_Could Blockchain accelerate plans for the tokenisation of real estate?
Andrew Baum: I can see how tokenising real estate is appealing but there is a huge amount of ignorance around the subject. With Blockchain it feels like we are still in Alice in Wonderland territory, and it’s fair to ask whether it will ever enter the real world.
Abhimanyu Dayal: I agree that there is ignorance – but, crucially, demand is growing. I have spoken to a number of large funds, and owning real estate tokens rather than whole buildings gives them added liquidity and greater flexibility in allocating capital, which they find very appealing.
AB: I see three ways this could play out. First, the tokenisation of property becomes widely adopted by investors. Second, it gains traction but only appeals to a smaller group of investors, with trading confined to a side market. Third, neither of the above happens, and the world stays much the same. I would note that all previous attempts to unitise real estate in a meaningful way have failed.
AD: What’s different this time, though, is that the technology has advanced to a point where there is critical mass. Asset management has become more competitive since the global financial crisis, and the ability to cut costs is attractive. A pension fund may own a skyscraper in one city and want exposure to another city without having to buy a whole block. Blockchain creates a secure crossborder exchange that allows them to do that in a regulated way.
AB: I hate to pour cold water on idealism, but I am dubious about tokenising real estate for the simple reason that more liquidity means more volatility. There are forces of reaction and many investors are perfectly happy with a slow-moving, illiquid asset class like real estate. You are not forced to mark values to market and you don’t get blown around during financial crises.
Above: Professor Andrew Baum of the Saïd Business School at the University of Oxford
AD: Real estate investment is still relatively old fashioned and tokenising real estate can allow investors to manage risk better. In the case of a hotel or shopping mall, investors may be seeking exposure to a certain site rather than to its management team. You would be exposed to both if you owned the company’s shares. Plus, if things go wrong, there is always the security of owning real estate. Effectively, good real estate can act as a hedge against bad management, or the ups and downs of the wider stock market.
AB: It could possibly work as a side market, but not as something that overwhelms the main market. The trading of real estate tokens may ultimately end up becoming absorbed by the real estate investment trust market as the distinction between the two becomes less and less significant.
AD: There is also an appeal for emerging market investors. Take the case of a large international investment bank with an office in an emerging economy. An investor might prefer exposure to the fixed income stream of the bank as a tenant rather than the risk of holding the government bond of the country where the bank is located. Blockchain enables this more original approach to investing.
AB: I can see how things get more interesting in emerging markets, where there could potentially be less resistance. There are more risks around title, currency and political stability, and these new models could mitigate some of those in principle.
AD: There is more work to be done in order to change people’s mindsets. Investors saw the bull run enjoyed by cryptocurrencies, and are interested in the fact there are tangible returns. Once they get comfortable with that, many go one step further. I’m getting lots of calls from funds who want to talk about tokenisation. Nobody wholly understands the technology yet, but at least people are asking the questions.