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The more I explored this idea, the more I struggled to answer this question. What was the blockchain really solving here? Couldn't this same functionality be achieved by legally structuring a company and securitizing the LLC to meet these same conditions? The answer is, yes, in part, this could be done with a centralized database and a securitized product offering. While some of this could be done with a database, it's important to consider, what advantages does the blockchain provide? In short, the beauty of the blockchain is to automate and remove the third parties through smart contracts, and provide reduced operational costs at scale.
While some of these benefits also apply to investors, resulting in a better investment experience, others directly affect the possibility for investors to access new opportunities, customize in a more granular way their investment portfolio, and an overall reduction on the discount rate. Access can be improved by lowering the transaction cost, lowering investment minimums, and allowing international investments. Granular customization is the result of single asset tokenization. Lower discount rates are the result of lower risk premiums due to greater information transparency, higher expected liquidity, and improved portfolio management (as a result of granularity).
Historically, public REITs have underperformed private REITs. They also trade on an average at a premium to the underlying NAV. Thus, leaving retail investors with lower returns. Moreover, the total CRE market dollar value as estimated by NAREIT is between $15-17 trillion . While, public REITs’ total market capitalization is only 16 around $1.2 trillion . This means that a huge piece of possibly higher returning CRE 17 assets (~93%) are beyond retails investors reach. Tokenizing these private deals and providing them to a broader set of investors bridges this gap. It gives retail investors access to these previously exclusive deals.
Retail investors are also at the mercy of REIT managers and do not have the option of customizing their real estate exposure. They might want access to a specific type of asset in a specific geography and currently REITs do not provide that level of granularity. Additionally, direct real estate investing has prohibitively large upfront capital requirements and makes diversification next to impossible. On the other hand, if real estate is fractionalized, these tokens would allow investors the flexibility to tweak their exposure to the underlying. Theoretically, an investor could hold a piece of many different properties across the globe even with a small capital.
What is being tokenized? Debt or equity?
Real estate properties can be tokenized in two ways. Either the equity of the company owning the property is tokenized, or loans provided by investors to finance the property are tokenized. In the first case, each token refers to one share with regular dividend payouts. In the second case, each token refers to a loan note held by the investor that provided a fraction of the loan. The loan note entitles the investor to regular interest payouts. The digital share further entitles the investor to a share in a potential profit when the property is sold; a loan note often does not give that right.
Source: Tokenized Security MIT
What are the responsibilities for each individual party in the conveyance process?
- Searches for property
- Established proof of funds
- Makes offer on property
- Visits property
- Deposits escrow money
- Obtains necessary property inspections
- Finances property sale
- Property title transferred
- Property valuation
- Property listing
- Review offers
- Provide property disclosures
- Facilitate property inspections
- Inspections and conditions removal
- Receives cash proceeds
- Negotiate terms
- Assist in closing process
- Pre-approve buyer
- Finance buyer
- Loan creation
- Loan conditions
- Performs title research
- Create title report
- Holds earnest money
- Facilitates closing procedures
How does tokenization impact real estate funds and asset management?
In real estate, tokenization refers to the digitization of securities, alternative assets, and financial instruments. With blockchain technology, digital assets can be programmed to include ownership rights, transaction history, and rules to ensure asset issuance, distribution and transfers are regulation compliant. Simple examples include controls to ensure that tokens can only be transferred to certain counterparties, or not at all during a lock-up period. Digital assets can be customized to meet all kinds of issuer requirements.
In addition, tokenization reduces the costs and increases the speed of creating, issuing, and exchanging assets, innovating new features, administering dividends and managing other corporate actions. In-depth customization and rapid issuance allows issuers to tailor digital assets directly according to investor demands, significantly reducing counterparty risk.
Reduced costs allow issuers to decrease minimum investment amounts and expand access to a wider pool of investors. Increased connectivity between digital assets and associated networks expands secondary market opportunities and improves liquidity. These benefits to both issuers and investors demonstrate the real promise of blockchain is a future with fundamentally new instruments and markets.
How does blockchain impact property management?
Large scale property management firms endure inefficient oversight of their global portfolios. Blockchain facilitates secure data sharing, streamlines rental collections and payments to property owners, and also provides premium due diligence across the portfolio. This increases operational efficiency and allows for time- and cost-savings. It also generates substantially richer data to facilitate better decision making.
How does blockchain impact the residential ownership process?
Property development almost always occurs without valuable input from the community. The public often feels disenfranchised from planning processes, unable to express preferences for the local community. Blockchain-based planning platforms can include educational resources, token-based participation incentives, and a feedback loop between stakeholders. This would encourage community engagement and better integrate local communities in the property development value chain, improving public confidence, and improving developer services for sustainable success.
How does blockchain impact investor and tenant identity?
Blockchain-based digital identities will be powerful across multiple industries, consumer applications, and within the public sector. Tenant and investor identities from mutualized blockchain-based KYC/AML procedures can streamline background checks, reduce costs, and increase security. Decentralized identities enable anyone to prove ownership of properties while making essential documents (proof of insurance, identity, credit history) easily shareable with necessary parties.