GUEST COLUMN: Commercial real estate is one of the largest asset classes the world over. Credited by high-net-worth individuals as a source of extreme wealth, CRE investment levels have been buoyed by a broad range of success stories.
However, despite its reputation for towering skyscrapers and even taller returns, the reality is that CRE investment is plagued by a number of ongoing problems that undermine its profitability and status.
Stanching illiquidity, unequal access to the market, and the widespread use of costly and time-consuming paper trade processes are only a snapshot of the underlying issues hindering the development of the CRE space.
What if we could open up the market to new, energetic investors, invigorate international economies and propel the growth and development of real estate projects around the world?
Once a lofty ambition, this kind of game-changing shift can be delivered through the deployment of Distributed Ledger Technology (DLT).
What is Distributed Ledger Technology?
Primed to bring unprecedented benefits to the market, DLT simply refers to any form of decentralized database.
DLTs provide a method of storing assets across multiple computers, acting as an immutable ledger, instead of on one centralized system. The result is a trustless digital environment for transferring assets, instantly and without costly intermediaries.
Examples of DLTs include the commonly known blockchain technology and other, next-generation forms of DLT such as hashgraph. While the technology has yet to achieve mainstream adoption — the suitability of DLT to address the long-standing inefficiencies within the CRE space are clear for all to see.
With respect to the CRE space, the implementation of DLT can be geared towards automating processes, reducing costs, increasing transparency and enabling real-time payments.
Beyond these benefits, this emerging technology can finally solve the primary pain points for CRE through innovative solutions to increase liquidity, access and security for investors across the globe.
Increasing liquidity via tokenisation
As prices inevitably rise and fall in the property market, the profitability of investments is undercut by the industry’s slow-moving paper trade processes and lack of asset liquidity. It is extremely difficult for investors to take advantage of the market’s volatility by quickly off-ramping and on-ramping various assets.
As such, vast amounts of equity remain tied up in property investments.
Though leveraging DLT, CRE professionals can transform the investing landscape with asset tokenisation. Asset tokenisation allows illiquid assets, traditionally traded on paper, such as real estate, gold or art, to be converted into a token that can easily be traded or stored on a blockchain or another form of DLT.
As an example, consider a New York City apartment valued at $500,000. While this is a significant purchase for an individual investor, asset tokenisation on DLT would allow this property to be divided into 500,000 digital tokens.
Through a decentralized application, any investor could purchase a share of the property and easily trade tokens, as well as accumulate them over time. This new process has the power to increase liquidity and drastically reduce the time it takes to trade, in comparison to traditional securities.
Around the world, access to the CRE market is limited by inequality and elitism, with high barriers to entry restricting large swathes of the global economy from participating.
These high barriers to entry can be exacerbated due to financial regulations surrounding accredited investors, which can lock out a large number of new, younger minds from taking a piece of the market.
As illustrated in the example above, asset tokenization allows building owners to sell fractional ownership of their properties, opening up the potential investor base of that property to a much wider market.
This allows private investors who previously could not access the market to make a purchase, freeing up equity previously stuck within the parameters of a legal agreement and increasing the pace of trade.
Through fractional ownership, token shares in a rental property can be purchased and rent can be collected as income, offering smaller private investors an easy, lower-risk first step into the market.
Increasing security and protection
As our world gets smaller, global investors are increasingly looking to add overseas properties and developments to their portfolios. Essential to this is the guarantee that such investors can engage with secure processes.
Due to the vast majority of the CRE market still being based on paper, this is unfortunately not the case in most circumstances — files are lost, stolen, modified and corrupted.
These issues relating to the documentation of ownership are particularly relevant when it comes to overseas investments due to the increased time it takes to process paper transactions and the lack of oversight investors have over the process.
Many investors are also fearful when it comes to investing in countries where there is a lack of investment capital, unsure whether their documentation will hold up in court.
As major investment opportunities pass markets and investors by, the decentralized community moves forward in advancing scalable DLT platforms which will reshape the global CRE business when it comes to ownership documentation.
When an exchange occurs on a tokenized asset, it is added to an immutable ledger, permanently recorded and resistant to malicious attacks (this is especially applicable in next-generation DLTs, such as hashgraph), thus removing fear and uncertainty and allowing for safer, lower-risk capital investment.
In 2019, the commercial real estate investment market’s total global revenue amounted to an estimated $5.4 trillion.
The reduction of paper trades and transition to asset tokenization pose exciting opportunities to unlock even more revenue streams, allowing industry players, new and old, to reap the benefits of increased liquidity, access, and security.
Many industries have made major strides through the adoption and integration of new technologies – it’s time we made the overdue upgrade to improve the speed and security of our processes when it comes to CRE investment.
EDITOR’S NOTE: Ed Nwokedi is the CEO of RedSwan. For more information about him, click on the byline link to his biography.