led to a proliferation of proptech companies seeking to participate in Asia’s real estate ecosystem. Still, subsequent reservations remain in the industry that tokenisation bypasses property managers, lawyers, banks, and other intermediaries and threatens established protocols or institutions like lenders.

“It does alter how real estate will be owned, managed and transacted around the globe,” says Kaur. “My view is that it disrupts existing value chains and the traditional way of doing things, for sure.

“The benefits of the technology in simplifying complex, manual processes and driving scale at lower costs are a given.”

Either way, it’s important to remember that tokenised real estate is very much in its infancy. The first tokenised project only happened in 2018, and a market as big as real estate isn’t going to be disrupted overnight.

Still, Kaur and others believe the transformation is inevitable. Many real estate companies are paying close attention and laying the groundwork for the future, real estate investment and ownership are moving online, and the blockchain seems the best way to do it.

What is up for debate is the timeframe of when tokenised assets will become widespread. It could be a while in a sector like commercial real estate, where change is traditionally slow.

The original version of this article appeared in Issue No. 172 of PropertyGuru Property Report Magazine. Write to our editors at [email protected].