The idea of fractional real estate ownership is nothing new. Already since 1960, REITs (Real Estate Investment Trusts) were introduced in the United States.
By pooling investors’ capital in REITs, the real estate market suddenly became much more accessible. You could now invest in real estate without having to buy or manage properties yourself.
Fast forward to 2021, and a new revolution in the world of real estate is unfolding in front of our eyes. This time, it’s called “tokenization”.
Real estate tokenization is the process of partitioning real estate into many small pieces, called tokens. Whoever owns a token, owns a piece of the underlying asset.
These tokens are created during a so-called STO (Security Token Offering), in which the real estate is essentially split up into digital, tradable assets stored on a blockchain.
It’s easy to see why people are enthusiastic about this development. The global real estate market values at around $280 trillion, making it one of the largest markets on earth. At the same time, it’s one of the most illiquid and intransparent markets out there.
In other words: a recipe for disruption.
Blockchain, known for bringing transparency and efficiency to systems in which value is stored and transferred, was envisioned to play the main role in this tokenization disruption.
But how far have we come? Is real estate tokenization actually happening? Is the technology delivering on its expectations?
In this article, we try to give an accurate representation of the current status of tokenized real estate anno 2022.
Why tokenize real estate
Before we dive into that however, it’s important to know why we should even pursue real estate tokenization in the first place.
Here are a couple of reasons.
Low entry barriers
Just like how REITs made real estate investments more accessible to regular people, real estate tokenization does the same – on steroids.
In 2019, a luxury villa in Paris valued at €6.5 million was tokenized and put on the Ethereum blockchain. The asset was subsequently split into 1 million pieces of as small as €6.5 (!)
With a piece of real estate costing about the same price of a burger, tokenization drastically lowers the entry barriers. A much wider range of investors is able to access the real estate market.
As the entry barriers of owning tokenized real estate become lower, investors are able to create highly diversified portfolios.
“I’d like one piece of a luxury villa in Paris, two pieces of a shopping mall in New York, and another piece of a flat in Hong Kong please.”
– “Great choice, that’ll be $28.90 please.”
The wider audience that’s able to be reached due to lower entry barriers is not the only driver behind a more liquid real estate market.
As digital tokens on a blockchain are able to be securely and efficiently transferred without a middleman, trading of these asset-backed tokens suddenly becomes much easier and cheaper as well, leading to increased liquidity.
Blockchain technology, with its ability to automate processes and to cut out middlemen, can lead to cheaper and more efficient processes.
As Stephen Macdonald, Australian partner at The Proptech Connection, a specialist firm working to bridge the gap between technology, real estate and investment, points out in an interview with Blockdata: “The use of smart contracts has the ability to drive down fees and costs, which will be positive for real estate investors and the sector.”
Off for a great start… Or not?
For a while, it seemed like the real estate market was indeed being disrupted by STOs. There were just too many advantages for the technology to not jump in on the hype.
During 2018 and 2019, many examples of successful real estate tokenization projects indeed appeared in the media.
One of the earliest examples of a successful real estate tokenization project was done by Aspencoin. The digital security represents fractional ownership in St. Regis Aspen Resort. After successfully raising $18M through an STO, they moved over to Securitize for improved liquidity.
“Fractional ownership made possible by blockchain technology led to a sharp increase in potential investors who had been locked out in the past. The prospect of liquidity is a game-changing element for investors and issuers alike.”— Erin Sheehan, VP of Sales at Securitize
The founder of Aspencoin has a similar take as they “want to enable investors to benefit from the accessibility, liquidity, and transparency of real estate digital securities.”
Another example is Harbor, who was set to tokenize a $20 million student residence in South Carolina. Or consider Propellr and Fluidity, who were tokenizing a Manhattan luxury condo worth $30 million in 2018.
It seemed like blockchain technology was delivering on its expectations – tokenization is happening and the real estate market is up for a big disruption!
Searches on sites like Google News, Ledger Insights and Cointelegraph yield a disappointing amount of articles about real estate tokenization in 2020 and 2021.
Articles about real estate STOs which confirm they have actually completed successfully are even harder to find.
Digging deeper, one is even able to find articles about failed real estate STOs. Remember that $20 million student residence in South Carolina mentioned earlier? Failed. Or that $30 million luxury condo in Manhattan? Quietly scrapped.
So what’s the deal here? Why does it seem like so little is happening anno 2022? Did the media simply lose interest in the topic? Or is there something more going on?
Bottlenecks all around
2017-2018 marked a huge ICO boom. Ever since then, regulators have entered the field, and investments in ICOs have been declining.
It seems like regulators have pushed ICOs away, moving the market towards their more regulated counterpart: STOs.
While there are some options which allow you to dodge the bullet of a full SEC registration (like going for a “Regulation A+” offering), doing an STO is still far from easy.
This is shown by, for example, Arca Labs, who got approval for their US treasury backed security coin Arcoin. It did not take less than 605 days though to make it through the regulatory funnel.
In other words, regulation is a bottleneck for real estate tokenization projects to take off.
Besides regulatory challenges, there are other reasons for the seemingly slow developments in the world of real estate tokenization.
The Proptech Connection mentions they see many benefits in using blockchain technology for real estate, but that without a structured framework, there will be a bottleneck to adoption.
“Real estate deals are not vanilla and can be complex, often using things like sophisticated tax structuring and contingent return instruments. It is also worth reiterating that many real estate projects do not deliver the stated returns or fail. Therefore, direct investment without regulation, advice or professional portfolio diversification is something which will increase risk. The companies that will succeed will bring together elements of both the existing framework and the exciting aspects of blockchain and smart contracts. ”— Stephen Macdonald Partner at The Proptech Connection
Another bottleneck, as shown by the $30 million Manhattan project discussed earlier, is that institutional appetite was not enough. As Sam Tabar, Fluidity co-founder, mentioned: “The market was just too young at the time. It didn’t have sufficient institutional appetite.”
Ironically enough, the project suffered from a lack of institutional investments. Wait – wasn’t real estate tokenization supposed to lower entry barriers so that retail investors could participate more easily?
Signs of life
Regulation around STOs has been getting more strict – that’s a given. The real estate market hasn’t been completely disrupted from one month to another – also true.
Sceptics might conclude that they were right; real estate tokenization was nothing more than a hype.
But just when everybody is looking away, some companies are proving the sceptics wrong.
Consider for example RealT, who has successfully tokenized 75 properties since 2019. They recently partnered with digital asset platform Mt Pelerin to speed up the tokenization process, and to enable investors to easily transfer tokens between Europe and the US in a compliant way.
If that sounds more like the idealistic promises that were made during the 2017-18 hype – you’re absolutely right.
Another example of an impactful tokenization project was executed by Polymath, who successfully tokenized roughly $2.2 billion worth of commercial real estate for RedSwan.
Meanwhile, Deutsche Börse and Commerzbank just recently announced a joint venture. Backed by these giants, the platform dubbed “360x” aims to tokenize real estate as well as art.
“Real estate tokenization has an incredibly bright future. At Polymath, we believe it is only a matter of time before all assets are blockchain-based assets. Real estate has been leading the charge as one of the most exciting and widespread use cases for this technology.”— Graeme Moore, head of tokenization at Polymath
What’s to come
One can conclude that real estate tokenization might not have lived up to the high expectations that were set during the 2017-18 hype.
But hey – how often does reality actually live up to hype?
Especially in a market like real estate – infamous for its complexity, paperwork and intransparency – we shouldn’t expect disruption to just happen overnight.
But make no mistake – real estate tokenization is happening and will continue to happen.
Graeme Moore, head of tokenization at Polymath, thinks the same. He mentions that “real estate tokenization has an incredibly bright future. At Polymath, we believe it is only a matter of time before all assets are blockchain-based assets. Real estate has been leading the charge as one of the most exciting and widespread use cases for this technology.”
Real estate investment, ownership, and transfer of ownership are inevitably moving online. Until proven differently, blockchain seems to be the most favourable technique for doing so.
Whether you call tokenized real estate a hype of the past or an inevitable success simply depends on your timeframe.
Special thanks to The Proptech Connection, Securitize and Polymath for their contributions to this article.
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