What is the potential for real estate tokenisation in the future?

Is blockchain technology about to transform real estate investment? It’s a question we’ve asked a number of times on Property Investor Today in recent months, especially when covering the work of Smartlands

Now a new report, released last week by the Oxford Future of Real Estate Initiative at Saïd Business School, University of Oxford, has explored the reality behind the promise of real estate tokenisation.

What is real estate tokenisation? 

Real estate tokenisation is the term used to describe the transfer and fractionalisation of the value of real estate assets, debt and funds into digital tokens using blockchain technology, drawing on the concepts of both crowdfunding and cryptocurrencies and promising a revolution in the way real estate is funded, bought and sold.

“PropTech entrepreneurs across the world believe this invention is about to change real estate investment forever. Are they right?” the report aks.

The report, in collaboration with Bryan Cave Leighton Paisner, CBRE and EY explores the true potential of tokenisation and its likely impact on the real estate industry.

Titled Tokenisation: the future of real estate investment? , the report is split across eight chapters and features extensive interviews with industry leaders, entrepreneurs and academics.

The report revealed no shortage of optimism among real estate entrepreneurs and found that the technology’s potential is compelling – young investors, for example, could place a foot on the property ladder with just a small sum of money and trade their investments in seconds. What’s more, the fractionalisation of real estate ownership would improve liquidity by speeding up trading and lowering costs.

“Both primary and secondary real asset markets could in theory be transformed by financial technology in the way that online retailing and hospitality have been," author Professor Andrew Baum, PropTech expert and leader of the Future of Real Estate Initiative, said. 

However, the report advised investors and entrepreneurs alike to hold fire: with the report finding only 15 examples of successful real estate tokenisations, and many failures.

“The key mismatch between the popular conception of real estate tokenisation and a realistic vision of the near future is the often-painted picture of a single property asset being tokenised for the retail investor,” Baum stated.

He believes, though, there is limited public demand for such a product, and no easy way to achieve it.

Instead, Baum found the future is much more likely to lie in the tokenisation of real estate funds, which are made up of diversified properties - largely because the investors here are already fractionalised and the legalities well-established.

“Tokenisation offers exciting possibilities for the real estate investment market,” Baum concludes. “It is, however, at an early stage of its development…There is a clear danger that innovation will be set back by years and possibly decades if attention is focused solely on the digital fractionalisation of single assets, for which the demand may be limited, the economics unconvincing and the obstacles significant.’

Richard Werner, partner at BCLP, added: “We were delighted to contribute to this report and are excited at the range of novel transaction structures that developments in real estate tokenisation could facilitate for our clients.”

For a detailed analysis of the potential of real estate tokenisation, you can download Tokenisation: the future of real estate investment?.

Smartlands - the first regulated blockchain-based crowdfunding company in the UK, and the first to tokenise property in Britain – has a slightly different viewpoint, and its chief executive Arnoldas Nauseda set out the case for fractional ownership and tokenisation in this Q&A last year.

The platform also recently partnered up with UK Sotheby’s International Realty in a further sign of tokenisation starting to enter the mainstream.

Ilia Obraztsov, CEO of Smartlands, responded to the report: "Mass adoption of new technologies doesn’t happen overnight. A decade ago everyone was used to writing cheques, now this payment method is becoming extinct accounting for only 1% of transactions in the UK. Electronic payments are simply faster and more convenient, but it took years to develop the technology, infrastructure, build trust, and lead the consumers to go mobile."

He says it's the same with blockchain. "Today it’s a visionary, relatively young technology. It has many exciting applications within the real economy and finance, and real estate is where it can truly show its beauty at work. Just imagine: one of the most illiquid assets out there is turned into a tradable security; no more paper records, all transactions are instant and recorded into an immutable smart contract with a timestamp; automated compliance, more cost-effective investing and reduced fees thanks to removal of some of the middlemen and a more efficient back-office; enhanced liquidity coming from a greater number of investors on the market…The list can go long."

He argues one of the key arguments in favour of tokenisation is the lower barrier of entry which opens access to institutional-grade deals and higher-yielding opportunities to individual investors. "Here’s where fractionalisation of single assets wins. In the case of a tokenised fund, there are management fees which are then reflected in the fees paid by investors, while for a single property it’s not the case. Next, raising funds through tokenisation is a mode of crowdfunding which has a regulated limit. In Europe, if the funding target exceeds €8,000,000 (which is likely the case for a fund, not a single property) a prospectus needs to be filed, which again results in more operational expenses, hence higher fees for investors."

"The report aptly notes that there needs to be an expressed demand," Obraztsov added. "However, there is already a new generation of investors – early adopters who successfully leverage tech innovations to make investment decisions and they will become the key driver of changes. Millennials and Gen Z are tech natives, and we believe that they would love to choose on their own discretion from a menu of different assets in the app on their smartphone."

Obraztsov says there is already a legal framework for tokenisation of real estate, the technology is ready, and 'there is proof of concept and first success cases'. 

"While much still needs to be done in terms of regulations and infrastructure development, it’s important to remember: we’ve seen a hundred times how technology revolutionised industries. And now blockchain is the next big disruptor," he concludes.