Property Investor Today has previously looked at how Smartlands became the first company to tokenize property in the UK and asked whether fractional ownership and tokenization is the future for property investment. Here, Smartlands' Yaroslava Tkalich analyses why purpose-built student accommodation could be especially ripe for tokenization.
Investing in property markets is rightfully considered a foolproof scheme. Numerous studies have been done on the subject - from thorough professional analysis to 'top 5 assets to invest in this autumn' and the conclusion is always the same: real estate it is.
A building won’t go bankrupt in a year, it won’t be involved in a scandal costing it its reputation, it won’t get split in pieces and sold off as parts or for scrap. Buildings that have been erected hundreds of years ago still change hands keeping both buyers and sellers ecstatic and their coffers full.
The real trick is to determine which type of real estate best suits your needs as an investor and corresponds with your financial capabilities. Another important factor is deal structuring, which can mean the difference between a great investment and a bottomless pit where all hopes for profits and liquidity come to die.
Personally, I’m of the strong opinion that purpose-built student accommodation is an asset class of its own for a number of reasons.
Constant growth in quality, quantity and foreign investments
In 2018, students have dropped a record £12.6 billion ($16.3 billion) on accommodations of all sorts. The volume of investments increased almost 7 times over in the past 10 years. The steady volume growth is just one reason why anyone who is interested in investing in property markets should get a closer look at PBSA, even though it’s a relatively new segment of the real estate market.
Today, student housing is no longer dorms with bunk beds. Both native and especially international students who pay handsomely for the chance to study in the US or UK prefer well-maintained and professionally-managed accommodations.
The most popular format in the UK is a premium studio flat that runs for between £140-£160 a week. For this kind of cash young people want all the amenities that come in a regular family home: on-site laundry facilities, round the clock security. And in the vast majority of cases, property developers are most happy to oblige.
Paul James, editor and founder of Property Road, says that 'the social nature of attending university means that many students prefer the sense of community offered by PBSA’s and the fact the servicing can easily be contracted out means they are a relatively stress-free and hands-off investment for both short and long term gains'.
Finally, here’s one other curious statistic: according to Knight Frank, a total of £6.2 billion was invested in the UK by domestic investors while £2.9 billion came from abroad. Think about it: 40% of investments in the local PBSA market came from people with foreign passports.
To me, this figure alone speaks volumes about the investors’ confidence in this asset class. Robert Jones, director at Property Investments UK, confirms that 'the-long term future looks good for PBSA especially where tenant demand and yields stay high as it helps keep consistent interest in a secondary market if an exit is considered'.
Jones adds: "Due to the nature of the property and tenant type the secondary market is investors, which can be limiting as you remove the homeowner market, but we're seeing active sales and re-sales in this space as investors have been favouring higher yielding properties in the current market rather than relying solely on capital growth.”
Option to tokenise (distributed crowdfunding)
Let's take a step back and reflect before we attempt to prove our point that crowdfunding investment in purpose-built student accommodation (any type of real estate for that matter) through the use of security tokens 'creates an opportunity both timely and unique' as the Colonel from Avatar would put it.
Crowdfunding is not new. Going through the chapters of the financial crisis of 2008, one sees a distinct pattern of overwhelming aversion to the financial markets on the part of the enterprising folk at that time. Combine that with the startups’ need for cash in the credit-starved market, add the rise of smartphone into the mix, and you can get a sense of where things were headed at the time.
Eventually, the prevalent distrust for bankers morphed with the transformational power of e-commerce birthed the likes of GoFundMe and Kickstarter.
Roughly at the same time, Bitcoin ceased to be a topic for computer science lessons and turned into a mainstream media headline as a viable technology for creating a monetary system completely independent of the state apparatus. Selfless minds rejoiced, and from their midst appeared Vitalik Buterin with his Etherium ecosystem, followed by Fabian Vogelsteller - the inventor of the Ethereum-based ERC-20 technical standard that kicked off the ICO era.
At its peak in 2017, many digital entrepreneurs honed their crowdfunding skills on the ICO boom perfecting the technology for use in the coming years. That technology came to be known as 'the Security Tokens'.
Now, there are far better people than me who have written extensively on the topic of security tokens and I recommend to anyone attempting to go in-depth on the subject, first of all, to read up on professor Steve McKeon.
But, for the purposes of this article, let’s say that you trust my definitions, and one for security tokens would be that they are a compliant and legally binding digital representation of the ownership right to an asset.
In other words, it’s a piece of software with a smart contract embedded with it that testifies to the fact that you own something fair and square. The contract is made irrefutable by the distributed ledger it’s registered on better known as the blockchain.
And now to the main point: why security tokens that are issued by blockchain-based platforms are such a good fit for crowdfunding investment in real estate and student accommodation in particular?
I’ve gone over some of them in the beginning of the article, but the real answer is, it’s the perfect instrument for unlocking the “liquidity premium” (essentially, making any type of private equity freely available on public exchanges) in the least liquid asset classes such as, you guessed it, real estate.
Given that illiquidity discount in privately held funds can easily reach 50%, wouldn’t you agree that creating a market for fast and frictionless trading of tokens that represent fractional ownership would be a great advantage for everyone involved?
One thing that really speaks for tokenizing shares in student accommodation properties in the UK is the proven and successful use case. Smartlands was the first ever securities issuance platform in the UK not only to create a regulated framework for this brand new mode of crowdfunding investments, but to actually successfully tokenise a student accommodation block in Nottingham allowing the use of both fiat currencies and cryptocurrencies.
Retail investors could enter this deal with only 500 pounds in their pocket. The truly unique expertise raised by Smartlands opens doors to infinite possibilities for digital entrepreneurs, crypto enthusiasts and large financial institutions alike.
For instance, we can now tokenise asset classes that are actually meant to be illiquid. Investors in VC funds know that fund-level restrictions will lock them up for 10 years with no chance of redeeming the investment in the interim, but they go for it hoping to snag the liquidity premium when the fund matures.
The same goes for seed funds that invest in startups at stages so early, it's impossible to evaluate the underlying assets. It may very well take years for LPs to acquire the redemption rights. But tokenizing a portion of the fund would firstly raise the capital needed for purchasing those initially illiquid assets, and secondly, since security tokens are highly divisible, facilitate trade without the minimum investment.
Let me close with the quote from Ryan Selkis, founder and CEO of Messari. When asked about the proper metrics to monitor success in the digital assets space, he said that “...the only three applications of crypto that have hit the product market is money, originally with Bitcoin, which is kind of like a distributed central bank. [...]distributed crowdfunding, which is kind of like a distributed investment bank, and more recently lending, which is like a decentralized commercial bank.”
I’m glad that the model I find innovative and promising enough to be involved with both commercially and personally is on this prophetic list.
*Yaroslava Tkalich is chief marketing officer at Smartlands, a digital securities issuance and investment platform