How tokenization brings liquidity to the real estate (secondary) market

Akshay Mishra
blockimmo
Published in
8 min readAug 24, 2018

Swiss commercial real estate has many characteristics that make it a desirable investment. Owners get to collect dividends from rental income, which is a winning combination with Switzerland’s stable economy and low vacancy rates (more details in this blog post). This makes it a great choice for people seeking a stable, long-term source of passive income.

Also, who wouldn’t want a piece of this?

But as desirable Swiss real estate investment may be, for many it just isn’t practical.

Limitations of the Status Quo

Property ownership in Switzerland is tracked in the Swiss Land Registry. This land registry is an impressive and precise system that tracks land ownership across the country, as outlined in our previous blog post. But this precision comes at a cost. Changes to the land registry are carefully vetted but require significant time, money, and paperwork. In order to transfer ownership, all of the involved parties must sign a notarized sale-purchase contract and notify the Swiss Land Register. This whole process is costly: notary fees can be around 2.5–5% of purchase cost. Filling out the paperwork and waiting for approval will be time-consuming as well. Let’s break down the consequences.

No Property Share Exchanges

Although both properties and companies can have shared ownership, shares of real estate have traditionally been far less liquid. Liquidity refers to how easy it is to buy and sell an asset at a certain price. Public companies have their shares traded on various stock exchanges, which make it easy for investors to buy and sell their shares. Due to the previously discussed legal requirements for property transfers, real estate lacks such a streamlined process to buy and sell shares.

Swiss stocks can be traded on SIX.

The difficulty associated with selling off property shares is one of the factors that deter people from investing in real estate. Some investors may be able to stomach uncertainty of when they will be able to sell their holdings. But for others, liquidity is crucial. An investor in the latter category may not care even how much a property appreciates if they are unable to cash out when they need the money. Making an asset more liquid makes it more attractive as an investment.

Excludes Smaller Investments

Due to the costs and time required to get a name onto the land registry, it would be impractical to allow co-ownership among thousands of people. Too much money would just be wasted in the overhead of adding each owner. Consequently, Swiss law limits the number of co-owners to a few dozens. To comply, current investing platforms require minimum investments of tens of thousands of CHF for a single property.

These restrictions will obviously exclude investors who don’t have a couple thousand Francs laying around. But they can even deter investors who have enough funds. The required investment may simply be greater than what an interested buyer is willing to invest. This is clearly suboptimal for sellers, who wouldn’t impose these limits if they were not required.

Main Issues

So although the Swiss real estate system has many great properties, there are a few areas for improvement.

  1. Streamlining the transfer of shares of properties. Preferably with something similar to a stock exchange. This would make it easier to exchange the shares, making real estate more liquid.
  2. Remove limitations on investment size, and allow investors to purchase arbitrary portions of a property (allowing true fractionalized ownership). This would expand the number of investors actively trading which would also increase liquidity.

Note that both issues are tied to the current lack of liquidity in the real estate industry. Fortunately, we have some good news.

Killing two birds with one blockchain

If you aren’t familiar with blockchain, we’ve got you covered, you can read up on it here. But, if you want a quick reason to care about it: it can be used to solve both of the previously raised issues. We know this because we are building an investment platform on Ethereum’s blockchain, and have a legal framework that is approved by the necessary financial regulators.

The key idea is to use ERC20 tokens to represent ownership of shares of properties. The process of taking an asset (like a commercial property) and creating an on-chain representation is called tokenization. These are the key characteristics of ERC20 tokens that make them useful for tokenizing properties.

  • Tamper-proof: This comes from the strength of the underlying blockchain technology, and is the most important characteristic. It wouldn’t matter what our platform claimed to offer if we had to compromise on security. But with an ERC20 token in a properly secured wallet, you can be confident that your investment is safe.
  • Easily transferable: Compared to the old world method where ownership transfer could take weeks, exchanges of these tokens can happen in minutes. This is poised to become even more efficient, as Ethereum’s blockchain matures and introduces systems to improve scalability.
  • Divisible: Each ERC20 token can be split to 18 decimals. This means properties can be split amongst an arbitrarily large number of investors. Additionally, the investors will be able to sell off any portion of their current holdings at any time.

However, for these tokens to be liquid, we need to provide a system to allow buyers to match up with sellers. This is where a protocol called 0x comes in.

A protocol for ERC20 Token Exchange

0x is a protocol for defining ERC20 exchanges. With 0x, order books are maintained off-chain but the final settlement is on-chain. But before we dive into 0x, let’s get some terminology down.

  • Order books: As the name implies, order books are filled with orders. Each order specifies a price for an asset, an amount of the asset, and whether the asset is being bought or sold.
  • Market Makers: People who list orders in the order book are called market makers.
  • Market Takers: People who accept the orders the makers offer are called market takers.
  • Relayers: In the 0x protocol, the order books are maintained by entities called relayers. Relayers determine which orders will be added to their order book. Relayers set up rules regarding fees, which tokens can be traded, and which addresses are allowed to make orders.

Once a relayer is set up, the process would look like this:

Example of usage (explained below)
  1. First, a market maker lists an order for an exchange of a pair of tokens. The maker keeps full ownership of the tokens at this point.
  2. If in compliance with the relayer’s rules, the relayer will post it to the order book.
  3. Takers will see the new order in the order book.
  4. A taker can accept the order, and execute the exchange of tokens on Ethereum’s blockchain. Only at this point do the tokens actually transfer between wallets, and they go directly between the maker and taker’s wallets.

Though the relayers become points of centralization, they allow for exchanges to scale to much larger volume than when everything is done on-chain. And although they allow for better scalability, the key functionality (token exchange) is still decentralized. Once it all comes together, relayers can look pretty familiar to people who have dealt with traditional exchanges.

Yup, this is a relayer built on 0x.

The blockimmo Relayer

To provide even greater liquidity, blockimmo’s relayer that will allow investors to buy and sell shares of tokenized properties. (Note that for legal compliance, all investors must go through a one-time identity verification process before they can obtain shares of a tokenized property.) The relayer will be conceptually similar to how AirSwap works.

Users must first obtain some Ether, the cryptocurrency used to run all transactions on Ethereum’s blockchain. This step is necessary for both buyers and sellers to cover the transaction costs. What the user does next depends on whether the user is interested in buying or selling.

  • Sellers can specify the portion of their shares that they wish to sell, as well as the price (in Ether) that these shares will be sold for. This will result in an order being added to the book if the price is higher than the maximum buy order. Otherwise, the seller can match a buy order to sell the tokens immediately.
  • Buyers must wrap the Ether they wish to invest so that they get an ERC20 token of equivalent value. This is necessary because 0x exchanges must use pairs of ERC20 tokens, and Ether itself is not an ERC20 token (for more details, check out weth.io). Once this is done, an order or exchange can be made based on the price the buyer is willing to pay.

This is all done without blockimmo collecting any fees, so there is effectively no middleman. For the first time, investors will be able to buy and sell property shares whenever they want. Investors will also be able to buy smaller shares of properties, making investment practical even for the working class. Finally, the restrictions on the number of property owners are lifted. No paperwork, no drama, just token exchange. Through a partner, we will even provide some guaranteed liquidity with details to come upon finalization.

Bringing it all together

In the old world, the system worked great for holding onto properties. However, it was a pain to transfer shares of properties. In the era of blockchain technology, we can maintain the legitimacy and security of the old ways, while making real estate investment more accessible and attractive.

Representing property ownership as ERC20 tokens introduces fungibility and transferability, without compromising security. These properties combined with a broader pool of investors will bring an unprecedented level of liquidity to real estate. With this system, Switzerland may be on track to create the future model of real estate investment. And blockimmo will bring that future to you sooner than you think. We’ll be updating this post to include a walk-through of how the tokens can be exchanged on our platform. Stay tuned!

Did we spark your interest? Would you like to find out more about our platform, technology, or meet us? We’re happy to invite you to our offices in Crypto Valley Zug. Let’s keep in touch! https://blockimmo.ch

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