A useful new study released by the Hamburg Commercial Bank (HCOB) and the Frankfurt School Blockchain Center (FSBC) at the Frankfurt School of Finance and Management looks at the global tokenisation of property.
The study examines the worldwide offer of tokenised real estate and compares companies and transactions on the basis of objective criteria such as technology, yield, term and minimum participation. The report concludes that the Blockchain-based tokenisation of property has the potential to revolutionise the typically conservative real estate markets - but certain pre-requisites are still lacking.
The tokenisation of real estate investments has the possibility to reduce costs for fund issuers, the ability to reach far more investors thanks to the sub-divisibility of the investments into manageably-sized and tradeable units and the potential to improve currently inefficient processes.
However, the authors also note that from today's perspective, some important pre-requisites such as publicly accessible digital land registers, regulatory frameworks and liquid secondary markets are still hampering the full potential of tokenised real estate.
We increasingly read reports about shares in properties being sold to investors as tokens, thus making them more tradeable investments. While the market for tokenised real estate is developing rapidly, it is still hindered by a high degree of uncertainty. There is a lack of regulatory framework in order to improve legal security, which would make the investments more attractive for issuers and customers alike.
The term “tokenised real estate” is used in different contexts, but the authors attempt to tighten the definition of the term to mean the tokenisation of a property itself. A broader interpretation often used today when talking about tokenised real estate, includes subordinated loans or real estate securities, which indirectly represent the properties.
The number of issuers is on the increase and the USA and Germany are leading the way. The authors have examined the issuers of tokenised real estate around the world and compared their respective technologies and financing structures. The market is growing rapidly: the report identifies a total of 41 companies in 17 countries, which already offer tokenised properties. These are primarily active in the USA (13), followed a good way back by Germany (6) and Switzerland (4).
However, the report can offer only a rough estimate because of the lack of transparency in the market. The principal technology for the tokenisation of real estate is the Ethereum blockchain system, particularly suitable thanks to its use of smart contracts and transparent tokenisation standards.
There is a very divergent picture between the issuers when it comes to yields, terms and minimum participations in the projects. For example, some appear to offer low yields of between 2% and 3%, but others promise much higher returns of over 20%.
The market for tokenised real estate is still in the starting blocks, but is clearly becoming more dynamic - which itself could be seen as a serious challenge, particularly for the initiators of property funds. For investors, tokenised real estate can offer above-average yields and below-average costs, which is an attractive proposition for investors prepared to embrace innovation. The overall effect is that property can now appear to be “crowdfunded”.
Co-author Dr. Cyrus de la Rubia, Chief Economist of the Hamburg Commercial Bank explains: “The classic real estate market has been with us for many decades with very little by way of innovation. Now the new blockchain technologies offer highly interesting, even revolutionary, possibilities for the exchange of assets, which could result in significant changes across the whole market. As an experienced real estate financier, we will continue to follow the development of this forward-looking technology closely and support our customers through this innovative trend as sparring partner”.
“The advantages of blockchain technologies in the real estate sector are huge. Issuers benefit from reduced costs, whilst investors benefit from costs savings and a tendency towards higher yields”, says co-author Prof. Dr. Philipp Sandner, Head of the Frankfurt School Blockchain Center. “In particular, the sub-divisibility of properties into small and tradeable units means a wider investor audience and promises to revolutionise the real estate sector.”
