Why the time for tokenization is now.
The old world of real estate is vanishing fast. In previous generations, real estate laid out clear “do not cross” lines. Between commercial and residential. Between warehouse and retail. Between urban and suburban and rural.
Now, according to two widely-anticipated annual reports from international finance firm PWC (PriceWaterhouseCoopers), those distinctions have broken down.
From Airbnb to WeWork, more and more of us are finding new uses for real estate every single day.
Do you work out of your home? Spend your vacation at a resort catering to “digital nomads” with built-in coworking space? Found an innovative use for a no-longer-wanted warehouse space?
Offices and retail have been hardest hit by recent shifts in property use. Today’s challenges include financing, buying, selling, and developing property outside of conventional categories. Properties like data centers, cell towers, manufactured housing, and mixed-use suburbia.
And this means that every single player in the real estate space – buyers, sellers, realtors, investors, and others – must embrace complexity. Real estate is evolving; those who don’t keep up will be left behind.
Yet traditional financial institutions have been slow to respond. And they’re generally risk-averse at the best of times. Pension funds, for example, can’t afford to gamble. So they’re investing in more of the same, while scrambling to regain what they’ve lost in retail and other sinking sectors.
The Rise of Proptech
According to the PWC report, many investment firms are using new forms of property technology (proptech) to support their already conservative practices. They’re applying big data and advanced analytics to hedge their bets, seeking out the safest, most predictable assets.
That’s nothing unique – 2019 was the year the proptech boom became impossible to miss.
In fact, in PWC’s Europe study, that 62% of respondents said they were using and investing in proptech more than ever. One-third are using products from industry suppliers, buying solutions off the shelf. More interesting are the quarter who said they’re partnering with proptech startups. They hope to democratize access to data, create operational efficiencies, and spur better decision-making.
These are the companies that are creating innovation, embracing the future instead of running or hiding from it.
Death to Innovation
Where proptech is needed most is in real estate investment and capital. Global markets are stagnating because most real estate investment is tied up by risk-averse traditional lenders.
In Europe, for example, construction costs are rising while access to capital remains low. Yet, as one investor states, “… the debt market remains cautious and relatively selective… the providers are not that many.”
U.S. investors and investment firms are cautious as well. As one investment manager says, “We are more likely to reduce risk and unlikely to pursue speculative development… The bar is higher for development at this point.”
When lenders aren’t prepared to take a chance, that spells death for innovation.
What kind of innovation? Projects to build the kind of “Hipsturbia” mixed-use live/work/play environments that millennials dream of. Or the similarly millennial-driven push towards environmental, social, governance (ESG) projects which use energy, transportation, water, and other resources with care.
These are the developments the world needs right now. They’re the developments younger investors are demanding. And they’re exactly the ones traditional lenders shy away from. Which is exactly where non-traditional lenders come in.
Instead of using proptech to put the brakes on innovation, we can use it to create exciting new funding sources. The leading contender among these is blockchain-based real estate investment through tokenization.
The process of tokenization divides up a single real-world property asset into multiple shares, or tokens. Tokens work very much like traditional securities, giving investors a stake in the property. Asset owners keep control over how the property is used and developed.
Investors can buy tokens during a security token offering (STO), like the IPO of a publicly-traded company. After the STO, tokens can be bought, sold, and traded on secondary markets. Holders receive regular, predetermined dividend payments. Blockchain refers to the network connecting all these complex moving parts. Through its “digital ledger,” it creates a fast, transparent, and secure transaction infrastructure.
Harnessed to current developments in proptech, tokenization is the closest thing to a win-win. Property owners and developers have ready access to the capital they need. Investors choose projects which match their risk profile along with their personal values.
Tokenization for the Win(-Win)
Through tokenization, investors could build up a portfolio of related properties: co-living spaces, or CBD-oil startups, or any other focus. Traditional investors can keep on investing in the same-old, same-old. Meanwhile, token investors will be creating the real estate they want to live, work, or just hang out in five or ten or twenty years from now.
Real estate remains a strong investment for the same reasons it always has. It’s concrete and recession-proof. But that’s no excuse for complacency, as past industry shockwaves have taught us.
One of the most startling results from PWC’s US and Canada report show how deeply in the sand many real estate professionals’ heads are. In an assessment of potential “disrupters” for 2020, most said “construction technology” would be very important. But at the other end of the spectrum, they said “blockchain” would be essentially unimportant.
I suspect that, if asked, most of these real-estate professionals would admit that they don’t really know what blockchain is. For those of us working in proptech, that should be a rallying cry: we must do more to raise awareness.
Today, proptech offers real-estate professionals the tools to create real change. According to one industry insider in PWC’s US and Canada report, “We’ve always done it this way’ doesn’t cut it in real estate anymore.”
Today’s bottlenecks may have been caused by conservative traditional lending and banking institutions, but a better way is already here. For anyone willing to put a little time into learning about the alternatives, there’s a lucrative future in store in the brave new world of real estate.