Tokenization of traditional asset classes offers unique evolutionary advantages. Real estate in particular is the front runner for nearer term adoption. Tokenization will transform the asset class in numerous ways. Benefits include fractionalization, increased liquidity, automation of corporate actions and compliance, efficient settlement, data efficiency and transparency, 24/7 trading and new structured products.
However, despite the promise of numerous benefits, uptake has been slow. Lack of standards, performance issues and “Blockchain fatigue” due to logistical challenges have all hindered adoption of distributed ledger technology (DLT) for the ubiquitous asset class. With these challenges in mind, Chintai has placed strategic emphasis on leading industry wide adoption of tokenized real estate on EOS
Benefits of Tokenized Real Estate
Among the benefits of tokenized real estate, transparency and liquidity will likely account for the majority reasons DLT will be adopted for the asset class.
Fractionalization enables a historically illiquid asset class to be broken into virtually any amount of units of investments, thereby enabling the potential of creating liquid markets. The only comparable financial product is a real estate investment trust (REIT), but these instruments are usually unattainable for average retail investors (even though they make up $1.7 trillion in total market value) and in many cases restrict foreign investment. The cost or unitization and issuance is also very expensive when compared to an on-chain solution. Furthermore, “non-traded” REITs can still have liquidity issues.
Real Estate tends to be illiquid for several reasons. Large capital requirements are needed for market entry and the process of acquisition and sale is slow. Several parties are needed, all of which have their own disparate data sources. The time taken to consolidate this information usually takes months (depending on property complexities such as maintenance history, occupancy, ownership etc.). For these reasons real estate is usually traded in private markets, where information is only available to a select number of qualified investors and buyers. This is why having a transparent, immutable, single source of truth activates a number of distinct evolutionary possibilities for real estate.
Transparency: The Power of an Immutable Audit Trail
From the creation, syndication, and investment in real estate financial products, a complete audit trail of information for a given property can enable the removal of time consuming processes and middle men who carry the history of real estate assets (reducing the need for brokers and escrow agents and other intermediaries). The knock-on effects are especially important for access to investment, increasing margins, compliance, corporate actions settlement and liquidity.
Liquidity & Market formation
Disparate and incomplete history (maintenance, tenet, insurance, rent, etc.) about real estate makes investing more difficult. Sound investments and confidence in markets are based on a full understanding of an asset. DLT can solve this issue by providing investors and lenders with the information they need to make proper investment decisions. This is crucial for market formation and increasing liquidity in the asset class.
Automation of Compliance & Corporate Actions
Additional benefits of transparency and tokenization include automation of compliance and cashflow like rental payments, dividends, buybacks and other events. All of these elements are usually handled manually, adding significant cost burdens on the handling of real estate assets. Given the benefits of a “digitally wrapped” security token, all of the behaviors related to corporate actions and compliance are programable (ProFi).
Compliance can be automated by smart contracts that determine the jurisdictionally based compliance controls related to an investor account and given assets in real time. Only eligible investors can access investments and complete records are automatically kept for issuers. This is especially important given the liability concerns issuers have and the resources spent maintaining compliance.
Corporate actions such as dividend payments can be automatically handled by smart contract and distributed to a broad investor based by smart contract, thereby removing administrative overhead.
Access to Investment
The efficiency gains afforded by transparent information and fractionalized real estate has the potential to democratize access to an entirely new audience of investors. By reducing the administrative burdens and breaking an illiquid asset into many parts, units of real estate can be sold at potentially any price. This would enable democratization of the most reliable and lucrative asset class in history.
Industry Adoption: Tokenized Real Estate
The first tokenized real estate issuance and transfer took place in 2017. An apartment in Kiev, Ukraine was sold for $60,000USD. Michael Arrginton, the founder of TechCrunch was the buyer. Since this initial issuance, optimism has dwindled as hype subided. Lack of an institutional appetite has been one reason for lack of adoption. However, the primary reason(s) that institutional uptake has been slow, is not due to the clear promise that DLT can offer.
David Packham, CEO of Chintai has 20 years experience working for large financial institutions such as Goldman, Barclays and HSBC. His focus was compliance and risk before he entered the blockchain space with the goal of revolutionizing capital markets to create more equitable and fair financial markets.
From speaking with interested institutional participants around the world about tokenized real estate he says
“At the forefront of institutional concerns are regulatory and technological challenges. Lacking the ability to operate a high performance DLT solution that can fully account for the specific regulatory frameworks of a given jurisdiction makes the advantages of DLT worthless. If you cannot meet the compliance requirements of regulators and have slow and expensive technology you are essentially offering solutions that do not have a backbone……
we’ve made a priority to address these concerns by using EOS, which is dynamic enough to resolve technological challenges and go above and beyond all regulatory needs of institutional players. At this stage it’s a matter of education and implementation.”
First Mover Advantage & Adoption
Tezos has made itself known as a hub for experimentation for tokenized real estate and tokenized securities. All of the tokenized securities issuances to date are small when compared to the total value of professionally managed real estate globally - estimated to be over $10 trillion in 2020. But the token issuances that have taken place are promising for industry uptake since they foreshadow interest and demand.
The reasons for Tezos being a successful hub for tokenized real estate is in part due to successful marketing and branding. The technology is inferior to EOS. Transaction times are slower, it is more expensive and full compliance that requires a 100% on chain solution is not possible. Efficiencies and advantages are severely limited in some cases, especially with secondary trading and matters of regulatory concern.
However, one of the key concerns of industry players when tokenizing real estate is trust in new technology. When other players in the space have already shown a degree of success, have strong brand reputations and deep capital backing, the environment fuels confidence - even if sub-optimal solutions that do not enable fully on-chain efficiency benefits are being utilized.
Making EOS The Premiere Venue For Tokenized Real Estate
EOS is optimally positioned to become the hub for tokenized real estate. Without question the platform offers technological advantages that enable the full potential of tokenized real estate, that meets institutional requirements. Speed and transaction cost are comparable to conventional venues for financial products, while allowing an immutable audit trail of transparent information.
Chintai has developed a comprehensive industry solution that will drive commercial usage with the intention of large scale adoption of tokenized real estate financial instruments. This includes an integrated issuance portal and secondary exchange functionality, which automates regulatory compliance. Furthermore, we have developed a full go-to-market strategy and begun working with a group of strategic advisors who have deep industry networks and knowledge of commercial real estate globally.
With that said, the EOS ecosystem has many talented developers and business development experts. We are calling on anyone in the community who wants to be involved in coordinating the brand development and client acquisition strategy as a whole for the EOS ProFi ecosystem to contact us.