Fractionalisation of Property to Empower Communities
Unbanking the Banked creates win-win for communities
A new property fractionalisation project opportunity has been launched using the Smart Trade Networks blockchain for key data security services. The opportunity opens up real estate assets to anyone, as barriers to entry are slashed and digitalised convenience enshrined.
This article describes the rationale behind the opportunity, and introduces the portfolio strategy that has emerged through community action.
There are also details on how to get a copy of the White Paper for Opportunity #1.
Who benefits at whose expense? That is the question.
Property assets are a cornerstone of communities. It’s where people live; and increasingly, it’s also where many people work. But traditionally, it’s also not a very easy to access asset class. We’re changing that, for the better.
Real Estate Assets are traditionally not very liquid. The barriers to entry are also high, especially when we’re talking about traditional bank-based mortgage (loan) finance. The problem, however, isn’t just that people are kept out of the residential market. The problem is that mainstream banks also hold disproportionate power over members of the community, even though the banks gain their ‘authority’ by virtue of the community … in Australia, by virtue of the taxpayer funded deposits guarantee scheme, and by laws that enable banking institutions to fundamentally ‘create money out of thin air’.
With this power to create money simply by creating new entries on digital ledgers, traditional bankers impose mortgage securities onto borrowers and ultimately, as such, hold the whip hand over people in our communities. This power extends all the while the lender has some outstanding loan, no matter the amount of equity the borrower has.
So, let’s quickly summarise the way in which traditional residential mortgage lending works via a banking institution.
1. A borrower needs to have a significant deposit. That’s hard earned money. The bank provides the difference. (Deposit + loan = purchase price.)
2. The bank takes a mortgage over the property. In effect, the bank has the ultimate right of veto over the property so long as there’s one cent of money owed.
3. So, where does the bank get the money to lend? Conventional finance theory (and economics) see banks as intermediaries between savers and borrowers. But that’s not strictly the case. Sure, banks have a smattering of deposits on their balance sheets. At the moment, deposits in banks are earning 1% or so in interest.
4. But, a bank isn’t just lending out the funds its holds on behalf of depositors. Rather, on the back of the deposits (and in Australia’s case a legislated deposits guarantee scheme funded by taxpayers — in other other words, the borrower), banks can actually mint money simply by creating new entries in digital ledgers. On the bank’s ledger, they add an asset (the loan value); and on the borrower’s ledger, they add a liability (the money owed).
5. For that, banks levy an interest. So, in effect, the bank is able to make money from what they’ve created out of thin air, on the back of a balance sheet that is created by the deposits of ordinary citizens and backed by the taxes of citizens.
The winners in this scenario are the banks, their executives and eventually the shareholders.
The losers are:
• The community at large who’ve deposited the funds (but earn very little);
• Those who are guaranteeing the liquidity of the banks without earning anything for that; and
• The borrowers who are now locked into a relationship of power inequality where over the life of a loan, they’ve paid out a lot more than they’ve borrowed due to the ‘magic of compounding’ interest.
There are better ways. And these better ways are possible within the context of existing regulations and laws.
Solution: Fractionalisation Tracked on Blockchain
There is actually no fundamental reason why accessing the real estate market, or utilising real estate assets to access more liquidity for equity owners, should be dependent on traditional bank lenders.
We can create mechanisms by which communities can directly finance housing, without intermediaries. That means lower costs to residents, opportunities to access the market, and less ‘leakage’ of value away from the community and into the pockets of the banking institutions.
This is what we have done at Smart Trade Networks by utilising blockchain technologies to support the registration and tracking of fractionalised securities.
We have devised models that make use of existing legal frameworks, such as proprietary limited companies and company title, to open up pathways for people to access real estate assets, while benefiting from the low barriers to entry and liquidity opportunities of these kinds of instruments.
Members of the community are demanding alternatives. They’ve approached the team at Smart Trade Networks to join with them to design fairer options.
As a result of this, four basic models have now been fleshed out. There will no doubt be many variations on the theme, but for now, these four models provide the focus for opportunities development over the next 6–12 months.
1. Model 1: Owner Occupier — Unbanking the Banked. This model sees community investors participate in a special purpose vehicle (a proprietary limited company — OwnCo) by purchasing shares. The shares are registered and tracked as ERC20 tokens. The company purchases the property from the owner occupier, and in the process buys out any residual bank mortgage. The owner occupier converts their equity into company shares on a pro rata market-value basis. We remove the bank from the equation, and ensure that all value is fully vested in the hands of the community, directly. The occupier now becomes a tenant, with the relationship between the OwnCo governed by a transparent tenancy agreement. Rents are paid into the OwnCo multisig account and distributed in accordance with the agreed model of the security holders. Investors in the company benefit from rental revenues, capital value growth and future development opportunities (should there be any). The owner occupier benefits from removing the bank mortgage, while retaining security of tenure.
2. Model 2: Equity Withdrawal — Unbanking the Retired. Many retirees are asset rich, but cash poor. Increasingly, they are forced to take out reverse mortgages to access cash to fund their retirements. When the retiree eventually needs to dispose of the property, the mortgage consumes the bulk of the proceeds and the family is left with only a portion of the inheritance value. Meanwhile, the retiree is forced to pay interest on a loan. This is hardly a fair situation. In this model, community investors again participate in a special purpose vehicle (OwnCo) by purchasing shares. The ownership and equity structure is the same as that described for Model 1. The benefit of this model is that retirees can gradually dispose of their equity (which now takes the form of shares in OwnCo) to fund cash requirements without going into debt. They pay a rent to OwnCo for residency rights, which are governed by tenancy agreements. Family members, in this scenario, are invited to participate in Estate Planning and progressive acquisition of the ‘inheritance’ by buying into OwnCo. Non family members can also participate, earning a rent and access any capital growth of the security.
3. Model 3: Rent to Buy — Community Banking of the Unbanked. Many young people are locked out of the residential property market. This models enables a property to be fully owned by the community (again via a special purpose vehicle — OwnCo), and renters can progressively purchase shares in this company.
4. Model 4: Rental Asset. This is a variation on the Rent to Buy theme, but in this case, the tenant is not an equity owner of the OwnCo.
In all these scenarios the model can be delivered under a range of securities regulations in a compliant manner.
Smart Trade Networks is actively discussing the needs of different people in our community for these kinds of solutions.
Ultimately, many people in the community are already indicating to us their desire to come together around these kinds of citizens-initiated solutions. Some have even flagged a desire for us to support the design and development of diversified portfolio companies. For example, this would see a portfolio vehicle established (either as a company or under a regulated investment trust structure), that would enable investors to participate in a cross-section of properties through the convenience of a single instrument.
First Opportunity — ask for the White Paper
The first opportunity we have prepared at the request of the owner-occupier is a residential property in the inner city of Brisbane, Australia. This project is inviting discerning members of the community to join with the existing owner-occupier to take out the banks and secure long term rental income and capital growth directly.
No middleman. No rent-seekers.
Due to the need to comply with Australian law, the White Paper is available by request only. Feel free to reach out at email@example.com to ask for your copy of the White Paper. The opportunity will expire soon.
How we are using blockchain
We are using blockchain for the following main uses:
1. Registering and tracking the shares on the companies. This delivers a more secure registry than centralised systems, and also enables transparency for participants.
2. Deployment of a project multisig wallet. This multisig wallet will be the governance mechanism enabling all shareholders a say in the management of the asset. The multisig will be the recipient of rental income, and will be used to govern the use of proceeds and the distribution of proceeds.
3. Tracking asset-related documents. All relevant documents (including title deeds, lease / rental agreements etc.) will be signed and registered to the Smart Trade Networks blockchain. This mitigates document fraud risk, and again delivers transparency to community shareholders and prospective shareholders.
About Smart Trade Networks
Smart Trade Networks is a general purpose blockchain technology-enabled supply chain asset registration, tracking and trading ecosystem.
Smart Trade Networks undertakes R&D in cross-border supply chain and trade systems in collaboration with researchers at Queensland University of Technology and the Future Food Systems Cooperative Research Centre, in Australia.
More information about Smart Trade Networks can be found at:
Medium Article: What is Smart Trade Networks?