The UAE has recognised the potential of blockchain - will the world follow?
The adoption of blockchain technology solutions in the UAE is being promoted by a government determined to become a global leader in innovation
Tokenisation of assets could remove a number of existing barriers to entry into the real estate investment market. Can it empower a new generation of investors?
Evgeny Exter, Project Manager SAP, Steiner AG (with contributions from Professor Milan Radosavljevic, Professor Thomas Pfahler and Professor Michael Trübestein)
13 February 2020
Real estate is one of the main pillars of international growth and employment, and a backbone of the world’s industrial and post-industrial economies. A unique and complex sector, notoriously resistant to change and seemingly averse to the adoption of new technologies, real estate sits alongside equities and bonds as the most traded asset class on the global markets.
Nevertheless, barriers to entry, which include high transaction costs, long-term commitments and more stringent regulations, separate real estate from comparable asset classes. This separation is further accentuated by the fundamentally heterogenous and immobile nature of the market. Hence, real estate transactions face the joint challenge of information inefficiencies and correspondingly high transaction costs. The traditional role of banks is being reshaped under the combined pressure of changing client demands, stricter regulations such as Basel III and Basel IV, and new and disruptive technological models. One such technology, oft cited but less well understood, is blockchain.
Asymmetric information in commercial real estate markets is a significant cause of difficulty. Blockchain promises equally available information sets and the creation of an open real-estate ecosystem, but would require a complete, systemic rethink of the way the market currently operates. The permissionless nature of blockchain offers the potential to generate and encode information in such a way as to make it equivalently available to buyers and sellers, removing the need for intermediaries.
The problem of trust and asymmetric information could be resolved by the creation of a decentralized blockchain ledger which would generate high added value for the real estate market in various use cases. One such case would involve the mapping of “property DNA” – records of all relevant information relating to the asset, creating transparency for investors, owners and occupiers alike.
Another would be the adoption of tokenisation platforms that offer eligible investors access to a regulated asset-token. By using a token which is tradeable for and with existing tokens and cryptocurrencies, the platform would be a pioneering model for real estate wealth management. Asset-backed tokenisation of high-value real estate allows for the more flexible allocation of investment funds, with ownership tracked transparently through the blockchain. The value proposition for token holders includes competitive returns (estimated at 6-7%) and the introduction of an inherent value principal to the notoriously volatile crypto-currency market.
Investor cost reductions are made possible through the lowering of transaction fees via automation, along with built-in compliance measures facilitated by the transparency and immutability of the blockchain. Such a unique and revolutionary approach would disrupt traditional markets by introducing an almost fully liquid real estate investment product with significantly cheaper entry points and operational costs.
During the initial issuing period, tokenisation would be executed in a safe ecosystem with qualified or private investors, where the existing asset is partitioned based on underlying market value, and tokens issued correspondingly. The total number of tokens would be fixed; price fluctuations on the open market present investors with the opportunity to buy or sell according to the opportunity, as would ordinarily be the case. The platform would create a certain marketplace for real estate assets, in which tokens cannot be overpriced. They will also be connected in real-time to the blockchain, which tracks the identity and legitimacy of their ownership, ensuring transparency and safeguarding shareholder ownership.
Asymmetric information in commercial real estate markets is a significant cause of difficulty. Blockchain promises equally available information sets and the creation of an open real-estate ecosystem.
Other benefits include greater ease of transaction, removal of minimum investment thresholds, greater access to premium assets, and the diversification of asset portfolios. The use of an established blockchain would also allow small start-ups to use existing technology without the need to create their own new, costly trading platforms. This has profound implications for go-to-market strategies, through the removal of a significant existing barrier to entry.
Proof-of-Concept has already been undertaken and has successfully demonstrated that traditional commercial real estate processes can be encoded within a smart contract and that tokenisation can cause reductions in transaction costs and increases in revenues and profitability. Smart contracts can address issues of asymmetric information through automation, and enhance the transaction process through better structured data, quality guaranteed and encrypted to protect against manipulation.
Blockchain technology also allows for significantly reduced transaction and overhead administration costs, through the elimination of ‘middle-men’ and duplication procedures. New business models could be investigated by means of smart and automated contracts which map existing contract logic into the predefined algorithms, reducing remittance and initiation costs. In this way, the real estate industry could be revolutionised. Disrupting traditional contractual arrangements and replacing existing distribution channels opens up the market to a global network of potential investors who are currently locked out and eager to participate.