Digital securities address many of the barriers that have long plagued investing in assets such as commercial real estate. Historically, investments in private, nonlisted REITs have had virtually no liquidity because of complex regulations, a fragmented marketplace and inherent market inefficiencies. Tokenizing these investments allows for fractional ownership, widening the base of potential investors and improving liquidity in the secondary market. The tokenized format also harnesses distributed ledger technology to eliminate manual, redundant trading processes, reducing settlement times and capital costs while automatically enforcing relevant regulations.
These blockchain-based digital assets are poised for exponential growth in 2021 and beyond as more investors and institutional players enter into the market. With huge untapped potential in the multi-trillion-dollar alternative asset space, many are looking to digital securities to unlock the liquidity that has long been missing from the commercial real estate market.
However, despite all these potential benefits, and that the digital securities ecosystem has been evolving since 2017, we have not seen significant growth in tokenized real estate assets to date. The obvious questions are: why is that, and will it change?
To answer these questions, we must first look at some of the potential benefits of tokenizing real estate assets.
Unlocking liquidity where there was none: Real estate assets are illiquid. Tokenizing real estate (together with fractional ownership) allows for much easier trading of investors’ holdings, as well as ownership changing hands without liquidation of the real estate asset. Through lowering the entry barrier for investors, tokenizing has the potential to make real estate investments more attractive for a broader spectrum of participants. All of this combined results in an increase in liquidity, allowing the reallocation of investment capital by asset managers. Where real estate investments traditionally are part of the portfolio marked for illiquid assets, tokenization funds could potentially shift these funds to a liquid part of the portfolio.
Improving market security and transparency: Employing distributed ledger technology eliminates complexities and paper, simplifies transactions, and ensures compliance and security with every transaction. It also provides simpler and irrefutable proof of ownership.
Automation simplifies and streamlines infrastructure: Blockchain-based technology can automate and streamline the complex, laborious processes that have defined private investment in real estate for decades, while still ensuring full regulatory compliance of every transaction. Tokenization through embedding and automating local regulations also simplifies cross-border deals, which in turn significantly expands the target universe of these deals.
MORE TO THE STORY
While the benefits of real estate tokenization are promising and obtainable, the industry continues to grapple with a number of challenges. Yes, these barriers present an uphill battle. However, industry leaders, regulators and technologists are creating opportunities and discovering solutions to the following challenges at a rapid pace, bringing us even closer to realizing the full potential of real estate tokenization.
The tangible world of real estate must exist in the virtual space: Unlike many other popular digital assets that are more “virtual” in nature, real estate assets are about as tangible as an asset class can get. Thus, the process to trade a tokenized real estate asset requires the right technology, platforms and regulations tying the physical world to the virtual world. For example, verifying the asset does exist and ownership is as stated, documenting what investors need to know about the asset and its valuation, as well as investor rights as a security holder (i.e., updated disclosures, secure, privacy-enabled and immutable, etc.) all need to be clear.
A dedicated real estate–focused trading infrastructure is key: The industry has not yet sorted out how this particular type of digital security will be traded. Real estate assets and deals are complex in nature. From residential to commercial and agricultural assets to development and rentals, each of these assets is unique and require a keen understanding of the various nuances of each deal. Investors in these assets depend on multiple variations and factors to extract value. These assets cannot effectively exist on a “vanilla” digital securities marketplace, suggesting the need for more dedicated marketplaces for tokenized real estate assets.
The infrastructure and standards required to identify, compare, gain insights and then simply and safely trade tokenized real estate assets are still in their early stages. However, many firms realize the potential and are making significant progress.
Recently, we’ve seen an uptick in real estate asset tokenization, including key partnerships such as SK Securities and Kasa Korea, Securitize and LIFULL, as well as Red Swan and Polymath — all of which are creating new opportunities to issue and trade tokenized real estate assets. Additionally, marketplaces such as Reinno and STOs like AspenCoin and Fundament are already taking shape. These are promising developments that will greatly benefit the growth and adoption of tokenization and blockchain technology in the real estate market, but more is yet to come.
Further digital securities ecosystem growth: Further acceleration in the development of the digital securities ecosystem in general, more ecosystem providers, increased liquidity in secondary markets, and a growing number of assets being tokenized will foster growth.
Emergence of dedicated real estate tokenization platforms: We will witness the emergence of dedicated platforms for tokenized real estate projects; some end-to-end platforms for issuance, fundraising and secondary trading, as well as more dedicated to a specific phase.
Successful real estate tokenization projects: Initially we will likely see more financing and REIT-type deals, as they seem to be the easiest to implement and bridge the gap between the physical asset and the virtual digital world. We will likely also see, initially, a bifurcation between institutional and more retail-focused deals. And, as more institutional focus shifts to this ecosystem, we will see several successful prime (in quality and size) real estate tokenization projects as well.
The continued emergence of new regulated platforms and digital securities exchanges, that are dedicated to the real estate asset class, will allow investors to browse, sell and buy property shares at more attainable and much lower amounts. The digital securities marketplace is entering a new phase of maturation, with growing numbers of ecosystem players emerging, increased institutional interest and involvement, along with positive regulatory moves.
Tal Elyashiv, a serial entrepreneur, is founder and managing partner of SPiCE VC, which funds early-