Real estate is currently one of the largest alternative asset classes, with USD 3.1 trillion in assets under management (AUM). As the world of digital assets continues to expand, the last couple of years has seen the concept of combining blockchain tokens and real estate gaining momentum, with regulatory hurdles likely the most challenging obstacle to overcome.
Raising capital by utilizing blockchain technology to issue tokens that democratize the entire process of buying and selling real estate and removing intermediary fees is attractive. Simultaneously lowering the traditionally high barriers to entry for real estate investments and providing liquidity in the stock market, real estate tokenization screams win-win.
An appetite, a demand
Susheela Rivers, office managing partner of DLA Piper Hong Kong, co-chair for the global real estate sector and head of the Real Estate Group and the Hospitality & Leisure Group at DLA Piper in Asia Pacific, feels there is a real opportunity for real estate tokenization in Hong Kong and Asia.
“Tokenization is interesting because it creates liquidity at the time of development and it also creates the opportunity for exit,'' says Rivers. “What we have here is an appetite, certainly in this environment with COVID-19, for people to look into investing in real estate tokenization, because it can use technology — smart contracts which are clever — to actually do what it says it does and create efficiency and trust in the system.”
While there has not been actual real estate tokenization in Hong Kong or Asia yet, implemented “in the proper way”, Rivers is certain it is only a matter of time before it happens.
“There has been demand from investors who understand the technology and the trust it creates, to partake in hard assets in a fractionalized way,” Rivers adds.
An investable and fair ecosystem
Backed by real assets, real estate tokens are generally much less risky than cryptocurrencies, assets which are highly volatile and speculative. Stabilization measures can also potentially be put in place to ensure that the value of these security tokens does not deviate too far below the underlying net asset value (NAV) of the property.
Traditionally, a conservative asset that has been developed and institutionalized with conservative players, there are well-defined ways of investing or trading in real estate.
“Because we have technology, fund, regulatory and real estate lawyers, we’ve compiled our expertise to understand how things are done traditionally in relation to buying & selling real estate or parts of real estate,” says Rivers. “We are working with the regulatory bodies, in particular the SFC (Securities and Futures Commission of Hong Kong) to understand their concerns and create a safe place, a sandbox where we can create the ability to invest in real estate in proper ways and the regulatory bodies can protect investors.”
In Asia, the roles of tokenization developed so far are “on the fringe of what the potential can be”.
“In the world of traditional securities, real estate tokens are just representing securities that exist in digital formats. So, it’s a smart contract that sits on a blockchain. That’s the tokenization that has happened so far,” explains Rivers. “What we’re looking at is true fractionalization of a real estate interest represented by a kind of hybrid ownership or perhaps even a debt if you like. It could be a proprietary security interest, or a right to income or a kind of loan… What we are trying to do is to make sure that these kinds of security interests can be taken up by institutional players, not on the fringes, but as a real way to invest, to raise capital and to trade. Ultimately, we are trying to build an ecosystem of investments in real estate that is very investable and fair.”
Rivers points out that the regulatory process will need to be looked at from a jurisdiction level — where the money is being raised, where the assets are based and eventually the exchange marketplace for the tokens.
Not prohibitive but protective
The recent lockdowns globally have led to a number of socio-economic trends and changes in the real estate market, rendering some real estate asset classes harder to fund than others. Rivers cited “retail and hotels” as being in a “tricky position”.
“Maybe those asset classes can have a repositioning place,” suggests Rivers. “The raising of tokens can be used in relation to taking advantage of a lower pricing. So the player there would be a developer who knows a lot about hotels or retail and is prepared to do a repositioning.”
“What we can’t have is an inefficient system where because of fees of various professionals, it becomes cost-prohibitive, despite the efficiencies of having blockchain technologies,” says Rivers. “What we don’t want is an environment where the tokens come and go because nobody invests in them or there is no marketplace. Hong Kong is a densely populated city with sophisticated players and a lot of real estate and opportunities to develop, change and reposition, well-placed to do tokenization with the right players. So if the discussions we’re having prove well, I really hope it won’t be too much into next year before we see this happen.”
Hoping to see the SFC stand behind blockchain technology “that can be used very progressively for the future”, Rivers hopes to create a marketplace of interest with real estate investors who are tech savvy.
In terms of regulations, the aim is not to have lots of regulations but to protect investors within the current environments.
“Technology is meant to enhance, not prohibit,” declares Rivers. “So long as we make sure it doesn’t abuse and doesn’t lead to people taking advantage of loopholes. It shouldn’t be prohibitive, but protective and enabling. That’s why the regulatory framework is important.”
If or when these regulatory frameworks are finally implemented, it will certainly be exciting to see a new world of real estate investment where liquidity, efficiency and customizability through smart contracts take property investment possibilities to the mass markets.
Photo credit: iStockphoto/Fokusiert