We played the healthy skeptic in our bites to Crypto News Asia on Jul 12, 2018.
In the asset tokenisation journey, the real estate use case is being furiously pursued by entrepreneurs globally.
And why not. The buying and selling of property is stuck in archaic and inefficient practices. Fractionalising real estate on the blockchain opens up new opportunities for owners, builders, buyers and sellers.
Hence from green field developments ranging from apartments for staff on an island resort to building iconic buildings in global hot spots that can be fractionally owned by the masses, to existing plantations and fisheries, real estate tokenisation projects are underway in Asia.
Many are merely looking to put the REIT structure on a blockchain, minus the higher costs and other limitations placed on traditional REIT structures.
But there are problems.
The first is land titles. It is well known globally that land registers are painfully complicated. So too is land law. None of these easily cater for fractional ownership of real estate.
As a property lawyer puts it, “Unless the land office or land registry gets involved, you’re going to have a hard time trying to prove that you own 1/100th of some prized real estate that your token represents.”
Furthermore, the complexities of real estate ownership are difficult to fit into today’s smart contracts, points out Edmund Yong of Celebrus Advisory. “More importantly the courts have to accept and recognise it. Delaware and ERC-884 is an encouraging precedent, but that is for share certification, not the title deed to your house,” he says.
(The Delaware state legislature in the US recently passed laws to allow for the use of blockchains to maintain corporate share registries. ERC-884 is designed to represent equity issued by any Delaware corporation.)
To overcome that, some projects are looking to copy the REIT structure, but at a cheaper cost, that in turn promises higher returns.
Such projects, though, will be deemed security tokens, as holders will typically have a right to the dividend of the holding company that is investing in real estate.
Not only do security tokens present their own challenges, as highlighted recently by CryptoNewsAsia, but the promise of liquidity is missing, considering the absence of any security token exchanges to-date. A number of them are in the works in the US but have yet to get regulatory clearance.
But in Singapore, one entrepreneur has ambitions to launch the world’s first real estate security token exchange.
Julian Kwan, CEO and co-founder of Investacrowd, is confident his platform will be successful in being granted a recognised market operator license. “Only 5% of all real estate globally are in public REITs. This makes it a huge opportunity,” says Kwan.
In May, the Monetary Authority of Singapore (MAS) issued a consultation paper aimed at facilitating innovation in financial services by recognising emerging new business models while safeguarding investors’ interest. The regulator stated that it has “observed the emergence of new business models in trading platforms, including trading facilities that make use of blockchain technology”.
Notably, Singapore’s stock market is also home to some of the top listed REITs in this part of the world. Any new regulation will take this into account.
Darvin Kurniawan, another entrepreneur working hard in the real estate blockchain space, is less sanguine.
“Securitised real estate tokens will take more time before it can gain a respectable momentum. Sure, in 2018 and 2019 we might see a ramping up of efforts in this area, but so far the economic logic in tokenising real estate is just not there,” he says.
Kurniawan is the co-founder and CEO of Crowdvilla, which recently got listed on the Gibraltar Blockchain Exchange.
He is quick to point out that Crowdvilla is not issuing a security token. “It is a non-profit organisation based in Singapore, whose sole purpose is to acquire holiday real estate, and make it available for our token holders at cost price. Crowdvilla’s token holders will not have any rights to the underlying properties, only rights on the time utility of the properties, which allow them to stay in them,” he explains.
On the prospect of bringing the blockchain to REITS, Yong of Celebrus says this: “ We already have REITs out there, so a REIT in a tokenised decentralised economy will seriously need to do better and address things like equitable interests, encumbrances, leasehold titles, municipal zoning restrictions, native customary laws and so on. Otherwise, they will just hide behind utility definitions and tokenised timeshare contracts”.
There is also a catch-22 situation. Real estate security tokens are meant to offer an attractive dividend yield to token holders, which is higher than what REITs currently offer. However, if the market for that is the crypto community, then it is unlikely to attract that much interest considering the much higher capital gains that cryptocurrency investors are used to. And if the target is traditional investors, then a lot of education will be needed before they participate.
These challenges do not dilute the use case for blockchain for real estate. As an earlier Medium post by Real Fuel (of which Kwan is also CEO) pointed out: “Real estate is a US$$217 trillion illiquid asset class. InvestaCrowd’s mission is to enable more people to benefit from property investing. Moving from a world where property investment is exclusive to one where it’s inclusive, allowing everyone the opportunity to participate in commercial real estate investments.”
But is this dream too early to achieve in the blockchain timescale?