Real Estate Tokenization – Where Are We At?
The value proposition of asset tokenization gained particular importance in the real estate market. Many projects were created this year, promising to disrupt the entire industry. In this article, we’ll have a look at what happened to these initiatives, and what can we expect for 2020.
This year began with high expectations. All odds were set on security tokens redefining the future of digital assets. Following the crash of the ICO market, the potential of a regulated framework to crowdfunding held great promise. Added to the realm was the property industry, which would become inclusive and provide liquidity through tokenization.
The potential lies in the fact that one-third of the world’s wealth is held in cash, and the remaining is held in real estate and securities. This means that liquidity is locked up, and security tokens were seen as the path to change that.
Let’s recall. Since security tokens behave like traditional securities, but it’s seen as a safer way to raise money. In the post-ICO world, having a “foolproof” system against scams was all that startups and investors were looking for.
Security tokens are essentially digital assets that rely on smart contracts to divide the ownership of some legal entity. They allow traditional investments to be “fractionated” into tokenized assets, which are more stable than conventional cryptocurrencies.
For more info, check out our in-depth piece on security tokens.
Therefore, the value proposition of asset tokenization gained particular importance in the real estate market, given that it’s one of the largest asset class in terms of global value. By tokenizing a property, the digital version of it can be split in digital tokens, turning a traditionally illiquid market into a liquid one.
Thus, many projects arose, promising to change the entire industry, making it more democratic and accessible, removing the middlemen, and as a result, the bureaucratic processes that are known to slow things down as well.
Earlier this year, we covered the ins and outs of property tokenization.
Now, let’s have a look at the projects that were meant to change the scenario this year.
Where are they at, and what can we expect for 2020?
The joint venture between technology providers Fluidity and the digital asset-focused broker-dealer Propellr was seen as the epitome of this new frictionless real estate system. However, as Ian Allison from Coindesk puts it:
“The seismic disruption of the multi-trillion dollar real estate market so hotly anticipated hasn’t happened.”
What was once a highly publicized tokenization project of a luxury real estate development in New York, was discontinued. The joint venture fell through sometime later this year, with no further details from the two companies apart from both sides agreeing that the market wasn’t ready. Sam Tabar, Fluidity’s co-founder, revealed:
“The market was just too young at the time. It didn’t have sufficient institutional appetite.”
Unfortunately, this wasn’t the only kind of deal that didn’t go through in 2019. Earlier, the token sale of a $20 million mega-dorm fell through. The blockchain startup Harbor, in collaboration with Convexity Properties, were intent on tokenizing, through a Real Estate Investment Trust (REIT), the Hub at Columbia’, a luxury university residency in South Carolina.
955 shares were meant to be tokenized, with token holders entitled to a 5% dividend. According to Harbor, the sale was terminated due to a dispute with a lender. A spokesman said that underlying cause was a dispute with the project’s existing mortgage lender.
“The issuer was unable to come to favorable terms with the existing mortgage lender. As a result, they decided not to move forward with the offering.”
All in all, things don’t look very promising for these two projects. 2020 might hold some surprises, but for the moment let’s have a look at what did go well in 2019.
What about the success stories? 2019 has got them.
Blockimmo is a decentralized real estate platform that aims at making investments in smaller stakes more accessible. They call themselves the “first regulated real estate transaction platform based on blockchain technology,” and they offer joint ventures through crowdsales, as well as protection to investors through a “working regulatory compliant product for consumers while complying to existing laws and regulations.”
They use Ethereum and smart contracts to render the transactions completely transparent, with a reduced fee. They’re known for completing the first tokenized real estate sale in Switzerland, with some reports stating it was the first in the European continent.
In May of this year, the STO had been concluded, and the tokens were distributed to the shareholders. The venture involved Elea Labs and Swiss Crypto Tokens, and approximately $2.98 million was tokenized, representing 20% of the overall property value.
A couple of months earlier, in March, Brickblock revealed the tokenization of a real estate property of approximately $2 million in Germany. At first, the sale was exclusively for eligible investors. It was then approved in October, by BaFin, Germany’s financial regulatory authority, a Security Information Sheet (SIS) for a public security token offering.
While there have been no clear reports on the difference between these the two offerings, Brickblock remains as the facilitator. The differentiating factor seems to lie in the German government’s introduction of blockchain regulations. Nevertheless, this was also called the “first transaction in the European Union.”
Jakob Drzazga talked about the future impact of tokenization:
“Once a property, real estate fund, or financial instrument is tokenized, the real advantages come into play: subsequent transactions are instant, nearly free of charge, and, if done properly, without counterparty risk. This is an absolute game-changer for the industry.”
In the U.S.A., Stephane De Baets, president of Elevated Returns, decided to launch a real estate STO after the purchase of the St. Regis Aspen Colorado Hotel. After having tried an initial public offering (IPO), and quickly flirting with the idea of an ICO, he settled on an STO.
“We went to IPO, but realized halfway through the process that this will not be a scalable business because the cost of a listing on the NYSE is just so prohibitive that it just does not make sense for a single asset.”
By conducting an STO, they could eliminate the intermediaries needed in an IPO, and use blockchain to connect investors directly to the assets they wish to invest in. However, he soon found out that STOs have to comply to a set of rules established by the SEC regulations. In De Baets case, the SEC required a one-year lockup on the St. Regis REIT in which investors couldn’t trade their tokens.
Overall, was 2019 a good year for real estate tokenization?
As it happens to all new technologies, or to anything that disrupts the “traditional ways of doing things”, there’s a period of maturity. In this case, there are still some bumps in the road that needs to be handled. Be it a “young market”, or “slow institutional appetite”, these key components to the adoption of tokenization of assets need to be followed by regulations, particularly when it comes to disrupting a huge industry such as real estate.
And, while the market may not be 100% ripe, tokenization of assets remains an instrument to be used in other ways. Beyond tokenization of real estate (focused on liquidity only), other projects have been applying blockchain technology in different ways. From helping customers acquire mortgages and enter the property ecosystem in a more “orchestrated” way, or in the construction phase.
The Instant Property Network (IPN) is an example. This solution runs on the Coadjute Platform, a company that offers blockchain tech as a mean to create secure peer-to-peer workflow patterns.
We mentioned it earlier this year, highlighting that RBS and Barclays had joined the trial, which involves the integration of platforms used by estate agents, brokers, lenders and other actors, on a distributed ledger and smart contract network. The goal is to enable consumers to a fast and secure digital journey to buying a home.
Initiatives like these show that there’s an appetite and it was quite present in 2019. A tokenized future remains a possibility for all those willing to continue trying as new frameworks of implementation are put in place. 2020 may be the pivoting year for blockchain technology and its applications, as it passes through a much needed period of transition, before reaching full maturity.