A climate of uncertainty amid the COVID-19 pandemic has resulted in the increased use of digital securities for commercial real estate holdings.
Richard Johnson, founder and CEO of Texture Capital, said the pandemic has expedited the need for real estate companies to take a serious look at tokenization as a way to differentiate offerings and provide more flexibility to investors. Further, issuing digital securities via blockchain technology provides a new approach for private investors to invest in high-end properties.
“With tokenization in private markets, it’s possible to get a lot more granular and focus on certain assets,” said Johnson, who founded Texture in September 2019 after spending nearly four years as a senior analyst at Greenwich Associates. “While there are limited options now as the space is growing, it will soon be possible to construct a portfolio targeting specific asset types by zip code.”
Real estate tokenization could serve as a catalyst for providing liquidity to investors who lack a market to get out of positions on struggling asset classes, such as office and leisure properties. The Securities and Exchange Commission recently released guidance around custody of tokenized assets like real estate, which Johnson said should lead to greater institutional participation.
New York-based Realio Technology has already tokenized more than $300 million worth of assets with a special focus on real estate. The firm entered into a joint venture with Valentus Capital Management to build its digital issuance platform and recently formed a $10 million fund administration engagement for a large residential tower project on Fifth Avenue in Manhattan.
“Given the size of the overall real estate market, finding efficiencies wherever possible can provide a significant competitive advantage,” said Derek Boirun, founder and CEO of Realio. “Tokenization has the potential to reduce costs for asset managers, provide a capital cost advantage for developers, and offer investors a better and more digital experience with regard to managing and trading their holdings.”
Realio announced last week the launch of its Realio Security Token (STO), which provides investors with equity and shared revenue derived from its tokenized assets. The STO offers up to 17 million tokens and will be the first digital security issued on the platform as a multi-chain asset, available on the Algorand, Ethereum, and Stellar blockchains. The platform was originally unveiled in March 2020 before getting placed on hold due to the COVID-19 pandemic.
The origins of Realio designing its real estate tokenization concept began in 2017, when Ethereum was emerging as a decentralized fundraising tool. Boirun said certain habits altered during the pandemic, such as remote working, could remain long term, which will “accelerate” the adoption of tokenized assets in the real estate space.
Johnson noted that one key factor driving increased interest in real estate tokenization stems from real estate being one of the most favored asset classes among institutional investors, deriving 17 percent of assets under management in family offices alone. He said tokenization could also boost liquidity opportunities for investors to sell assets after just one year, compared to lock-up provisions of five to seven years featured in typical real estate funds.
“I recently spoke to a real estate developer who told me 50 percent of his investors ask for a shorter lock-up,” Johnson said. “Tokenization solves this.”
Despite increased movement toward real estate digital securities in private platforms, many hurdles remain before the concept hits the public markets. Among the obstacles in place preventing further adoption are central banks in some countries banning transactions denominated in cryptocurrencies.
“I do not think we’ll see a public real estate token market for a long time,” Johnson said. “The innovation is happening in private markets, and that is where the new, secondary trading marketplaces will arise.”