One of the most exciting prospects for digital finance today is the tokenization of illiquid assets such as real estate. A variety of firms are attempting to bring this model to Asia, by focusing on the benefits to the investors. But what’s in it for the property developers?
Leo Lo, owner of Fonto, a Hong Kong-based real-estate surveyor and financier, says he is looking at building a blockchain-based platform for tokenizing real estate – in Singapore, where the regulations are better.
But in addition to regulation, he says the problem is that property developers don’t seem convinced that tokenizing a portion of a development is worth it. It’s unlikely, he says, that any prime property will be tokenized unless there’s a sharp market downturn that leaves developers hungry for cash.
In the meantime, the emphasis will have to be on more basic, less sexy projects such as getting properties documented on a blockchain. Lo has a stake in a company that has worked with Bank of China and ASTRI, a Hong Kong government-backed institute, to put mortgages on a distributed ledger.
“Securitization and STO [securities token offerings] are the second stage,” he said. “Institutional investors need to see titles on the blockchain first.”
Other firms in Asia are working on exchanges and market makers for real-estate DSOs. But Lo says this won’t be enough. “You’ll still need a real-estate developer that’s got credibility to give tokens a good reputation.”
The first DSOs for real estate exist. Last year, Templum Markets, a fintech with a U.S. broker-dealer license, issued tokens representing stakes in the St. Regis resort in Aspen, Colorado. A few others have followed.
Likewise, plenty of money has been raised to cater to SDOs: by security-token issuance platforms like Polymath (based in Barbados); by companies offering STO services, like Coinbase and Bakkt (both in the U.S.), and by security token trading platforms, such as tZero (U.S.), Gibraltar Blockchain Exchange and Templum.
The action has mostly been in the U.S. because, DigFinhas been told, the authorities’ early call that almost all tokens are securities (as opposed to utilities) forced startups to come up with business models that would be regulated. The rest of the world, by implication, will soon catch up.
We're looking to solve problems that are real in our business
Julian Kwan, InvestaCrowd
If that’s true, the rest of the world is taking its time. Asia, in particular, is lagging, despite the well-known fondness for real estate among the region’s investors. What’s the holdup?
According to Security Token Group, which has identified $500 million of funds investing in the real-estate STO industry (as of March 19), there are no Asia-based firms receiving funds. No security-token issuance platform, no security-token trading platform, and no other token-related infrastructure companies have been included in the company’s list. Among companies offering STO services, only Hong Kong-based BnktotheFuture has been funded – but that was via a $30 million initial coin offering, from back when crypto-enthusiasts were willing to back ICOs.
There are, of course, Asia-based players working on the tokenization of real estate (and other assets). But the lack of big-time funding suggests there’s more to the story than just a late start.
Singapore-based InvestaCrowd is among the most prominent companies trying to create the infrastructure for SDOs. It crowdfunds investment into properties around the world, letting smaller investors get the chance to invest in private assets otherwise open just to private-equity or other institutional investors.
Its co-founder and CEO, Julian Kwan, says the experience has shown how much more efficient crowdfunding could be if it focused on digital assets rather than paper-based ones. Therefore it is building an exchange.
“We’re looking to solve problems that are real in our business,” he said, speaking at an industry talk in Hong Kong.
What DSOs do
These problems include the lack of liquidity and secondary markets; administrative costs; friction in settling deals; cumbersome lock-in periods (a typical real-estate private-equity fund lasts from five to 10 years); a combative relationship with developers once the money’s been booked. PE funds, in the meantime, enjoy the carry on the money invested in their pooled funds.
Thomas Zaccagnino, founder and CEO of Boston-based Muirfield Investment Partners, is working with InvestaCrowd to identify tokenizable projects. His firm invests in opportunistic (high return) property deals, but he wants to escape reliance on long lockups, which, he says, “forces private equity to think short term, so we become lenders, not investors.”
Incumbents are rich and slow to change
Leo Lo, Fonto
The need to deliver high internal rates of return (a metric P.E. funds use for investments) can distort portfolios by forcing managers to sell the best assets first. A digital alternative, by providing investors with secondary-market liquidity, would let them invest more based on the fundamental attractiveness of a property, as securities investors do.
That means the underlying quality of the property is going to paramount. “No token will save a bad security offering,” Kwan said.
It also means DSOs have to be priced attractively against publicly listed real-estate investment trusts. There are already Reits in Singapore, Hong Kong, Japan and Australia, giving retail and institutional investors equity-like exposure to property.
“Any DSO has to offer multiple times the return of a publicly listed Reit, or it’s a waste of time,” Kwan said. That means it must offer returns more like what a private-equity fund expects, rather than a public equities investor.
Zaccagnino’s firm specializes in turning dilapidated buildings into trendy workspaces and other high-return turnaround deals. It could be Asia needs this kind of project to jumpstart a DSO market.
This ties back to the question of supply, which seems to be the missing equation in the argument for DSOs in Asia. Pleasing investors is one thing; but what’s in it for the developers?
Leo Lo of Fonto thinks it’s worth trying to develop a DSO business that’s based in Singapore, because of its better regulation, but using assets from Hong Kong or mainland China.
Even so, he says it’s difficult to get developers to experiment in alternate financing around a prestige property. “Incumbents are rich, and slow to change,” Lo said. “They’re happy with the traditional way of doing things. They can easily sell and lease their prime properties. Look at the residential sector: there’s always a queue to buy new flats.”
Finfabrik, a fintech in Hong Kong, had one such project last year but insiders say the developer it was working with decided to drop the scheme.
The risk, Lo says, is that the first Asian DSOs won’t be attractive projects, as developers will only agree to tokenize low-quality properties.
But he is optimistic that tokenization will happen, because it provides liquidity to both investors and developers. Echoing Zaccagnino, he thinks DSOs can improve the margins on developing out-of-favor sites. It’s just a question of how long – and whether we need a property bust in Hong Kong to make it happen.