How blockchain is disrupting the insurance real estate investments market
The value of real estate assets declared on Insurances’ balance sheet does not reflect the real market evaluation. Here is why and how to avoid it by leveraging the Blockchain technology
Insurance companies operate within an environment of risk which requires strategic analysis of their investments. For most of these companies, diversifying their investments is perceived as the most effective way to safeguard their capital. Studies have shown that investing in real estate is more advantageous than using bonds, stocks and cash instruments; this is true when an insurance company wishes to achieve a higher level of portfolio return with less risk.
However, several factors are leading to the sharp downturn in insurance companies’ direct ownership of institutional real estate with the low liquidity of this asset class as the primary driver for the decrease in their holdings.
Insurance companies investing in real estate face a significant number of challenges due to the constraints of investing in this asset class. Most real estate investments only become liquid after a fixed term, if at all. There are a number of trading restrictions and costs / frictions that arise as a result of buying and selling assets in real estate that are not present in asset classes such as for example equities.
On top of that, the value of commercial real estate fluctuates widely over the course of the economic cycle. As commercial real estate operates on a ~15-year market cycle, owners must take purchase/sale decisions carefully to maximise a property’s yield. Otherwise, when the real estate cycle faces a downturn, owners are left with the unenviable options of either selling the asset at a reduced price or waiting for a potentially extended period of time for the market to recover.
In recent years, due to market slowdown and the need of liquidity, international investors came to the scene taking advantage of the situation and bidding at significantly lower prices than the assets were valued at in the market.
Faced with these circumstances, insurance companies have had to take difficult decisions: marking their assets to very low market values in order to gain access to liquidity or waiting for better times but at the cost of allocating part of their profits to the costly maintenance of their real estate holdings.
An important example comes from the Milanese ‘Torre Velasca’, built ~60 years ago as an icon of the Milanese architectural renaissance of the second half of the 1900s. Originally owned by the Fondiaria-Sai, over the years it has been forgotten and no planned maintenance has been completed leading to its slow decline. Even when the tower became the property of the Unipol insurance group, and a strategic plan for restoring the tower was presented, the need for significant investment (i.e. liquidity) slowed down the restoration works.
Everyone is aware of the potential profits that can be derived from Torre Velasca, especially the Unipol group that recently invested € 15M to re-build 13 apartments in the tower. On the other hand, wealthy overseas investors are showing their interest at values of no higher than EUR100M, considerably lower than estimates made by Unipol.
Often the value of real estate assets declared on Insurances balance sheet does not reflect the real market evaluation
So, what is the underlying issue that does not allow Torre Velasca to be sold or refurbished? Mainly the scarcity of investors able to buy such an asset for their portfolio and from the owner’s perspective, the absence of liquidity.
What if Torre Velasca could be digitally split into thousands of little parts and those sold to a number of investors (either small or big) who would then collect revenues deriving from the market growth in the value of the tower and the rental yield from residential and commercial activities operating within the tower?
Despite the fact that this scenario seems to be a utopian ideal, Blockchain technology already offers a range of solutions aimed at addressing the challenges faced by the insurance industry in real estate. Among the plethora of start-ups, Brickchain Investments’ main objective is to provide liquidity to the owners of sizeable real estate assets by tokenizing portions of their asset holdings while allowing them to maintain ownership. By means of this approach, a share of the asset (up to 49%) is distributed among hundreds or even thousands of users (through Brickchain’s REMARK platform), who benefit from a safe investment with associated high-quality revenues. In executing its transactions, the REMARK environment uses BUILDCOIN which represents a bespoke cryptocurrency developed by Brickchain Investments Ltd.
A liquidity premium may grant Insurance companies a positive re-evaluation of their asset portfolio ranging from 10–30%
In the case of Torre Velasca, the tower could potentially be registered on REMARK’s platform and 30% of its shares distributed through a Building Public Offering (BPO), this would grant Unipol as liquidity 30% of the value of the tower, all while maintaining ownership. The released funds could be reinvested into the tower itself e.g. for restoration works, which would likely lead to a positive revaluation of the asset and a higher level of return for the investor, making the tower itself more attractive. At the same time, the Torre Velasca could be traded as per its real value, calculated by Brickchain’s proprietary algorithm and market estimation tools, without leaving any room for speculation.
People behind this article
Matteo Oldoni is the Director of Brickchain Investments Ltd, a London based company aiming at registering, tokenizing and trading real estate assets on blockchain network. Brickchain Investments just launched its ICO with a pre-sale starting at the end of November (further details at www.brickchaininvestments.io/ICO).
Davide Leggeri is a management engineer with more than 8 years of experience in the real estate industry, mainly focused on asset management and investment activities. After having worked for the biggest Italian asset management company, during the last years, Davide is committed to help foreign investors in setting their local platform in Italy.