Contributed by Tan Kok Keong (COO & Co-Founder of FundPlaces Pte. Ltd.)
Governments, enterprises, and start-ups have been applying blockchain technology to address the fundamental inefficiencies of the real estate market
Using blockchains to democratise real estate
Blockchains have been touted as a key technology enabler for opening access of products and services to the masses. Facebook, JP Morgan, IBM, and even the Bank of Japan are at various stages of implementing the use of blockchains to issue digital tokens, to open access to financial products or services, and to achieve financial inclusiveness. In the real estate realm, the same evolution is also taking shape.
Adoption of the blockchain is becoming mainstream
The governments of Dubai and Sweden have both started to issue property titles on the blockchain, with Sweden’s initiative expanding to facilitate transactions. Built on the Ethereum, the cryptocurrency token Propy is using smart contracts on the blockchain to make real estate transactions more seamless and at a lower cost.
Perhaps the most impactful outcome will be the application of blockchains to tokenise real estate investments. Tokenising real estate investments can open access to more people, reduce the costs of investment, and make real estate investments more liquid. More believers are coming on board.
In November 2018, the developer of a luxury 12-unit development in New York’s Manhattan embarked on a token sale of ownership of the project, which is worth US$30m. In March 2019, three entities from the Swiss “Crypto Valley” canton of Zug, blockimmo, Elea Labs, and Swiss Crypto Tokens, successfully raised CHF 3 million for the first-ever token-based property transaction in Switzerland.
In June 2019, the family office of property giant Stan Group announced its intention to use blockchains to tokenise real estate holdings and open access for real estate investments to a wider pool of people. Stan Group has a real estate portfolio estimated to be worth US$6.38 billion, comprising offices, retail, hotels, and residential flats. I believe this is the start of much more to come.
Why the need to tokenise real estate?
Real estate investments have been one of the most consistent and exponential wealth generators. The barriers to entry for investing in real estate are considerably higher for the less affluent. This is due to the large initial capital needed, the high costs of transactions, the limited ability of the less affluent to secure financing on favourable terms, and the lack of reliable information.
To enable greater participation in real estate investments, we need instruments that can enable investors to invest small amounts in a cost-efficient manner, transparency in pricing and information, and a vibrant resale market. The issuance of tokens backed by real estate assets on publicly available exchanges can offer a way out. It also opens up possibilities of investing in alternative real estate other than residential properties.
Initial concepts (though not all are on blockchain yet) have shown promise. The Australia-based crowdfunding platform, Brickx, has shown success through enabling investors to part-own properties in Australia for as little as AUD$100. Crowdbank, based in Japan, has enabled investors to take part in being a developer in the renowned Roppongi Hills. My own company, FundPlaces, have enabled investors to take part in development projects and loans for as little as S$1,000.
Why is alternative real estate investment important?
Traditionally, investors have gravitated towards investing in residential properties, be it within their own country or overseas. Financially, the yield on investments for residential properties have not been favourable compared with non-residential properties in many countries.
For instance, an investment in a residential property in Perth, Australia could provide a gross yield of around 4% to 4.5% in a good area. But an office asset can yield between 7% and 8% per annum. Furthermore, if investors look beyond the traditional buying and selling of properties and invest as a developer or provide loans to developers, the returns could be between 15% and 20% per annum and 8% to 12% per annum respectively.
The opening up of these investment opportunities in a transparent manner via platforms can make a big difference in investment returns to the less affluent. The issuance of tokens backed by such deals on blockchains can improve the transparency of such investments, lower the cost of entry, and enable investments in small amounts.
Once the community on the platform grows, the investment can become liquid. Taken together, the implementation of blockchain technology to tokenise alternative real estate investments have the potential to open access to better investment opportunities for the masses.
What is next?
The tokenisation of real estate is still some years off from being mainstream. Several key components are still not in place. Regulars need to create a more cohesive taxation regime and set of regulations, instead of relying on outdated securities and company laws to regulate this space.
New laws need to be created to enable more cost-efficient corporate set-ups. Better compliance and more reliable anti-money laundering technologies need to be available. The proficiency of the legal profession, as well as taxation and other related professionals, need to improve. Analytics and artificial intelligence capabilities need to be enhanced to automate the vetting and ratings of real estate deals. I believe the tipping point is near – especially with the focus on technology implementation in many countries.
Democratise real estate investments
Democracy means everyone has an equal chance to make a choice. I hope we can reach a stage where this is true for real estate investments. For far too long, the market has long favoured those with prior access to information and more favourable financing terms, while limiting participation to select groups. I hope with the current pace of technological development, we can move towards greater financial inclusiveness through opening access to real estate investments to more people.
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