8 key points on Property Tokenisation

Before you jump into property tokenization, do read what Elizabeth Siew, property lawyer turned tech advocate has to say. In Part 1, Elizabeth explained in detail about the basics of property tokenization. In Part 2 here, she further expanded on the concept in a Q & A with Asian Property Review.

1. How big is the potential of real estate tokenization going forward?

The global real estate market is estimated at US$3.81 trillion in 2022 and expected to grow to US$ 5.85 trillion by 2030. Real estate remains one of the most secure asset classes for investment. In the past, only the wealthy have access to investment opportunity in property. Today, with the rapid digital transformation of all industry, and availability of blockchain technology and democratisation of investment accessibility to the retail market, more people on the street are able to afford property investment in small bite sizes.

Government regulatory bodies in most countries are regulating this space. Hence, it will gradually become more and more a mainstream investment for the man on the street.

To gauge the potential of real estate tokenization, one has to study the market movement of RETs, especially in the Asia Pacific region.

According to UOB Asset Management report on 9 Sept 2022, “It’s hard not to notice that rents are rising across Asia. If you are a condominium owner, it has probably caught your attention that rents have trended  up steadily over the past 18 months. Singapore public housing (Housing Development Board) rents have also increased every month over the past two years. Both are now around 20 percent higher than they were a year ago.

As a result, real estate investment trusts (REITs) markets have been rebounding. This is despite the worldwide correction in REITs markets caused by the Covid-19 pandemic. From 2013 to 2021, and despite the Covid crisis, the market capitalisation of the three largest REITs markets in Asia i.e. Hong Kong, Japan and Singapore have increased by 79 percent”.

The progress of REITs is a positive sign for real estate tokenization to grow in tandem, as the concept of property tokenization is somewhat similar to REITs. Property tokenization offers more diversity in the portfolio of real estate, hence it will surely open up more opportunity for funding and investment.

2. Which exchanges around the world currently allow trading of property tokens?

There are currently very few crypto exchanges that allow trading of securities token.

Securitize – initially launched in 2017 as a digital securities issuer and since then, they have been successful in tokenizing some of the most successful security tokens such as Blockchain Capital (BCAP), and SpiceVC (SPICE). This is currently the most successful security tokens issuer.

In 2021. Securitize launched an exchange to offer a marketplace to buy and sell digital securities. The marketplace is divided into two sections. The “primary market” serves as a market offering the option to purchase STOs (security token offerings) and the “secondary market” functions more like a traditional exchange with users buying and selling from one another.

Tzero – https://tzero.com
Open to retail non-accredited and accreditedinvestors in the US as well as accredited investors globally. Currently trading one
security token, the Tzero Equity Token.

INX-inx.co

Open to accredited investors globally. Currently trading six security tokens, INX, SPiCE VC, Blockchain Capital, Protos, Science Blockchain, and 22x Fund.

The offering of securities token in its nature being an offering of securities or derivatives is regulated in most countries (if not all countries of the world). And the regulatory body in most countries have been establishing Regulations and Guidelines on the offering of securities tokens and the Regulations and Guidelines on the trading / exchanges
of securities tokens.

With that, there are various platforms being granted license by these regulatory bodies to legally issue and offer securities tokens. Some of the platforms are allowed to offer their tokens to the retail public while some are only allowed to offer their tokens to accredited investors.

Some of these platforms started with or will start with offering of securities tokens, and
subsequently will develop a secondary market portal within their platform, to facilitate secondary market trades for their tokens.

But of course, the limitation of these exchanges is that they are only catering to secondary market trade of their own tokens. So, it is more a secondary marketplace for the holders of their token, to promote liquidity of their tokens.

Due to this, the volume of transactions of token exchanges may not be a lot.

The big question is why are the major crypto exchanges not allowing trading or exchanges of security tokens. The answer is regulation. The offering and trading of securities / derivatives are highly regulated in all jurisdictions. As the platforms are basically digital, virtual and borderless. each country will guard their jurisdiction over the digital space where securities tokens are being offered and traded. The crypto exchange is required to obtain many licenses from regulatory bodies all over the world, or at least in major countries.

3. Do these tokens represent a fraction of the property or a fraction of a property business, or shares in a property company?

The short answer to all the above is, yes. Typically, a lot of property fractionalization and property tokenization platforms are
using a LLCto hold the property title, and the shares of the LLC are being tokenized. Hence you may see some platforms refer their token holders as shareholders.

Some tokenization projects relate to the property and the business that is built on the property, for example an agriculture project or agri-tourism whereby the token holder will be entitled to appreciation in value of the land over time, and the dividend from the agriculture business or tourism business operated on the land.

To tokenize a property directly is a different matter altogether. Tokenization of a property means the owner is breaking into multiples part of a property, as a result the property will have multiple owners. Each owner is co-owner of the property.

Co-ownership of property means more than one person has ownership interest in a piece of property. There are essentially two legal principles of co-ownership of property – (i) joint tenancy. (ii) tenancy in common.

In the joint tenancy principle, co-owners are individually “wholly entitled to the whole” of the property. Strange as it sounds, it means that, for instance, the husband owns 100% and the wife also owns 100%. It also means that, both co-owners possess a right of survivorship. Upon the death of one party, the surviving co-owner inherits the whole of the property.

In a tenancy-in-common system, each co-owner owns the right and interest to their part or portion of the property, and that part of the ownership can be sold, assigned, transferred and/or passed down to the next of kin or estate of the owner.

Therefore, property fractional tokenization can only work in a jurisdiction that practises a land system that is based on tenancy-in-common. The Malaysian National Land Code is one such example.

4. How safe is the blockchain technology used in tokenization of real estate?

According to the definition of Wikipedia, “a blockchain is a type of distributed ledger technology (DLT) that consists of a growing list of records, called blocks, that are securely linked together using cryptography. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data (generally represented as a Merkle tree, where data nodes are represented byleaves). The timestamp proves that the transaction data existed when the block was created. Since each block contains information about the previous block, they effectively form a chain (comparelinkedlist data structure), with each additional block linking
to the ones before it. Consequently, blockchain transactions are irreversible in that, once they are recorded, the data in any given block cannot be altered retroactively without altering all subsequent blocks.”

Essentially blockchain technology is safe and immutable as far as the record of transaction is concerned. In short, when a person has a token that is developed and maintained on blockchain, there is surety that the said token will not be duplicated.

But the security does not extend to the ‘token wallet’ where tokens are stored. So long as the token wallet is online and connected to the internet, there is risk of hacking.

The security of token wallets lies in the concept of hot wallet’ and cold wallet.

A cold wallet is basically a crypto wallet that is responsible for storing private keys in an offline environment. It could be in paper form or an offline hardware that stores the private key and public key of the token. A hot wallet on the other hand is connected to the internet, hence vulnerable to hacking.

Another security issue is the password for the token wallet. Once the password is lost, there is no ‘recovery of password function available. The token wallet will not be recoverable.

5. Give some examples of successful property tokenization.

http://www.realT.co offers fractional real estate investment in tokenized assets. Real estate tokenization offers asset ownership with blockchain-secured passive income.

tZERO Group, Inc. (ZERO) offers a customized solution for helping issuers in easier tokenization of their securities. In addition, issuers could also bring the tokens on the tZERO ATS or alternative trading system. Investors could purchase or sell the tokens on the tZERO ATS. The notable use case of tZERO, which made it the most popular asset tokenization platform, is for Aspen Digital. Aspen Digital securities started trading on tZERO ATS in 2020 with representation of shares in equity of St. Regis Aspen Resort.

https://www.securitize.io is a Digital Asset Securities firm Its goal is to provide access for investors to invest in private market digital asset securities (security tokens), and provide companies with a fully-digital end-to-end suite of compliant solutions leveraging the advantage of next generation blockchain technology.

6. Recently, it was reported that Malaysia wants to establish a national public blockchain. How does real estate tokenization fit into that?

On October 7 2022, MY E.G. Services Berhad (MYEG) and Mimos Technology Solutions Sdn Bh (MTSSB) signed a memorandum of understanding (MOU) to co-develop and operate Malaysia’s national blockchain infrastructure to onboard the nation’s private and public sectors to Web 3.0.

The current stage of the national blockchain project is merely at a MOU stage. The full concession agreement is yet to be inked. When signed, the parties will then get on to the blockchain development and testing and commissioning. It is still uncertain how long it will take for the project to be ready for public usage.

It will make sense for Malaysia Blockchain Infrastructure.

to be firstly adopted and used by government bodies, for example, for the national digital ID initiative and Immigration department for national identity and passport control. The other relevant bodies for blockchain adoption will be the Inland Revenue Department (LHDN), Ministry of Housing (KPKT) and Land Registration. In addition, all public contracts tenders and awards can be recorded and transacted on the national blockchain, for transparency.

As far as property transaction is concerned, if the Ministry of Housing has all the primary sale transactions recorded on the national blockchain, naturally subsequent sales and tenancies could be recorded on the same blockchain. In such a scenario, owners could potentially sell and transact fractions of their property on the national blockchain and have these fractional property transactions and fractional ownerships recorded on the national blockchain.