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Real assets tokenization : use case in the real estate

by | Mar 30, 2020 | 0 comments

Among all real assets, properties are very good candidates for tokenization, a mechanism that will facilitate democratization of investing on those assets. Because tokenization allows becoming a real estate owner for only a few hundred euros, without any loan.

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Real assets tokenization 

Generally speaking, tokenization means the registration of an asset and its rights on a token in order to allow instantaneous and secured ‘peer-to-peer’ trades and administration in a blockchain. Then, a new era is opening for real estate assets : their digitization

The tokenized asset ‘the token’ has numerous advantages :

  1. It can be transferred ‘peer to peer’ on the Internet like a crypto-currency. It means that it can be sent to another person without any third party approval and without any need of monitoring by the issuer.
  2. It has the specific characteristics of the blockchain : it means that it is not falsifiable, that transactions can be monitored in an ‘unchanging’ ledger and that security of the transactions is guaranteed.
  3. It can be coded by the issuing entity, and so it can represent a voting right, a medium of payment, a property title, a dividend, etc
  4. It has liquidity : meaning that you can buy and sell it any time on platform exchanges at a real time price determined by supply and demand.

    Concretely, tokenization of a real estate asset is a digital copy issue of a property title integrating the rights and obligations attached. This digitized version of the property can be shared in several tokens. We can then imagine for instance the disposal of a residential property at a value of 1 million euros divided in 1 000 tokens with a nominal price of € 1 000 each.

    Tokens are also issued during regulated issuances operations through STO (« Security Token Offering »). Those tokens are sold to investors on the primary market. Then, the second step is a tokens registration on a secondary market exchange by the issuer. Therefore, he will be able to take profit from the digitalized asset appreciation and also from its underlying right. The capital appreciation will be possible thanks to the income yield paid but also thanks to the price change of the underlying property. .

    Tokenization provides numerous advantages, specifically for the transmission of assets between sellers and buyers and also for reducing friction during phases of creation and trades. In the context of the Ethereum ecosystem (or for any other blockchain technology 2.0 generating ‘smart-contracts’), it brings numerous possibilities as well, particularly because of the utility tokens features. Smart-contracts brings transparency and goods trades globalization all in benefiting from the security of the platforms on which they are deployed.

    Thanks to tokens representative of real estate assets, savers that wish to invest in those type of investments but who do not have enough money, could acquire a « share » of a property while benefiting from the income yield .

    Thanks to this digital material, this new ‘real estate market ‘ through dedicated tokens will give possibilities to people as investment diversification beyond current national borders. For instance and currently, it can be really difficult for investors based in Asia to invest in unlisted US properties. Tomorrow, those assets will be exchanged on platforms accessible to all. .Accessibility, 24/7, including during financial markets closing hours will allow transfers and trades without any limits .

    Examples

    Tokenized real estate transactions are already existing, as some examples show it in Switzerland, United States and more recently in France. The tokenization is realized for now through Ethereum tokens and corporates that own the underlying properties. The tokens owners do not directly hold the property but it is a dedicated company, created on the purpose, that is holding it. In the US, we use LLC structures (or Limited Liability Company) and In France, it is usual to invest through the specialized status of SCPI.

    Tokens used are called ERC 20 (on the Ethereum platform), a standard in the blockchain ecosystem. Each of them are representative of one share of the capital of the company, knowing that the company is only owning the property in its balance sheet.

    1/ Tokenized residential real estate

    For the first time, a residential real estate asset has been tokenized by a specialized company called Real IT in 2019 in the US. The price was estimated at $60 000 and the House “9943 Marlowe RealToken” located in Detroit (Michigan) has been shared between hundreds of different investors who own security tokens worth $ 63 each. Owners are daily gaining $30 of income that gives an annual yield of 13 %.

    We have several assets in Detroit that are available directly on the platform now. Each of them produce different levels of yield and the attached tokens have different prices depending on the underlying property. 

    2/ Tokenized professional real estate

    In Switzerland, the real estate company BrickMark has acquired a building worth $ 134 million (in January 2020) and has used the blockchain to tokenize each property share and for reselling each ‘brick’ of this building located BahnhoffStrasse in Zurich.

    Earlier in 2019, the Swiss company Blockimmo, based in Zoug,had also tokenized a building in order to sell it on the blockchain. The total value of the tokens sold has been priced at CHF 3 million.

     Conclusion :

    Thanks to the strengths of the blockchain (quick transfer, unchanging record , absolute security) and thanks to the possibilities offered by smart contracts, a new world with strong possibilities are opened to the real estate market, both professional and residential. It will help to democratize it. The flexibility that allows the tokenization of real estate assets will help to create a new category of property owners.

     

    About the editor…

    A passion : Economics, behavioural finance and emerging digital assets

    Yves started his career in the asset management in 1986 where he worked at different positions as manager of equity funds and diversified funds. at Crédit Commercial de France and later, at Barclays group in Paris. In 1998, he took the lead of equity funds and diversified funds, then of the whole fund management business at the French team of the Dutch Robeco group  before joining Natixis Asset Management in 2012 as Director of the Equity Investment business unit. Yves left Natixis AM in 2018 to start as an independant player for professional investors and corporates (advisor and fund raiser).

    He likes to engages in sports that test his endurance like running and swimming, Yves is also fascinated by social sciences, and more specifically by history and economics. But this is the economics mechanisms behavioural aspect and the markets behavioural analysis that are a constant source of thought and discussion. Since few years, the blockchain issue and emergence of crypto assets is a new field of passion and opportunities for him.

    Yves Maillot

    Financial markets and asset management

    Yves Maillot

    Financial markets and asset management

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    Real assets tokenization : use case in the real estate

    Among all real assets, properties are very good candidates for tokenization, a mechanism that will facilitate democratization of investing on those assets. Because tokenization allows becoming a real estate owner for only a few hundred euros, without any loan.

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