Does the blockchain in real estate speak to you?
Whether you are a beginner or an experienced real estate investor. This new way of acquiring real estate and sharing the returns could appeal to you.
Indeed rather than acquiring a property via a company to sell its shares. It is possible to divide it into tokens and offer its acquisition on a dedicated primary market.
How does real estate tokenization work? Is this a step forward with real benefits for real estate investors?
What is real estate tokenization?
Real estate tokenization is a relatively simple concept to understand. It consists of dividing a property into several tokens which represent a fraction of the underlying property.
In fact the real estate token is very similar to the shares of a real estate investment fund or an SCI (real estate civil society).
Where the capital (having made it possible to acquire the property). Is divided into a multitude of shares conferring rights to their owner such as the collection of profits.
However unlike social shares real estate tokens are created and registered on a blockchain. To ensure the authenticity of the tokens and guarantee the accuracy of the information stored.
The concept of real estate blockchain
Blockchain did not appear with real estate tokens. It is a technology allowing the storage and the transmission of information in a decentralized way in the form of tamper-proof blocks.
Each change results in the creation of new blocks replacing the content of previous ones so that the information contained is always up-to-date and accurate.
The blockchain is opposed to the centralized register kept by a single authority such as the cadastral register. Making it possible to identify and certify the property rights of people.
With the blockchain each member of the network contributes to the reliability of the information. So that an isolated individual does not have sufficient power to tamper with the ledger.
We then say that the blockchain is inviolable and ensures an unequaled level of security.
However and this is particularly the case with cryptocurrencies and other crypto assets. The blockchain has a real energy cost.
Since it will be necessary for members of the network to carry out validation calculations permanently to make the blocks evolve and to keep the system up to date.
The division of a building into digital assets
Therefore the blockchain can serve as a register to record. Process and carry out transactions relating to the various real estate tokens.
Indeed if it is possible to divide a property into digital assets that is to say into tokens. It is still necessary to be able to exchange them and to certify at any time the effective ownership of each token.
For example the right to collect the rents of the property rented out. To facilitate the execution of the rights attached to each real estate token. It is possible to use smart contracts capable of interacting with the blockchain.
How is the value of a real estate token defined?
To define the value of a real estate token two signals can be taken into account.
The market value of the underlying real estate asset which evolves according to the behavior of the real estate market.
The market value of the real estate token which could depend on the supply and demand of the real estate token in question.
Theoretically the value of the real estate token should be equal to the market value of the underlying real estate. But it is now common especially in terms of active crypto.
To observe a decorrelation between the price of an active crypto and its underlying.
Advantages with DigiShares
In any case the price of a real estate token depends on the rules defined by its issuer.
Some issuers of real estate tokens decide to set the price of the token according to the market value of the real estate. With for example an annual revaluation.
The exchanges of tokens on the secondary market are then done by means of a waiting list. Without an imbalance between supply and demand of tokens being able to lead to an increase in the price of the latter.
Others may consider letting the price of the token set freely according to supply and demand. By allowing investors the freedom to buy tokens potentially decorrelated from fundamentals for speculative purposes.
What are the benefits of tokenizing real estate?
Moreover it is legitimate to ask the question of the interest of the tokenization of real estate. Indeed why not simply create a company to acquire a rental property and then sell shares to interested investors?
Tokenization to limit real estate transaction costs
One of the primary advantages of real estate tokens is the low transaction cost that comes from buying and selling tokens.
Indeed when you buy a property you must pay registration fees. Which represent approximately 8% of the sale price for old real estate.
Similarly it will be necessary to go through a long and time-consuming contractual process (signature of the sales agreement. Expiry of the withdrawal period fulfillment of the condition precedent. Signature of the deed of sale etc. Involving the intervention of numerous third parties (notary, real estate agent, administration, etc.).
Note: The technology of smart contracts in real estate sales could automate all these aspects by drawing. The effective consequences of the fulfillment of each contractual condition (obtaining financing for example) to operate an automatic transfer of ownership.
Therefore the tokenization of a property makes it possible to overcome the intervention of third parties and lengthy contractual processes. Not being a property per se but a digital asset it can be traded. Instantly on a secondary market for an unbeatable transaction cost.
In other words this amounts to allowing continuous listing of a property on a marketplace. Which is not possible with shares in civil property companies (due in particular to the obligation to have the sale approved by existing partners). Thus through its tokens the property enjoys better liquidity.
Increase the liquidity of a real estate asset thanks to geographical openness
Outside of major cities and capitals real estate is not an asset recognized for its liquidity. Indeed due to the multiplicity of real estate markets and the length of transactional processes.
It is not uncommon to have to be patient before being able to sell your property. The intervention of private individuals in real estate investment remains a very local dynamic. Where for example it is rare for an Alsatian to invest in Japanese rental real estate.
The division of a property into tokens then allows the asset to change dimension by becoming digital. Therefore a multitude of potential buyers can be interested in the property and exchange real estate tokens. Continuously on a marketplace provided for this purpose regardless of the geographical location of the property.
The other advantage of tokenizing real estate is the high security of the blockchain. Unlike a centralized ledger the blockchain is known to be tamper-proof so there is no chance of your token disappearing due to manipulation or human error.
You then have ownership of the real estate token without anyone being able to evict you from the keeping of the register.
This security is a real plus when you know that transfers of ownership of SCI shares are only recorded in a register kept by the company itself (in the best of cases). The loss of these contractual documents is not without concern…
Flexibility in the recognized rights of owners of real estate tokens
Although they are subject to specific financial regulations (financial securities or ICOs since the PACTE law). Real estate tokens offer greater freedom to the issuer in the choice of rights recognized to token owners.
Indeed it is for example possible to consider bond tokens backed by a debt security allowing the acquisition of real estate with a fixed or variable coupon paid at successive maturity to the owners of the tokens. These bond tokens can then trade easily on a dedicated platform.
There are many other possibilities such as creating real estate tokens. Relating to the ownership of a real estate property providing for a distribution of the rent collected monthly among all the owners of tokens.
In short provided you comply with the regulations. It is possible to consider real estate tokens of a very different nature in order to stick as best as possible to the demands of investors.
Admittedly today the real estate blockchain is only in its infancy. Token offers remain very limited. However it is not impossible due in particular to the evolution of the regulatory framework. That tokens can replace a large part of investments in paper stone and seduce certain institutions to diversify their investment funds.
Why real estate tokenization will survive the blockchain winter…
Successful projects a blockchain ecosystem in full overhaul and a new legislative universe. Matthieu Bouchaud, Digital Asset Lead at ConsenSys. Explains why real estate tokenization is far from having slowed down in 2019.
Blockchain occupied the front of the media scene in the new technologies sector between 2017 and 2019. In 2017 it even generated a wave of enthusiasm.
Before giving way a year later. To a certain disillusion born of the cessation of numerous projects. A lack of financing and market prospects. MIT even considered that in 2019 the blockchain would “become boring”…
A technology already validated
However the projects have not disappeared. Some have even initiated new forms of economy. This is particularly the case of real estate funds which little by little are adopting tokenization.
Currently booming tokenization is one of the blockchain-based technologies. One of those which has been able to resist and which has already won over many players including some heavyweights in the economy.
This is the case for example, of Societe Generale. The bank issued on April 18, 100 million euros on the blockchain, ” OFH Tokens ” rated triple A (AAA) by the rating agencies Moody’s and Fitch.
In September, another bank, Santander in turn issued $20 million in bonds on Ethereum. Tokenization is therefore no longer in its infancy.
Real estate funds are gradually adopting tokenization
Mata Capital a portfolio management company regulated by the AMF recently issued a real estate fund of 30 million euros on the blockchain.
If tokenization allows Mata Capital to generate emissions more simply. Its use also makes it possible to transform the way of distributing and exchanging the shares of a real estate fund.
The idea is to allow Asset Managers to continue to manage their assets as their liabilities evolve. While minimizing the efforts to maintain an automated secondary market that complies with the regulations in place.
The growth of real estate tokenization can also be seen through. The number of start ups that have decided to use it.
A legislative framework to regulate the blockchain
The establishment of a legislative framework, in 2018. Also encouraged the use of this technology. Even if many actors are still skeptical. When we explain that in 2020 tokenization will be accessible to a wide range of users. It is indeed not uncommon to come up against fearful interlocutors faced with the low number of projects.
This is to forget that the blockchain decree has been in force for less than a year! Also the regulatory framework rarely comes before the creation of an ecosystem. On the contrary it acknowledges a fully functioning ecosystem that needs to be regulated.
Regulation also provides security that encourages other actors. To this end, the AMF has set up a task force made up of French experts. Its mission: to inform and shed light.
A technology that is neither backward nor behind
If some consider a decree insufficient it is to forget that the blockchain in no way changes the legal status of the asset. Blockchain is simply a new tool. Which allows more transparency and more fluidity to real estate funds.
Finally the tokenization for real estate funds is not in retreat or behind. Less than a year after the adoption of a regulatory framework large-scale projects are in production.
And 2020 will certainly see the creation of the first distribution platforms for the real estate industry. If tokenization projects could exist in 2019, it is also because its benefits are quantifiable.
Tokenization has proven itself with the various real estate funds that have adopted it. In particular by enabling a reduction in creation costs. Distribution and exchange of financial products. And while increasing transparency in transactions and asset management.