Reimagining Investment

By on Oct 5, 2018 in People

Editor’s note: The following post was written for real estate and investment professionals in Asia by Bernie Devine, Regional Director (Asia) for Yardi.

With 30+ years’ experience dedicated to real estate and technology, Bernie is a leader in digital transformation in real estate and using data to create a more competitive and collaborative environment. He supports real estate clients with Retail, Commercial, Industrial, Residential and Mixed Use assets, helping them to grow their operations, create efficiencies, and gain better insight into their business. His expertise includes asset and investment management, private equity, operations improvement, program and project management, finance, technology implementation and compliance.

Currently responsible for the growth of Yardi Systems in Asia, Bernie lives in Hong Kong and is a qualified accountant and economist. He has published over 60 articles and has extensive public speaking experience.

I’ve recently seen a lot of discussion around the tokenisation of real estate investments. Some has been sensible, but some has missed a few key points.

Bernie Devine

Two key challenges of the real estate market for the last 400 years when compared to other investment asset classes are the slow pace of transactions (it takes a long time for ownership to be transferred) and liquidity (the purchase price is so large that only a limited market of buyers exists). There have been many innovations over the years (Such as private equity funds and REITS) that have sought to address these issues, but the proptech community now thinks it may have a better solution.

Tokenisation of real estate investments is about changing the way ownership of an asset is represented. It’s proposed that this change in ownership model will open up how the purchase of the asset is funded and how ownership is transferred.

Basically, if ownership can be broken down into smaller portions then there are more people who can afford to buy a portion which means that those smaller portions will be easier to sell, creating a more liquid market. Similarly, if those smaller portions can be transferred safely from one owner to another faster and more reliably then this creates greater access and liquidity. This is the value proposition.

Now, I am all in favour of any tool that makes a market more efficient with greater liquidity.  But there are some barriers.

Some challenges of tokenisation

A lot of this discussion comes back to compliance and regulations. I may not have a full grasp of all the legal complexities surrounding this, but I have enough experience to provide an opinion:

From a legal perspective the transfer of real estate titles is controlled by specific regulations in each market and typically uses a title registration and transfer process that involves a government department as the host of the register. Replacing this with a token representing ownership would need new laws to recognise the new form of ownership and transfer. When a dispute arises, a court will be needed to settle it and that court will look for laws that provide direction. Without laws enabling a court to recognise and enforce tokenisation I’m not sure where a token owner would stand. There is also the issue of the applicability of laws specific to real estate and their applicability if a token represents ownership. The specific laws I’m thinking of relate to getting a court order for eviction and the concept of vacant possession. I’m no expert but much of the law around this area relies on a reference to land titles and lease registries managed by government departments. I’m pretty sure most owners would not want to lose the protection those laws offer.

Investing in any form is regulated in most markets. Unlisted vehicles are subject to limits of the number of members and sometimes on the minimum investment size. Listed vehicles are very expensive to set up and have may regulations to control risk – as they accept investments from the general public. REITs are a special class of listed vehicle – they usually have tax benefits associated with their structure and this means even stricter rules on what they can do. Replacing these investment models by allowing people to buy a token – the closest representation is to have a corporate title on the asset and people buy shares in the corporate title. This corporate title if unlisted is currently limited to a small number of members – usually 50, depending on local regulations.

If these tokens were listed on an exchange where they are traded, then you are getting into trading securities and that also gets caught in legislation around exchange licenses in most places. What this means is not only would the tokens be subject to investment regulation but the exchanges they are traded on would also be regulated like any other stock exchange. For example, In Hong Kong digital tokens are considered virtual commodities, not currency, and in some cases are regarded as securities, meaning they are subject to securities law and any exchange they are traded on as a securities exchange.

So this then creates some challenges to be overcome for tokenisation to become a reality. When comparing these models to existing solutions there are a number of points to observe. See this PDF for more details.

Ultimately, I think that tokenisation of real estate will yield benefits and should be progressed. Much of the success that is proposed relies on changes to legislation that will be hard won. How long those changes take, or whether this idea has permanent staying power, remains to be seen.