REIT ASIAPAC
TECHNOLOGY
and their applicability if a token represents ownership. The
specific laws could relate to, for example, obtaining court orders
for eviction and the concept of vacant possession. Much of the
law around this area relies on a reference to land titles and lease
registries managed by government departments. Those laws
offer protection for stakeholders in the real estate industry, and
unless they are in place, the adoption of tokenisation is hard.
• How tokens are tied to the asset could vary – it could
be through a fund so that tokens are owners of the fund
that in turn owns the asset, or it could be direct to the
asset on a per share basis, a per area basis, a per unit basis
or some other prorated representation. So, you might be
able to buy 1% of an apartment building or one square
meter of an apartment. Any scenario where the portion
of ownership differs from occupiable spaces would
require some intricate management model that would be
challenging and costly.
Similarly, investing in any form is regulated in most markets.
Unlisted vehicles are subject to limits of the number of members
and sometimes on the minimum investment size. Listed vehicles
are very expensive to set up and have many regulations to control
risk – as they accept investments from the general public. REITs
are a special class of listed vehicle – and as they usually have tax
benefits associated with their structure, this means even stricter
rules on what they can do. Replicating a REIT structure with a
token would not necessarily make the set-up any cheaper.
Tokenisation is now maturing with a number of ventures
succeeding in the most difficult aspect, which is compliance. We
have seen several tokens listed on various exchanges and a small
number of exchanges capable of trading in real estate tokens.
P H YS I C A L R E A L E S TAT E I S S LO W
TO TRANSACT AND ILLIQUID
Two critical challenges of the real estate market for the last 400
years, when compared to other investment asset classes, are
the slow pace of transactions (it takes a relatively long time for
ownership to be transferred) and liquidity (the purchase price is
so large that only a limited market of buyers exists). There have
been many innovations over the years (such as Private Equity
Funds and REITs) that have sought to address these issues, but
the Proptech community thinks it has a better solution.
“Much of the success that is proposed
relies on changes to legislation that will
be hard won, and requires investment
of time, energy and resources to turn
into reality.”
To understand the subject – tokenisation of Real Estate
Investments is about changing the way ownership of an asset is
represented. It’s proposed that this change in ownership model
will open up how the purchase of the asset is funded and how
ownership is transferred. If ownership can be broken down into
smaller portions, then more people can afford to buy a portion
which means that those smaller portions will be easier to sell,
creating a more liquid market. Similarly, if those smaller portions
can be transferred safely from one owner to another faster and
more reliably then this creates greater access and liquidity. This
is essentially the value proposition for tokenising real estate
investments.
R E I T S H AV E TA X B E N E F I T A DVA N TAG E
Replacing these investment models by allowing people to buy a
token – the closest representation is to have a corporate title on
the asset and for people to buy shares in that corporate title. This
corporate title if unlisted is currently limited to a small number of
members – usually 50, depending on local regulations. However,
to get the tax benefits of a REIT, you still need to set up a REIT.
If these tokens were listed on an exchange where they are
traded, then you’re getting into trading securities, and that
also gets caught in legislation around exchange licenses in most
places. What this means is not only would the tokens be subject
to investment regulation but the exchanges they are traded
on would also be regulated like any other stock exchange. For
example, in Hong Kong digital tokens are considered virtual
commodities, not currency and in some cases are regarded as
securities, meaning they are subject to securities law and any
exchange they are traded on is a securities exchange.
L AW S F O R TO K E N I S AT I O N
From a legal perspective, the transfer of real estate titles is
controlled by a specific regulation in each market and typically
uses a title registration / transfer process that involves a
government department as the host of the register. Replacing
this central registry with a token representing ownership would
need new laws to recognise the new form of ownership and
transfer. When a dispute arises, a court will be needed to settle
it, and that court will look for laws that provide direction. There
is also the issue of the applicability of laws specific to real estate
So this then creates some challenges to be overcome for
tokenisation to become a reality. When comparing these models
to existing solutions, there are a number of points to compare:
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Attribute REIT Private Equity Tokens
Low minimum
investment Yes, can be less than $1,000 Typically, millions. Crowdfunding has
reduced this to $100k in some cases
less than that Tokens can reduce the minimum
investment size but the regulator will
still require qualified investors. Token
may assist intermediaries to play a part
in aggregating investment
Public able to invest Yes, open to anyone who can invest in
the stock market No. Limited to qualified investors only Tokens may create the opportunity for
intermediate aggregation of funds
Liquidity Very high. Large number of shares,
assets and potential buyers Limited due to minimum investment
size and investor qualification
requirements Subject to market size and regulation
Professional
management Definitely. Subject to public scrutiny
and regulation Up to the investor to determine
the skills of the manager. Limited
regulation in this area Up to the investor to determine
the skills of the manager. Limited
regulation in this area
Risk diversification Regulation often restricts what type
of assets can be included. Setup
costs demand a large portfolio.
Diversification is often achieved by
different asset classes and markets Fund size is often limited and single
assets often the focus. Investors need
to diversify with multiple investments Fund size is often limited and single
assets often the focus. Investors need
to diversify with multiple investments
Impacted by stock
market volatility Low correlation to similar sized
stocks – typically REIT values are
more impacted by the nature of the
underlying asset The value and use of the underlying
asset typically determines price The value and use of the underlying
asset typically determines price
Listing cost Regulatory requirements for a public
listing a quite high. It’s a trade off for
access to a public register Setting up a compliant, tax effective
structure is not cheap but much less
than the listing cost of a REIT Setting up a compliant, tax effective
structure is not cheap but much less
than the listing cost of a REIT. Remains
to be seen if its any cheaper than a PE
Fund
Private Equity style
returns Not possible given the risk constraints
that a publicly listed entity must work
within Yes Should be possible
Instant transaction
settlement Depends on market – Singapore 3 days,
Hong Kong 1-2 days. Australia 2 days Weeks TBA. But should be faster than Private
Equity. May be faster than REITS
Low transaction fee
structure Many intermediaries take a fee in this
process No Possibly
Able to undertake
development projects Depends on regulation. Can be done in
some markets Always Subject to final regulation, who the
investors are and the investment
mandate
Tax benefits Significant. Typically, no tax is paid Tax effective structures help but taxes
typically payable TBA – it’s doubtful regulators would
view this any different to a PE
investment at best
Protection of real
property law Yes Yes Unclear. Needs to be addressed
In summary, I think that tokenisation of real estate will yield
benefits and should be progressed. Much of the success that is
proposed relies on changes to legislation that will be hard won,
and requires investment of time, energy and resources to turn
into a reality.
Retail, Commercial, Industrial, Residential and Mixed-Use assets,
helping them to grow their operations, create efficiencies, and
gain better insight into their business. His expertise includes
asset and investment management, private equity, operations
improvement, program and project management, finance,
technology implementation and compliance. Bernie has led large-
scale technology projects, as well as led and supported Proptech
start-ups, across Australia, the USA, Middle East, Asia and Europe.
Currently responsible for the growth of Yardi Systems in Asia, Bernie
lives in Hong Kong and is a qualified accountant and economist. He
has over 60 publications to his name, and extensive public speaking
experience.
About the author: Bernie Devine has over 30 years of experience
in real estate and technology, specialising in digital transformation
in real estate, and using data to create a more competitive and
collaborative environment. He supports real estate clients with
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