TOKENISED REAL ESTATE — Remember to check the plumbing*
Even if they never got anything for it, it was cheap at that price. Without malice,I had given them the best show that was ever staged in their territory since the landing of the Pilgrims! It was easily worth fifteen million bucks to watch me put the thing over.
Never one to undersell himself, the words of the best scammer there ever was. Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi, or Charles to his pretty small circle of friends.
Having been released on bail in 1925, Ponzi set up the Charpon Land Syndicate and proceeded to offer investors tiny pieces of land in Florida. Some were under water but it didn’t stop him promising 200% returns in 60 days. He was participating in what became known as the Florida swampland scams. Evidently, the term, ‘I have some swampland in Florida to sell you’ is widely used to suggest you may be a gullible fool.
Now, does something look familiar here? Replace the Charpon Land Syndicate with any number of newly formed blockchain based property investment vehicles doing an ICO, swap out the tiny tracts of land for tokenised slices of properties and promise some fantastic returns. And just because that property is in New York or London or the United Arab Emirates, it doesn’t mean that it isn’t metaphorically ‘under water’.
Without naming any of the ICO’s directly, as some are providing very legitimate investment opportunities, these are tokenised securities. You are investing in an asset, in this case a piece of real estate. There may be a ‘free’ accompanying utility token that performs some sort of function, i.e. provides a mechanism for the management of the asset, pays fees to ensure the bins get emptied etc. However, this is part of the functioning of what is in essence, a tokenised property investment fund. A security that in non crypto land is part of a regulated industry.
At inception, the fund promotes itself to accredited investors via its offering prospectus, and remember, it’s a security token so we need more than a whitepaper to be at least appearing to be reg compliant. With robust investor on boarding, only those permitted to invest, i.e. due to their geographical location, their means or their experience, will be allowed to play. We won’t go into what happens in the secondary market space, as this is the elephant in the room. If you end up owning something you shouldn’t and it goes wrong, you’ll feel like I felt when my mum discovered me reading Playboy, aged 13. Ashamed. I just wasn’t quick enough to explain that it wasn’t a real porn mag but a useful educational tool.
So we have our fund with its newly minted crypto dollars and an experienced team ready to shepherd it into some solid property assets. We want high yielding, long term capital growth, reliable tenants that pay on time. In fact, it’s not a lot different to how one would select properties for a buy to let portfolio. At the point of finding a suitable property, you perhaps work with an agent to get it at a great price or maybe you are lucky enough to buy it off market.
But what happens if that superb block of apartments in a development in Spain is being sold ‘off market’ by the cousin of a member of the team making the investment? How is the price agreed and verified to make sure that it represents and fulfills the mandate given to the funds token holders? In a situation where a particular property asset is considered quite niche, who is providing the accompanying niche skill set to value it? We could have a situation in which unscrupulous funds operating in an unregulated way simply use the funds to overpay for properties or buy properties for the fund that they already own, for inflated prices. Unless there is a transparent and robust mechanism for property selection, valuation and investment, it is open to abuse.
So we have some properties in the fund and it’s 2007 again and nobody expected it, but wait, property prices have stopped rising and no way, they are going down. It’s okay though because this is crypto and it works differently. Sorry man. We bought that shopping mall for you guys at the top of the market; you know when prices were super high as a result of the quantitative easing policies of the Fed. You’ve bought into a tokenised fund that owns a shopping mall in Iowa and we can’t rent the units. As the yield falls off a cliff, guess what happens to the value of the mall. It gets ugly as foreclosures and repos act as a kind of death spiral.
Within all of this you have to hope that there is a smart contract or two in there that ensures you get your tokenised property asset looked after. This isn’t likely to be an issue in places where your friendly local official will hit you with a fine if you don’t cut the grass. However, there are monstrous examples of property assets rotting in quite affluent suburbs and city locations due to something going wrong, somewhere along the line. Is there somebody coming up behind to clean up the mess if the fund goes pop?
So the advice in all of this has to be, do your homework. Tokenised property investment funds, tokenised REITS’s and developers seeking to use tokens to fund developments, will be soon be everywhere. It will provide a terrific opportunity to participate in property investment in a way that will likely be the future of property ownership. However, property tokenisation needs to ensure it isn’t just a new way of making rich guys richer. It has to fulfill the goal of democratising property ownership in a truly liquid way. Invested in a high rise in London and want to sell those tokens and invest the proceeds in a development in Argentina, totally possible. You may not own your own home, but can be on the property ladder somewhere else for a fraction of the price of a place in your own town. That’s neat.
As with any investment, you should look to back a team that you feel can deliver to an institutional grade standard. Just because it’s crypto doesn’t mean we all have to invest in tokenised Florida swampland. However, as with anything new, the gullible are the low hanging fruit. Do your due diligence and be mindful of timing your entry on a macro level. Understand the funds processes for selecting investments, how they are independently assessed and valued and importantly, what happens if they don’t perform as expected. Ask difficult questions across the funds channels to make sure they can deliver on what they are promising. Check out the property investments they are proposing and look them up on Google Earth or Streetview. And remember, if it’s too good to be true, it’s probably a fraud.
*metaphor for the workings of the investment fund, not the pipework or the boiler of the investments themselves.