Tokenization - Future of Real Estate Investment A comprehensive view on real estate investment products compared to digital securities, like the BrickMark Token
Jan 27, 2020
In January 2020 Placetech (2020) publicised the flotation of IPSX’s first asset, The Mailbox in Birmingham, UK, the home of Harvey Nichols and the BBC’s Birmingham’s home, and one of the largest mixed-use property assets outside London, with 700,000 sq ft of shops, restaurants and offices. In the same month, it was reported that BrickMark purchased a prime commercial building from RFR Holding in Zurich in a share deal in which a significant part of the purchase price of around €120m was paid in BrickMark tokens.
The fractionalisation and tokenisation of real estate and real assets is a hot topic, with many schemes being discussed and a few executed. The launch of IPSX in London is an example of a proposal to enable the fractionalisation of real estate assets; there are several more radical propositions to split ownership via digital tokens, employing distributed ledger technology to register ownership and track trades. There is a clear shortage of objective commentary available to guide this market.
In the current real estate technology world, tokenisation is a term with two meanings: it can be used to mean the fractionalisation of property rights; or it can refer to the digital representation of asset ownership.
We prefer to use the term to combine these usages, following typical pitchdecks issued by technology platforms working in the field. Here is a good example:
Tokenisation is the process of representing fractional ownership interest in an asset with a blockchain-based token (Domus)
The purpose of this paper is to objectively examine the mechanisms now available to tokenise real asset ownership and to create active secondary markets in tokenised or fractionalised units.
We focus on the fractionalisation and tokenisation of single assets, debt and funds. The geographical focus is Europe, plus some global references. We explore the practical issues underlying the functioning and regulation of tokenisation, report the activity level to date and comment on the factors likely to drive or inhibit the success of these initiatives.
While our primary motivation is to examine tokenisation in an investment context, we are drawn sideways into a few related topics. We examine various non-digital fractionalisation alternatives en route to our material on tokenised fractionalisation. We also discuss utility tokens, which are not to do with ownership or investment, but are drawn into our field of scope through the medium of hybrid tokens (which are).
It is a difficult challenge in a report like this which combines finance, law and real estate to avoid over-complication while at the same preventing over-simplification. This challenge is amplified many times when adopting a global perspective. There are many different systems controlling land ownership; different approaches to investment regulation; varying appetites amongst governments to promote digitalisation for commercial advantage; different tax and accounting regimes; and a myriad of structures underpinning investment vehicles. To attempt to extract some global truths from this web could be regarded as over-ambitious.
In deliberately adopting such a global perspective, we must acknowledge the lens through which we view this world, which has been developed in the UK, the U.S., continental Europe and Asia, in that order. The U.S., and to a greater extent Europe, is itself fractionalised, with many fast-moving parts, so that there can always be an exception to our generalisations.
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. ...