Tokenising real estate investment

Anything connected with cryptocurrency and blockchain is highly speculative at the moment, and also unregulated. There is a risk that regulation will come in to nip this thing in the bud or there will be a financial scandal that reduces its appeal to the mainstream."
The crucial factor that will make or break tokenisation as a concept is liquidity. Real estate is a notoriously illiquid asset class because assets are large and the process of trading them is slow and fraught with paperwork. Tokenisation holds out the prospect of frictionless trade open to both institutions and individuals around the world. However, to make a market there must be buyers as well as sellers.

"There are arguments to say that liquidity might increase significantly, but you could also take the view that it gets reduced," says Thomas Wiegelmann FRICS, managing director at Munich based investment manager Blue Asset Management. "If there aren't many people who want to buy those assets, you have a higher exit risk. The first movers will have liquidity issues."

Steve Sillam, CEO at Leaseum Partners, which launched one of the first tokenised real estate investment funds at the end of 2018, counters: "You can invest in a fund in which your capital is locked up for five or 10 years or you can invest in a fund where you have liquidity on top of that for the same return, because the tokens will be listed and investors will be able to sell them."

Leaseum aims to garner $250m from institutional and accredited investors to buy commercial property in New York City, and while Sillam admits some are deterred by tokenisation, he is still bullish about the prospects for capital-raising: "Because of their strict investment criteria, institutional investors in the EU are not allowed to touch any tokenised fund, but it is not the same story in Asia, where institutional funds are more tech-friendly. Most of our potential cornerstone investors are from Asia. Family offices that have traded cryptocurrency before have been responsive as well," he claims.

It is a start, but for large institutional investors $250m is hardly a significant sum. While he is optimistic about future prospects, Lifthrasir believes it may be five years before a tokenised market is properly entrenched.

What is the catalyst that could propel tokenisation into the mainstream? A first big vote of confidence from within the property establishment would help, suggests Nick Wright, a London-based proptech consultant and director in CBRE's strategic consulting team: "It would work if you were to tokenise something really significant – it would need a Broadgate or a Walkie-Talkie [City of London office schemes], something that has value and will hold it over a long period of time."

He argues that some of the technological building blocks needed for tokenisation to take off are still lacking, including a digitised land registry and much more detailed information on building performance. However, he speculates that if those conditions are fulfilled then some market trends could play in favour of tokenisation. "If the valuation model changes then perhaps tokenisation starts looking more interesting," he says. "If landlords are providing services to occupiers and tenants on more flexible terms, that generates a different kind of income to a traditional lease, and if data about the operational income is available then I think that will make tokenised real estate more attractive to investors." The first seeds of real tokenisation have been sown, but as with all nascent technologies, the form into which they will grow in the long run is near impossible to predict. In the meantime, property industry visionaries will continue to dream of a truly global and democratised market in real estate tokens.

• This article originally appeared in the March 2019 edition of Modus