Property ownership has been the single, greatest store-of-value vehicle and wealth creator throughout human history. U.S. President Franklin D. Roosevelt once said: “real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.”
Real estate investing has evolved considerably since FDR’s days – most notable when considering the advent of the real estate investment trust (REIT), which provided retail investors with general exposure to the asset class for the very first time. Shortly after, singular-property syndications and crowdfunding deal structures naturally followed suit.
The premise was to solve commercial real estate’s most significant problems: high barriers to entry, illiquidity and transactional inefficiencies. In 2021, these issues have never been more evident than today, with a global pandemic shining a bright light on them.
In the years leading up to COVID-19, the PropTech revolution was already underway with an extraordinary level of venture capital flowing into companies attempting to digitize aspects of the antiquated real estate industry – and “disruption” became the new watchword.
Enter blockchain. A revolutionary distributed ledger technology poised to disrupt global finance in a similar fashion to how the internet disrupted global commerce. Anyone who believes otherwise simply needs to consider that only ten years ago, the singular use case for the technology was for a cryptocurrency called Bitcoin, you may have heard of it. Fast forward to today, and central banks around the world, including the Bank of Canada, are exploring and implementing Central Bank Digital Currencies (CBDC) to replace their respective native fiat currency.
Moreover, a proper regulatory framework is being established in countries around the world with respect to digital securities, or tokenized assets, which are potentially the most impactful use case for all of blockchain.
Tokenization is the process of creating digital securities, or tokens, to represent fractional ownership of an asset. A token can be versatile in nature – it could represent an equity interest in an incorporated entity that owns that asset, an interest in a debt secured by the asset, a right to share in profits, among others.
So, with that being said, how can tokenization take real estate investing to the next level?
Fractionalizing a property’s ownership into digital shares, potentially allowing for thousands of investors to participate into a singular property investment, solves the high barrier to entry issue.
Consider an apartment building valued at $10 million – an asset that 99% of the population wouldn’t be able to invest directly into as an individual entity, as it requires significant initial equity. Creating 10,000 digital shares priced at $1,000 each, for example, to represent fractional ownership of the asset, would lower the barrier to entry in a dramatic way and open new possibilities.
These token shares are backed by the value of the apartment building and offer rental dividends on a monthly or quarterly basis. As the rental income is distributed directly to your digital wallet, owning investment property can be as simple as holding a digital token. This type of offering allows smaller, private investors a simple, low-risk way to enter into the market, and have exposure to a private real estate investment.
One of the main reasons why REITs are so successful is because of their stock liquidity. If you wish to have some level of general exposure to commercial real estate, placing capital into a REIT makes sense. However if you wish to invest in a singular property deal with potentially much higher returns, then traditional crowdfunding options offer little to no liquidity and your investment is usually locked in for several years.
Digital security tokens can be tradeable on secondary markets, such as an exchange built for security tokens, so the process of tokenization combines the best of both worlds: a REIT-esque liquidity model and optionality to participate in private, singular-property investments as you would with a crowdfunding or syndication deal.
Call to action
Zora Management was established to source quality real estate investments as security token offerings and help build a blockchain-based ecosystem. The company has partnered with Toronto-based TokenFunder, Canada’s first fully-compliant tokenization platform.
Together, the mandate for both companies is to curate quality real estate investments as digital securities and offer them on the TokenFunder platform, democratizing access to investments that wouldn’t be available to most people otherwise.
As we enter the “digitization of everything”, commercial real estate vendors should educate themselves on tokenization, and strongly consider the process for strategic capital formations or for an alternative, cost-effective way to achieve an exit on their investment.
It’s important that we leverage technology and create solutions to address the growing wealth gap and inequality heightened by the COVID-19 pandemic. The younger population is concerned with their future prospects to purchase a primary residence, let alone a secondary investment property, so providing technology-driven on-ramps to property ownership is critical for the future.
Tokenization and digital securities represent the next frontier of the technology, and grants us with a unique opportunity to transform real estate investing from an antiquated, reserved-for-the-elite practice to a liquid, digital asset class that is accessible to anyone with an internet connection.
For more information, contact George Djuric, author of this article and Founder of Zora Management, [email protected]