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Digital Transformation

Tokenising real estate investment

Using blockchain technology, tokenisation promises to turn the notoriously illiquid asset of property into highly tradeable digital shares. Is it too good to be true?

Stuart Watson, Journalist
12 March 2019

Using blockchain technology, tokenisation promises to turn the notoriously illiquid asset of property into highly tradeable digital shares. Is it too good to be true?

On a trip to New York a businesswoman from Singapore passes a strikingly designed new office building. Her curiosity piqued, she uses an app on her phone to download information on its occupants, rent roll, environmental performance and return on capital. Later, after perusing the data again in the Starbucks on the opposite side of the street, she comes to a decision and purchases $10,000 of shares in the block through an online exchange. With a smile of satisfaction, she returns to sipping her flat white.

Imaginary scenarios such as this inspire the pioneers of tokenised real estate investment, and recent months have seen the industry in the US take its first baby steps towards turning the fantasy of easily traded fractional ownerships in real estate into reality. In October 2018 the owners of the luxury St Regis Aspen Resort in Colorado sold an $18m share of the hotel in the form of digital tokens, while US tokenisation platform Harbor is offering a $20m stake in a high-end student residence in South Carolina.

Tokenisation is enabled by blockchain technology, which is used to create a digital ownership share, known as a security token, and to enable it to be traded cheaply. At present, the market is still in its infancy, admits Ragnar Lifthrasir, president of the International Blockchain Real Estate Association.

"We are at the very early stages of security token offerings," he says. "We have most of the infrastructure in place to do this – a couple of legitimate companies that can do the tokenisation, a couple of companies that can do regulatory compliance, and a couple of exchanges where you can buy and sell tokens are online, but don't have a lot of traffic. The next stage is rolling this out with real volume. What's preventing that is that, so far, there has been very little demand."

Suspicion among professional real estate investors has recently been exacerbated by the deflation of the cryptocurrency bubble, as well as a rash of dubious real estate-related initial coin offerings (ICOs) seeking to raise money for blockchain-related applications. "ICOs really set blockchain real estate back at least ayear or two. They violate the securities laws in pretty much every country, so that is not sustainable for legitimate real estate investors in the long term," says Lifthrasir.

Among conventional property investors the basic merits of tokenisation are still being questioned: "If you believe the phone and app is the communications media that brings together investment opportunities and the broader market, it is possible that tokenisation is a means of making that investment more practical and achievable," muses Professor Andrew Baum FRICS, leader of the Future of Real Estate Initiative at the University of Oxford's Säid Business School. "But it could also be a complete scam that has no longevity at all.

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Anything connected with cryptocurrency and blockchain is highly speculative at the moment, and also unregulated. There is a risk that regulation will come in to nip this thing in the bud or there will be a financial scandal that reduces its appeal to the mainstream."
The crucial factor that will make or break tokenisation as a concept is liquidity. Real estate is a notoriously illiquid asset class because assets are large and the process of trading them is slow and fraught with paperwork. Tokenisation holds out the prospect of frictionless trade open to both institutions and individuals around the world. However, to make a market there must be buyers as well as sellers.

"There are arguments to say that liquidity might increase significantly, but you could also take the view that it gets reduced," says Thomas Wiegelmann FRICS, managing director at Munich based investment manager Blue Asset Management. "If there aren't many people who want to buy those assets, you have a higher exit risk. The first movers will have liquidity issues."

Steve Sillam, CEO at Leaseum Partners, which launched one of the first tokenised real estate investment funds at the end of 2018, counters: "You can invest in a fund in which your capital is locked up for five or 10 years or you can invest in a fund where you have liquidity on top of that for the same return, because the tokens will be listed and investors will be able to sell them."

Leaseum aims to garner $250m from institutional and accredited investors to buy commercial property in New York City, and while Sillam admits some are deterred by tokenisation, he is still bullish about the prospects for capital-raising: "Because of their strict investment criteria, institutional investors in the EU are not allowed to touch any tokenised fund, but it is not the same story in Asia, where institutional funds are more tech-friendly. Most of our potential cornerstone investors are from Asia. Family offices that have traded cryptocurrency before have been responsive as well," he claims.

It is a start, but for large institutional investors $250m is hardly a significant sum. While he is optimistic about future prospects, Lifthrasir believes it may be five years before a tokenised market is properly entrenched.

“If there aren’t many people who want to buy those assets, you have a higher exit risk. The first movers will have liquidity issues.” - Thomas Wiegelmann FRICS, Managing Director, Bue Asset Management

What is the catalyst that could propel tokenisation into the mainstream? A first big vote of confidence from within the property establishment would help, suggests Nick Wright, a London-based proptech consultant and director in CBRE's strategic consulting team: "It would work if you were to tokenise something really significant – it would need a Broadgate or a Walkie-Talkie [City of London office schemes], something that has value and will hold it over a long period of time."

He argues that some of the technological building blocks needed for tokenisation to take off are still lacking, including a digitised land registry and much more detailed information on building performance. However, he speculates that if those conditions are fulfilled then some market trends could play in favour of tokenisation. "If the valuation model changes then perhaps tokenisation starts looking more interesting," he says. "If landlords are providing services to occupiers and tenants on more flexible terms, that generates a different kind of income to a traditional lease, and if data about the operational income is available then I think that will make tokenised real estate more attractive to investors." The first seeds of real tokenisation have been sown, but as with all nascent technologies, the form into which they will grow in the long run is near impossible to predict. In the meantime, property industry visionaries will continue to dream of a truly global and democratised market in real estate tokens.

  • This article originally appeared in the March 2019 edition of Modus