How does the tokenized real estate market work and is it worth investing in it?
The current real estate market is complex, over-regulated and with a high barrier to entry. Therefore, more and more companies and investors are turning to new solutions, one of which is the tokenization of real estate rights on the blockchain. So, on September 17, the investment company AssetBlock launched the platform of the same name for trading commercial real estate tokenized in the Algorand blockchain.
Users of the new platform can buy tokens and become co-investors in a $60 million hotel complex. And on September 16, the Harbor platform announced that it was tokenizing shares in real estate funds worth more than $100 million.
How The AssetBlock Platform Works
AssetBlock is a Boston-based investment company that invests in commercial real estate. The company teamed up with the management company Lodging Capital Partners (LCP) to tokenize exclusive hotel properties worth $60 million on the Algorand blockchain. It is still unknown what these objects are.
Only accredited or qualified investors can trade on the platform. After registration, users undergo KYC / AML checks, as well as an accreditation check.
Investors can buy a share in hotel real estate in the form of Algo tokens on the Algorand blockchain, but cannot yet exchange them for shares in real estate. In the future, users of the platform will have access to real estate that is not available to the general public, and will also be able to directly exchange Algo for their share in real estate. AssetBlock will continue to add more partners and properties.
The AssetBlock platform has been in development for over a year.
The company believes that blockchain is an opportunity for the market to keep up with the times. The management decided to build it on the Algorand blockchain because of its high speed and security.
Algorand is a blockchain project by MIT professor Silvio Micali, who has been awarded the Alan Turing Award. Algorand promises practical instant transactions and low system maintenance costs. In June 2019, the project raised $66 million through an auction, and in August another $200 million from an investment fund. However, things are not going well for him so far: in June, the Algo token was traded at a price of $3.28, now the price has dropped to $0.19.
What Other Players Are On The Market
Asset Block is just one of dozens of real estate tokenization companies. Over the past few years, dozens of blockchain real estate startups have emerged. Here are a few examples, but the full list is much longer Atlant.
There are more such platforms than tokenized objects themselves. Among the largest: residential complexes in the heart of Manhattan worth $30 million and South Carolina $20 million, $18 million for a 10% stake in the St. Regis Aspen. On September 16, 2019.
The Harbor startup announced that it would tokenize the shares of four funds of the iCap Equity investment company managing assets worth more than $100 million on the Ethereum blockchain. Tokenization will increase the liquidity of the shares (it will become easier to sell them) and reduce the cost of document management. Recall that back in November 2018, blockchain startup Harbor launched the sale of shares in a residential complex.
Why Tokenize Real Estate?
Real estate is the world’s largest asset class, with a larger market than bonds and stocks. The total value of all investment grade facilities exceeds $200 trillion. The professionally managed global real estate investment market grew from $7.4 trillion in 2016 to $8.9 trillion in 2018.
However, traditional real estate investment is not for everyone. An ordinary investor can afford to buy 1-2 residential properties. As a rule, only institutional investors, developers and funds can afford to invest in commercial real estate.
These Difficulties Are Not New.
Previously, they tried to cope with them with the help of real estate funds: investment trusts (REIT) in the West and closed mutual funds in Russia. Investors bought a block of shares, and the management company invested in real estate. But such investments have a high entry threshold, low liquidity (it is difficult to exit the fund ahead of schedule), high commissions for managing funds, and you have to wait several years for a return on investments.
Tokenization could solve most of these complexities. In a nutshell, tokenization is one of the ways to securitize real assets. This is a form of attracting investments by issuing securities, but security tokens are used instead of stocks and bonds. Tokenize an asset means to divide it into shares (tokens) that can be sold to investors. Almost any asset can be tokenized this way: companies, real estate rights, securities, precious metals, derivatives, and even art.
Of course, real estate itself cannot be divided: only the rights of accounting and asset management are tokenized. The buyer of such a token partially becomes the owner of the building. But it is also possible to tokenize the rights to a part of the rental income or assign fixed payments to each token.
Tokenization allows you to break an expensive piece of real estate into any number of parts, or tokens, which can be worth fractions of a cent. For example, if you tokenize a shopping center for a billion rubles, dividing it into a million tokens, then the minimum investment threshold will be only 1000 rubles. This allows private investors to gain access to institutional grade properties without buying shares of classic real estate funds.
Asset tokenization makes many processes related to real estate transactions faster and significantly cheaper.
increases the liquidity of objects by tokenizing real estate, which can be sold much faster and more efficiently than traditional methods;
lowers the entry threshold for investors and increases the buying base for the issuer of the token;
allows you to implement smart contracts that can automate most of the workflow, which will reduce the time for processing a transaction to one click, and also significantly reduce transaction costs.
Real Estate Tokenization Is Not So Simple
The concept of property rights tokenization seems simple, and its benefits are obvious. However, in reality, everything is more complicated, there are nuances.
The real estate market is a heavily regulated environment. But this is necessary to reduce the risks, the number of errors and cases of fraud. Buying an apartment or investing in a mall can’t be as easy as buying a laptop or even a car.
In this regard, the main problem with the tokenization of real estate rights is the lack of proper regulation. In most jurisdictions, it simply does not have any regulatory mandates. Here are the main difficulties:
legislation allowing real estate tokens to be traded fully legally and with guaranteed rights has yet to be enacted. It is not clear how to transfer property rights, separate property rights and claim rights;
there is also no corresponding infrastructure: transactions carried out through the blockchain are not legally binding in all jurisdictions. It is not clear how to tokenize and register tokens (whether they fall under the definition of securities or not);
The above-described difficulties with tokenization
In fact, lie in the absence of a legislative framework for it now.
Which means that the investor will have to rely only on the integrity of the issuer and owner. At any time, the owner can raise money through tokens, and then sell the building at a lower price or pay dividends that are too low. Of course, all these nuances can be prescribed by law.
However, while there are no such legislative acts, investors are at best protected by securities laws. Therefore, if you invest in such projects, it is better to trust companies from the US and Europe, where regulation is stricter.
Also, tokenization does not guarantee an increase in the liquidity of the object and, even more so, high profitability. Moreover, the tokenization of real estate rights does not mean at all that all tokens will be instantly sold out – why would they?
Large investors do not need tokens, and the influx of small insolvent retail investors only reduces the value of the asset. In addition, this is a direct path to inflating the “bubble”. Also, now there are simply no large single platforms for trading tokens for real estate. Instead, there are dozens of platforms with a narrow audience and several sets of tokens. Buying such tokens is easy, but selling them is unlikely.
The Market Is Ready, But The Infrastructure And Legislation Are Not
Of course, the real estate market is ripe for tokenization – its potential benefits are impressive. However, all this is only in its infancy, and therefore you should not rush to come to the party first. Market development will accelerate significantly if the benefits of tokenization of real estate rights are realized by institutional investors – they will be able to bring the market to a new level.
However, the large deals that the media is now writing about do not mean that the risks are decreasing. For participants, this is often just an opportunity to artificially disperse liquidity and manage to make money on it until the “bubble” deflates.
In our opinion, the benefits do not yet outweigh the possible risks.
The potential return is unlikely to be higher than 5-7% per annum (a good return on real estate funds), and the risks will be only slightly lower than when investing in some kind of ICO. If you want to take a risk, there are already more familiar methods: you can simply buy a few satoshis or a whole bitcoin.
Now it seems much more reasonable to wait until real estate tokens acquire infrastructure and receive regulation in which they will be legally separated into a special asset class with prescribed investor rights. But it could take years for new investment options to be introduced into the regulatory framework.
What do you think about real estate tokenization and platforms that offer such services? Would you like to become co-owners of some elite hotel for a hundred or two dollars? How do you think you can make money from it? Are you afraid of losing money?