The barriers to investing in real estate are high; you need a large amount of cash and you need to be able to lock up that cash for a substantial period of time. Tokenisation promises to solve both these issues.
Tokenisation (as the name suggests) is the representation of ownership in an asset by tokens. Blockchain technology allows the ownership of an asset to be fractionally divided into smaller chunks. These chunks are sold as tokens and then (in theory) can be traded on a secondary market.
The latest UK House Price Index (published 13 June 2018) shows that the average residential property in London has a value of £484,484. Add onto that over £9,000 in SDLT (plus advisory fees) and you are looking at a minimum of £500,000 to get yourself a property in London. But what if you could invest in real estate with just £50?
On 9 May 2019 a US company called RealT launched offering investors the opportunity to buy a 1/1000th of a house in Detroit for $63 (at the time of writing) by way of a "RealToken". In the RealT model an LLC is incorporated, its sole purpose being to own the property and each share in the LLC is tokenised. Each token promises to pay its owner a rent of $0.86 per month. The concept of tokenisation is not dissimilar to buying shares or units in a special purpose vehicle which owns the property, but RealT state that: "Unlike REIT or other real estate funds, owning a RealToken is actually owning part of a home. Like typical real estate ownership, RealToken owners get regular rent yields immediately, rights to voting regarding property management and sales, and even the ability to physically enter and visit the property with proper notice to tenants." This is because smart contracts and blockchain technology allow the legal rights and obligations of the asset owner to attach to the token.
Potential advantages of tokenisation
Liquidity: Arguably the biggest drawback to investing in real estate is its illiquidity. Cash is locked up for long periods and there is a limited pool of investors who can afford a £100 million property so finding a purchaser can take time. Tokenisation promises to solve these issues by dividing the ownership up into more affordable chunks. Property owners could even sell part of their ownership to realise capital and later buy back the tokens when cash is no longer needed. Champions of tokenisation claim it could even capture additional value lost due to the negative perception that real estate is illiquid.
Flexibility: It is possible to tokenise pretty much anything so property owners have the option to choose what they sell. They can choose between tokenising:
- ownership of the whole of the real estate asset;
- ownership of part of the real estate asset;
- equity in the legal structure that owns the asset or a group of assets;
- an interest in the debt secured on the asset; and
- a stream of income based on the cash flows of the asset.
Wider investor pool: Tokens are highly divisible so investors can purchase tiny percentages in the underlying asset. Multimillion pound properties with a small market can be divided up and sold as fractional offerings with a wider pool of potential purchasers. Savings in transaction fees and process should also help reduce the minimum investment amounts. Higher liquidity should also reduce investment periods. In theory anyone with an internet connection and the money can participate.
Transparency: The blockchain record is immutable and decentralised which means clear records of the history of the ownership of the tokens and a lower risk of fraud.
Speed: Distributed ledger technology allows ownership to be transferred instantaneously. "Smart contracts" allow for a computer code to automatically execute pre-programmed actions once pre-defined conditions are met e.g. paying out a dividend or rent. Transactions are further streamlined as they can occur without an intermediary.
So can I become a landlord for £50?
In the UK, not yet. We will have to see how the RealT launch pans out but it is fair to say that appetite for property tokens remains cautious. In April this year, in what promised to be the first tokenised REIT in the U.S, the $20 million tokenisation of luxury student residence "The Hub" in South Carolina, was cancelled and whilst there has been some success in the US (the St Regis Hotel, Aspen and a Manhattan condo), these deals were only open to accredited investors and so far token launches in the UK have failed to gain traction.
The LawTech Delivery Panel believes that "perceived legal uncertainty is the reason for some lack of confidence" and has today launched a public consultation to confirm the status of cryptoassets, distributed ledger technology and smart contracts under English law. Work is also needed to clarify how data protection law can work with distributed ledger technology.
Tokenisation certainly has the potential to shake up how real estate is owned and traded across the globe. Its success will largely depend on whether legal clarity can be established to inspire investor confidence - not the easiest task when the underpinning technology is inherently opposed to centralised regulation.
Watch this space; perhaps in ten years' time millennials will still be unable to afford to buy their own homes but they will all control tokenised real estate portfolios from their smartphones.