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Real estate tokenisation promises to unlock retail investment
3 MIN READMarch 14, 2019
Cryptocurrencies and blockchain-based cryptoassets are set to become more closely regulated and scrutinised in 2019, following a bubble-like bursting of the market in initial coin offerings (ICOs). Fund-raisings are now being conducted largely through so-called security token offerings (STOs), a market where real estate has emerged as a leading sector. Moreover security tokens, it seems, have the potential to unlock considerable amounts of retail investment into real estate.

David Hodge, director of European Operations at AEI Consultants, explains the challenge surrounding retail investment in real estate:  “Retail investors cannot make the level of investment required to participate in institutional real estate investments. This class of investment has only been accessible to high net worth individuals, real estate investment trust (REITs), opportunity funds or real estate investment vehicles managed by major banks, private equity or institutional investors.” 

Digital tokens, says Hodge, offer the opportunity to split open and ‘democratise’ the world of real estate investment: “Tokenisation of investment-grade real estate assets into fractional real estate (FRE), either by single asset or asset pools, and investment via FRE-based STOs, lowers the threshold for investment to dollars and cents, democratising access.” Furthermore, continues Hodge, when it comes to investing funds in STOs trading on licensed exchanges, “having no lock-in or limitations on redemption of invested funds facilitates retail-level investors’ access to investment grade assets, those which were previously restricted to the traditional gatekeepers and market participants.”

Hodge points out that a number of FRE-based STO participants are already establishing themselves across real estate sub-sectors, including residential, distressed assets & non-performing loans (NPL), retail, logistics, offices, hotels/leisure, healthcare, and senior living.   

Trend from unregulated ICOs to regulated STOs

AEI has conducted research into regulatory advances surrounding blockchain and distributed ledger technology (DLT). Amongst recent developments, the World Economic Forum (WEF) announced in January 2019 the formation of a Global Council on Blockchain to act in an advisory role. Also in January, the UK’s Financial Conduct Authority published a consultation paper setting out its proposed guidance on the regulation of cryptoassets. And in the US, the Security and Exchange Commission is currently under pressure from investors and members of congress to clarify its regulatory position with regard to digital tokens, for fear of driving business elsewhere.

AEI’s research also takes a look back at the dramatic rise and fall in amount of funds raised by unregulated ICOs over the last two years: according to data from ICO ratings business, icodata.io, ICO fund-raisings rose from below US$5m in December 2016 to over $1.6bn in December 2017, before falling back to below US$75m in December 2018. Going into 2019, as AEI demonstrates, the trend in digital crypto-tokens has shifted away from ICOs and towards less risky STOs. Classified as securities, STOs come under more stringent regulatory and compliance controls. In 2018, according to data from blockchain market intelligence platform InWara, real estate was the fourth most significant industry for STOs in 2018: real estate accounted for 19 STOs compared to 33 for investments & trading, 26 for technology and 25 for financial services. 

Transactional architecture changing

Aside from cryptocurrencies and crypto-assets, blockchain and other DLT-based approaches are bringing about changes in the broader way that real estate business is conducted. 

Hodge explains how DLT is being used at transactional levels to create public, state and federal government blockchains for all types of real estate-related databases: “There is increasing disintermediation of the traditional transactional architecture.  The use of DLT is expanding into title verification, valuation, diligence, insurance, payment and settlement, smart contracts, construction monitoring and material verification.  This has the potential to increase the velocity and throughput of real estate transactions.  The expanded use of DLT has a strong growth outlook for 2019.”

Blockchain and its impact on the real estate industry will be discussed further at Deutsche GRI 2019 on 8-9 May in Frankfurt.
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