Real Estate Investing Will Play A Leading Role In The Shift To Digital Securities
One of the most compelling applications of Digital Securities on the blockchain is real estate. It may be the largest asset class in the world, but it is also among the most complex and difficult to invest in, hampered by high transaction costs, asymmetric information, a large number of stakeholders and disparate product offerings.
Using blockchain technology, real estate assets can be digitized to represent ownership in a variety of forms including fractions of existing buildings or projects under development, and digital securities backed by mortgages or the single-family rental market. These options, and others yet to be imagined, will provide unprecedented flexibility for capital formation in the real estate marketplace, offering a level of access that was previously out of reach for most investors. By fractionalizing, real estate owners and developers can offer smaller investment sizes in the form of Security Tokens, which will help to expand distribution to a broader and more diverse investor group.
Institutional investors traditionally had an advantage over individuals due to the steep illiquidity discount associated with a majority of commercial real estate investments. Conversely, more liquid real estate investment vehicles, such as publicly traded REITs, frequently trade at up to a twenty percent premium. Digitization of real estate will enable a broad variety of assets to trade on a secondary market, which will reduce the spread between illiquid real estate investments and publicly traded investment vehicles and bring an asset’s price more in line with its true value.
The use of blockchain technology will also significantly increase transparency and efficiency. For instance, blockchain-based smart contracts will enable the programming of rights, restrictions, and information associated with the underlying property into a digital security. A secondary market for digital real estate properties will provide real-time pricing information in place of the paper-based systems in use today that result in unequal access to information among the parties. Real-time cap table management with automatic distributions and governance will increase settlement speed and reduce costs.
Twenty years ago, recorded music was introduced to consumers as a tradeable piece of code in the form of a digital file. The advantages were so compelling that compressed digital music files quickly replaced physical media as the preferred form for distributing and consuming music. Digitizing real estate assets will have the same effect. By wrapping a traditional asset inside a tradable piece of code, digital real estate securities offer a way to broaden access to investment and lower barriers to entry such as illiquidity, high transaction minimums and steep administrative costs.
The transition is already underway. In late 2018, a thirty million-dollar apartment in Manhattan was tokenized on the Ethereum blockchain, allowing it to be “divided” and digitally purchased in small parts. The company, Elevated Returns, closed on an eighteen million-dollar digital securities offering for real estate that gave investors a small ownership stake in the St Regis Aspen Resort. UPRETS is pursuing the digitization of a number of residential units at The Oosten, a 216 unit complex in Brooklyn.
The momentum in real estate is part of a broader trend — we are moving to a digital economy where financial and physical assets will increasingly have digital representations of their unique value. The World Economic Forum predicts that by 2025, blockchains will store 10% of all global GDP. That represents a profound shift and real estate is the canary in the coal mine, alerting investors to the coming transformation.
