Stefan Aumann
Stefan Aumann - Peakside
‘We started to look at the technology about 15 months ago, in particular at blockchain,’ Stefan Aumann, founding partner of Peakside, told REFIRE.
Blockchain is starting to filter through to the German real estate market, with many in the industry hoping to gain a major competitive edge if they embrace it head-on.
While information such as real estate prices, comparable lease rental rates and valuations are more readily available in some markets than others, blockchain technology - which is essentially a digitized, distributed ledger that immutably records and shares information – is designed to increase the efficiency and ease of sharing information which, in turn, could improve accuracy and that all important competitive edge.
For most of us, blockchain is best known as the technology powering Bitcoin. However, blockchain-based smart contracts could play a much larger role in the commercial real estate space in general, potentially transforming core operations such as purchase, sale, financing, leasing, and management, according to a report published by Deloitte in 2017: ‘Blockchain in real estate – the future is here!’.
According to a 2015 World Economic Forum survey of 800 executives and information and communications technology sector experts, almost 60% of the respondents believed that 10% of the global GDP information will be stored on blockchain technology by 2025, in another sign of just how far reaching it could become.
In particular, in real estate, blockchain enables near real-time settlement of recorded transactions, removing friction and reducing risk, but also putting the brakes on the option of charging back or cancelling transactions, according to the report. The technology is based on cryptographic proof, thereby allowing two parties to transact directly with each other without the need for an intermediary. In addition, blockchain contains a certain and verifiable record of every transaction ever made, which mitigates the risk of double spending, fraud, abuse, and manipulation of transactions. It can also have a broader impact, as it can be linked to public utility services such as smart parking, waste, water, and energy billing, and also enable data-driven city management, according to the report.
Peakside launches its first fund via a blockchain-powered platform
Real estate investors are slowly starting to dip their toes in the water. Earlier this month, European investment manager Peakside Capital Advisors launched its first fund via a blockchain-powered platform. The fund, Peakside Income Fund 1, has an equity target of €200m and will invest in core and core plus offices in first and second tier cities in Germany, using blockchain technology to future-proof and simplify real estate investments.
Asset sizes will range from €15m to €75m, with a maximum leverage of 50%. The minimum investment ticket size is €125,000. Over the fund’s lifetime, it is expected that distributions (excluding sales proceeds) will average around 4%.
The fund was launched earlier this month on ScalingFunds, a funds-as-a-service technology platform developed by Berlin-based Brickblock Digital Services. Peakside and Brickblock are seeking to utilise blockchain technology as a toolbox to simplify and set up the future of real estate investment.
‘We started to look at the technology about 15 months ago, in particular at blockchain,’ Stefan Aumann, founding partner of Peakside, told REFIRE. ‘The concept of blockchain and the underlying technology is intriguing. We do mainly value-add but our new fund will be more core/core plus. There are two key advantages to us to using blockchain: it’s a theorem-based solution that allows investors to trade shares more easily because they basically own a digital share or token. Blockchain also enables transferability and liquidity. As a fund manager, it allows us to access a group of investors that we couldn’t access as easily elsewhere. So far, we have had investor interest from sovereign wealth funds, pension funds and financial intermediaries.’
When Peakside started to think about using blockchain, it spoke to 10 to 20 companies, according to Aumann. ‘We picked ScalingFunds because it was one of the most advanced platforms,’ he said. ‘What distinguished them is that they understood the interface between technology and real estate. If this fund is successful, we could launch other funds via blockchain-powered platforms. The ones to vote on it, ultimately, will be the investors. We can leverage the fund to €400m and hope to have it fully invested within 12 months.’
The fund shares are registered on the immutable blockchain as well as in an offline register with SANNE, a global provider of alternative asset and corporate business services. The platform allows fund investors to subscribe, access investment documents and sign contracts online on a self-checkout basis. Further functionalities will be added over time, which could include a transfer to external exchange platforms or additional reporting options.
For Gonzalo Sanchez Slik, head of investor relations at Brickblock Digital Services, the biggest challenge of blockchain in real estate ‘is not technical or legal –it’s adoption’: ‘That’s why bringing Peakside aboard has been exciting,’ he said. ‘A lot of real estate people don’t like risk or change, so they will watch to see what Peakside does next. The advantage of our blockchain platform is that it streamlines all the lines of communication. It’s like all technology – you use it because you know it works. Shares can be bought and sold in real time. I think we’ll see that sort of service implemented more within the next five years.’
Another German real estate company hopping aboard the blockchain wagon is fund manager Wertgrund Immobilien. It has set up a joint venture with Munich-based blockchain services provider Datarella and property group Hammer AG to start offering tokens later this year in the Connex office complex in Munich occupied by BMW, according to Datarella co-founder Yukitaka Nezu. ‘We plan to take around €2.5m of it and tokenise it,’ he told REFIRE. ‘We want to make something that is illiquid, liquid. To appeal to retail investors, the minimum ticket size will not exceed €10,000 per investor. It’s a pilot project but going forward we’d like to offer this service to other real estate companies and scale it.’
Also, in December, Wertgrund Immobilien started allowing investors to hold shares via a blockchain platform operated by Datarella. Wertgrund’s pilot scheme kicked off with a volume of €2m, to be invested in one of its existing Spezialfonds. The minimum ticket size was €200,000. The group’s aim is to create a secondary market for Spezialfonds with a blockchain component, thereby appealing to tech-savvy investors.
However, blockchain is not going to flood the market overnight, said Thomas Herr, EMEA head of digital innovation at CBRE. ‘Peakside’s fund is an experiment,’ he said. ‘For the management, one advantage can be that they can reduce the ticket sizes. Will blockchain be a breakthrough, will it be too expensive? I don’t think it will take off massively in the next three years.’
People might also be using blockchain without even realising it, according to Herr: ‘There are around 400 blockchain protocols, which will be embedded where it makes sense, even if users don’t know they’re there.’
The real challenge, as with all technology, will be to find the right use for it: ‘I could imagine that it gets used more in the operation of buildings more than on the transactional side,’ said Herr. ‘But at the moment, there is a lot of noise but not a lot of delivery.’
Nezu is confident that once the legal challenges have been ironed out, blockchain will become more mainstream in real estate: ‘BaFin has been dealing with cryptocurriencies for a while but it’s still a grey area and we’re not sure yet how they will define tokens. We’d like them to be defined as securities because regulation isn’t really in place yet. Once tokens are available via a regulated exchange, I think blockchain in real estate will take off.’
In March, Germany’s Ministry of Finance recommended that the country recognize blockchain-based securities as a legitimate form of financial instrument and regulate them as such. Without comprehensive regulation of security tokens in Europe, dealing with them can be problematic, not least because holding a token doesn’t necessarily equate to holding equity from a legal standpoint and dividend payments are not always legally compliant.
Ultimately, blockchain has a lot of potential and could certainly simplify the sharing of real estate data, unlocking the market to a wider range of investors in the process. However, technology can be fickle: last year was a rough year for Bitcoin and crypto currencies in general and limitations in Bitcoin’s algorithm, for example, probably mean it will not become the most mainstream digital currency. For now, the jury is still out on whether blockchain can become truly mainstream. (ssk)
