Almost every industry tries to apply the blockchain technology thanks to its disruptive nature, including real estate.
Being complex and inaccessible for everyday investors and startups earlier, the market has lowered the entry barriers by tokenising commercial and residential property.
What does it mean?
It means that if you’re an ordinary UK citizen dreaming about a stake in a commercial property located in Australia, you can get it in a few clicks.
Or, if you’re just entering the market and need financing for your property project, real estate tokenisation will help you to reach out to backers.
The idea seems to be bloody good, but is it?
Let’s clear it up together.
What is tokenisation?
In a broad sense, tokenisation is digital securitisation of assets with blockchain-based tokens issued by a particular service provider.
Tokens represent either the rights to use a product or service within a specific project or a stake in real or digital assets obtained by investors.
According to this, there are two groups of tokens – utility and security token offerings.
Initially, there were utility tokens issued within Initial Coin Offering campaigns (ICOs).
However, due to numerous fraud schemes that alarmed the cryptocurrency world, ordinary tokens have been replaced by security token offerings (STOs).
STOs are digital analogues of real securities representing investment rights of their owners.
The investment rights are fixed in smart contracts, and STOs can be traded on the stock market.
STOs are regulated like ordinary securities, yet the originator can apply for an exemption.
What’s more, unregistered STOs aimed at accumulating unlimited capital are available only for sophisticated investors, whereas security token offerings with a limit $5M work for everyday backers as well.
Unlike uncontrolled ICOs created by deceitful startups, STOs are secure and protect investors from possible risks.
How does tokenisation work?
To understand how real estate tokenisation works, let’s look at its predecessor – securitisation.
In general, securitisation of assets has several steps:
- The assets owner grants ownership of assets to a Special Purpose Vehicle (SPV).
- The SPV builds and structures the pool of assets according to various factors, including risk level and interest rates.
- Once a portfolio is created, the issuer starts selling securities to potential investors who can hold or trade them on the secondary market afterwards.
The apparent drawback of securitisation is a lot of time and money needed for its implementation.
Thanks to smart contracts that automate the majority of transactions and business processes, tokenisation takes securitisation to the next level.
If you consider the idea of using blockchain for real estate, you should know how to do it right.
- Find a platform with a high-quality infrastructure for creating a digital certificate on your real estate asset or cash flow generated by a property. You’ll need to submit an application where you will state the key features of your property and your personal details. The real estate asset is verified and estimated by an independent contractor.
- The service provider issues tokens representing stakes of the property owned by investors. Initially, the middleman fixes the price for each token, later the supply and demand influence the process.
- Tokens are sold to investors who become the owners of the property.
If you dig deeper into the technical aspect, you will see that a platform develops smart contracts and issuance protocols conduct KYC/AML checks, creates a Security Token Exchange (STE) aka a marketplace for trading tokens.
There are many blockchain startups that specialise in tokens. One of them is TokenD – our good friends and partners.
The team offers the blockchain-based tokenisation solutions that suit any industry, business or company – art, real estate, health, etc.
With TokenD, you get an off-the-shelf tool for tokenising and crowdfunding your property with a set of features for fundraisers, platform management, and individuals.
Real estate and blockchain: a match made in heaven?
The question is whether the tokenisation game is worth the candles or you can go for a conventional IPO?
Although initial public offerings have been here for a long time, these schemes are not for every real estate developer, owner or landlord.
They work well for mature companies with excellent records of success. The exception is unicorns – companies that don’t need special financial plans to gain seed capital.
They’re tough by default and angels are already obsessed with the idea of backing them.
The thing is that IPOs can be done only using financial intermediaries; that’s why the process is sometimes tedious and time-consuming.
STOs should seemingly resolve all the issues raised by IPOs and ICOs; however, some pitfalls make professional investors sceptical about their future.
Cybersecurity. There are still incidents of hacker attacks and phishing schemes which lead to investors’ losing their funds. To avoid such risks, select a platform that meets enhanced security standards.
Compliance. Since STOs are under the securities law, all the compliance procedures, including AML/KYC checks, should be carefully done. What’s more, the due diligence procedures vary from a country to country, and you need to be aware of how to comply with all of them.
Regulation. Since tokens exist in the digital world, the standard rules for regulating ordinary securities don’t always fit the bill. STOs can be regulated under Reg.D or Reg.S or both of them, that’s why it’s essential to enlist the help of professional advisors and attorneys.
Liquidity. Some experts believe that companies and individuals will eagerly buy not all the tokens at fair prices, which may lead to illiquidity issues. It means that STOs aren’t a godsend for any real estate project.
Use cases. 2019 is believed to be the year of tokens and smart contracts. Despite the hype around the innovation, there are not so many early adopters as it may seem. The more use cases of STOs there will be, the quicker the scheme will become a common practice.
How tokenisation of real estate affects issuers and investors
Of course, there are more benefits of using blockchain in real estate then challenges.
1. Liquidity and broader access to investors
Many believe this is what tokenisation came for.
Earlier companies would rely only on several backers willing to invest sufficient sums of money in a project.
Today the number of investors has increased, which marks the growth in the demand for RE projects.
However, it’s not about all the real estate projects. To make sure that your tokens won’t be sold at a discount on the secondary market, your proposal should be appealing to investors.
2. Super security and traceability
In the blockchain, all the data is stored on a distributed ledger.
If a property is tokenised, every party can view and monitor transactions made with property rights. On the one side, it contributes to better customer protection; on the other hand – makes the ownership structure more transparent.
3. Fewer intermediaries and lower costs
Again thanks to the blockchain technology, platforms can bypass financial intermediaries as every transaction is digitally recorded and identified.
What’s more, using cryptocurrencies and smart contracts for transferring funds result in lower fees.
4. Unlocking the global market
Anyone from anywhere in the world can get stakes in a tokenised real estate. The greatest thing about tokenisation is that average investors can fulfil the dreams in a matter of a few clicks. For businesses, it’s a new way to unleash public potential.
5. Automation – the 80th level
Smart contracts can be fully customised and programmed to meet the highest demands.
Everything from transferring the titles of ownership to distributing the proceeds from a property is done via smart contracts.
All you need is to predict events with the IFTTT logic.
But note, that not all the conditions can be programmed, which makes smart contracts a bit vulnerable.
Wrapping up
To tokenise or not to tokenise? – the question is still open.
Undoubtedly, blockchain and cryptocurrencies may be the best of what has ever happened with the real estate world; however, there are serious considerations to take into account: security, legal base, the complexity of smart contracts. This is what discourages property developers and angels from turning to digital fractionalisation.
