Digitalization of financial assets via Blockchain is coming, creating new markets in fixed income, real estate, art, and various other assets.
In 2018, we saw the first offerings of tokenized bonds, equities, and even luxury real estate condominiums. In 2019, an ecosystem of issuance and trading standards will be established across multiple countries and regions with listings on new exchanges for tokenized assets.
In tandem, a standard for stable, USD-based coins will be established, creating a new level of trust in Blockchain-based transactions that will drive new levels of participation in blockchain-based asset markets.
One asset class that looks ripe for tokenization is real estate. Real estate investments are currently in question because interest rates are rising, and further rate increases threaten to choke off financing of real estate projects and the ability of buyers to shoulder higher mortgage costs. Currently, the only tradable real estate assets are Real Estate Investment Trusts (REITs), and ETFs of REITs. As an asset class, US-based REITs typically have low single digit percent annual returns. As such, they are outperforming the benchmark S&P 500 this year, but underperformed last year’s large market gain. Overall, REITs have been designed to be defensive investments for individuals and retirees. They are mature properties with high occupancy rates paying rent and generating steady income.
Regardless of interest rates, two big advantages of tokenization of real estate are:
1) Reduce the high friction costs inherent in most real estate transactions, and
2) Increase the diversity of real estate investment projects and expanding the financing channels for them.
Real estate magnates and individual homeowners alike know that there are many complicated steps in purchasing and selling real estate to create the trust necessary to complete a transaction. Legacy practices involving accountants, lawyers, title insurance confirmations & other issues can all be standardized and detailed within the token created by smart contracts and the Blockchain’s immutable ledger. The result is that the friction and costs of purchasing real estate are reduced.
Tokenized real estate will offer a much more diverse set of investments than current REITs do. A token of real estate can be a specific investment in a building or small set of buildings, so an investor can invest specifically in a location they want – such as a new building in Dumbo, Brooklyn. Smaller investors who always wanted to buy a condo or apartment in Miami will find a tokenized version of that asset easier to buy than through the current legacy practices that exist today.
And while REITs are “post-development” and are typically lower risk, income producing properties, tokens can be of new projects that can generate a lot more return (although with higher risk) because the investor can buy it an earlier stage. The average real estate investor is not able to get into the funds that are building landmark buildings or areas such as the Hudson Yards in Manhattan – these are exclusive investments only elite real estate companies can participate in. This may change as tokenization can fractionalize large projects and allow more investors to participate.
Finally, tokenization of real estate can be about bank loans or bonds. A real estate company can bypass expensive banks and raise money via a loan or bond offering on blockchain to fund its development.
One key challenge to creating the trust to transact in asset tokens is the medium of exchange currently used to transact in blockchain-based transactions, cryptocurrencies. When buying a tokenized asset, investors will require a stable medium of exchange. The volatility and the perilous decline in the value of Bitcoin and many other cryptocurrencies create friction that the blockchain was created to obviate. in 2018, many different entities are working to create a stable coin, either based on a fiat currency such as the US dollar or on new technical algorithms that look to keep the currency in a stable range. It is likely that we will see a number of solutions develop in 2019 for this, and it will probably be a combination of the two efforts. Stay tuned for many more developments in early 2019.