Tokenisation – The Future of Real Estate Investment?September 26, 2023
The case for the digital tokenisation of single real estate assets is that real estate is lumpy and illiquid, and that investors should be able to participate in the ownership of a broader universe of assets, hitherto confined to the wealthy and institutions, and to build diversified portfolios with modest sums of money.
The challenge for proponents of the digital tokenisation of single real estate assets is that two radical developments have to be simultaneously accepted. First, there needs to be an expressed demand for the fractionalisation of single real estate assets. Evidence of this is at best sketchy, both through history and in the current period. Second, market participants need to be comfortable with blockchain, the digital underpinning of tokenisation.
Connected to this is the cost of fractionalisation and the cost of tokenisation. In many land markets, fractionalisation requires an intermediate structure to be established because the direct ownership of land cannot be split into many pieces. Even where this is not the case, agreement needs to be reached regarding the control of fractionalised assets. For certainty and risk control, not to mention regulatory compliance, it makes sense to reproduce existing structures which have been proven to govern fractionalised investments. Globally, these appear to be limited companies or LLCs, partnerships, trusts or dedicated contractual systems.
Given that an intermediate structure is likely to be both necessary and convenient, it seems clear that tokenisation has the greatest chance of making immediate progress in the world of funds, where that structure is already in place and there is already an expressed demand for fractionalisation.
In conclusion, tokenisation offers exciting possibilities for the real estate investment market. It is, however, at an early stage of its development, and real estate applications will take time to develop and become accepted. There is a clear danger that innovation will be set back by years and possibly decades if attention is focussed solely on the digital fractionalisation of single assets, for which the demand may be limited, the economics unconvincing and the obstacles significant. Funds and debt offer immediate opportunities to establish the credibility of tokenised real estate applications; utility tokens for building users and hybrid tokens for residential co- ownership and community assets may well follow; and, in time, there may be some successful trophy asset tokenisations. The mass market for the tokenisation of single commercial real estate assets, however, may be some way down the road.