With blockchain and its distributed ledger technology, real estate tokenisation is rapidly gaining attention throughout Europe. It is lowering investment thresholds, reducing transaction costs and the number of intermediaries and providing liquidity to a typically illiquid asset class.
Digitalisation is progressing ever more rapidly. This applies not only to communication, private households, politics and business, but now also to the financial and real estate markets. “Tokenisation uses a blockchain based token to represent a fraction of the ownership interests in a property.”1 This real estate tokenisation by means of a security token is a broad concept and can take various forms: the mapping of units in a real estate fund with tokens, the use of a token to represent debt or the conversion of an individual property into tokens2. However, it should be borne in mind that specific characteristics apply in the different countries. At present, only subordinated loans and bonds are permitted in Germany. Meanwhile, in Luxembourg, Liechtenstein and Switzerland, for example, participation is already possible via equities. Digital assets, structured as security token offerings (STO), are treated as securities and thus subject to laws and regulations. This distinguishes them from initial coin offers, which primarily operate in an unregulated environment.
STO boosting liquidity in the real estate sector
The real estate sector normally has a high entry threshold as it requires a lot of capital. An STO can lower the threshold and give new investor groups the opportunity to participate in assets that would previously have been reserved for institutional investors and high net worth individuals. The liquidity of the asset class can therefore be increased by fractioning real estate investments. Digital issuing and investments via STO can simplify business operations and reduce the number of parties involved. Automated smart contracts, transparent blockchain-based transactions, integrated know-your-customer documentation and other functions can also reduce costs.3
A few hurdles remain for digital ownership interests
However, as well as all the advantages of tokenisation, a number of hurdles still need to be overcome. These include the digitalisation of the land register and the development of secondary markets. Only in this way can the full potential of tokenisation be exploited. Due to the low interest rate environment and steadily increasing yield compression in the real estate sector, the cost savings from tokenisation can have a positive impact on the return.4 Regardless of the innovation, the underlying remains a property that needs to be managed by an experienced investment and asset manager in order to realise its full upside potential. However, tokenisation is likely to become an important additional medium in the real estate market.
1 Tokenisation: The future of real estate investment? University of Oxford Research (2020)
2 Tokenisation: The future of real estate investment? University of Oxford Research (2020)
3 Study on the tokenisation of real estate. Frankfurt School Blockchain Center and Hamburg Commercial Bank (2021)
4 Technology paper digitalisation and tokenisation. INREV (2021)
Author: Philipp Holzmann, Product & Lifecycle Management, Swiss Life Asset Managers, Germany
Find out more here about the real estate use classes in which Swiss Life Asset Managers is invested.