Digital homes and virtual land are selling for millions. Where is this tokenisation trend heading? And can it democratise real estate investment? Aurecon’s Kevin Miller thinks so.
While the global real estate market is worth around US$228 trillion – more than half the value of all mainstream assets worldwide – just four per cent is traded every year, says Miller, Aurecon’s principal, digital management.
“’Bricks and mortar’ is a very low liquidity asset class,” Miller says.
“This illiquidity was one of the prime reasons why the global financial crisis hit so hard as many real estate investors hit their risk limits when global property prices fell and they were forced to sell to negate further losses.”
While the global real estate market provides stable and steady income, unless you’ve got very deep pockets, it’s out of reach for many, Miller adds.
But what if there was a low-cost way to raise the liquidity of the real estate market? Miller thinks blockchain technology and tokenisation could be the answer.
The asset tokenisation market is predicted to grow to US$24 trillion by 2027 – by which time the World Economic Forum expects 10 per cent of the world’s GDP will be traded with the help of blockchain technology.
Asset tokenisation uses ‘smart’ or blockchain-based contracts to convert physical assets into digital assets. Every asset can be tokenised – from bonds and commodities to artwork and racehorses.
Miller points to a few examples that are relevant to real estate. Artist Krista Kim sold a digital home, Mars House, on a non-fungible token marketplace in March. The price? 288 Ether – the cryptocurrency equivalent to US$512,000. In June, the most expensive patch of virtual land to date sold for nearly $1 million on virtual world Decentraland.
What could this mean for physical real estate?
Currencies are fungible, Miller explains. This means anyone can exchange their dollar for anyone else’s dollar in a one-to-one trade. Non-fungible tokens, or NFTs, assign a monetary value to a rare or unique product that can’t be traded in the same way. A blockchain then provides an “immutable record of ownership – and a mechanism to transfer that ownership”.
A growing number of platforms are breaking down non-fungible real estate into a series of fungible blocks which convert property value into digital tokens. These tokens, commonly referred to as ’security tokens’, offer buyers a share in real estate assets.
“This means an asset valued at a million dollars can be converted into a million tokens and traded in a highly liquid manner in an open market. A residential home, an office block, a shopping mall or even a railway line could be owned by 50 – or indeed, 50 million – individuals,” Miller says.
RealT, for example, offers “fractional and frictionless real estate investing” with a blockchain-based platform for real estate transactions that uses smart contracts.
“ReaIT removes the barriers of real estate investment,” Miller says. “By shifting to a new tokenised paradigm, RealT essentially allows investors from all over the world to own fractions of the same physical asset.”
Miller believes that breaking up real estate into fungible security tokens and selling off smaller increments of this asset class will have big ramifications for larger infrastructure, such as ports and airports.
“Instead of trying to find a single buyer for a $20 billion asset, imagine having a way to sell this onto the market in the form of a non-fungible asset? It would be transformative.”
Carving up bricks and mortar into fungible tokens and putting each one out for sale on the open market will substantially increase transactions and reduce their cost, Miller adds.
“Trading real estate ‘chunks’ in this way will also provide a safer and more convenient way for all people to invest. After all, ‘bricks and mortar’ has always been the safest investment tool of them all.”
Miller says this could represent the “democratisation of investment”.
“Imagine a world where there was no significant financial barrier to investing in the world’s largest asset class and unlocking its liquidity. It’s closer than we think,” Miller concludes.