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29 March 2019

Blockchain-linked digital securities are being touted as a way to improve real estate liquidity, but will they work in practice?

A number of companies are in the process of launching digital securities for real estate, which they claim will be more efficient than private equity funds or real estate investment trusts.

Digital securities or security tokens are tradable assets which have been digitally represented on a blockchain. The tokens may represent a share in a property, a stake in a company or a share of a corporate bond. The use of blockchain means information about ownership is digitally and safely recorded and the securities can then be traded on an exchange. The use of blockchain means securities can be traded instantly and securely, with reduced need for intermediaries.

Singapore-based Investacrowd is creating an exchange for the trading of digital securities and has also teamed up with US investment manager Muirfield, which has launched a real estate fund using digital securities. This opportunistic fund, focused on US real estate, will be open-ended and reinvest profits to grow the value of its shares, rather than focusing on income generation like a REIT.

The intention is to offer the liquidity of a REIT but with private equity-style returns. Chris Marriott, chief executive South East Asia, at Savills says: “Real estate private equity funds require substantial initial investment and secondary trading in them is very limited and extremely slow. A tokenised fund should offer more liquidity and therefore better pricing than a traditional fund.”

However, there are obstacles, he says. “The value of the fund is based on the underlying real estate, so valuation information would have to be widely available, which is rarely the case in private equity real estate funds.” As with publicly-traded REITs, a gulf might emerge between the value of the fund’s shares and the underlying assets.

There is also the question of whether a private equity fund with liquid trading of its digital shares would produce returns in line with the direct ownership of real estate, or something more akin to stock market returns. This might well dissuade institutional investors, which would in any case have fewer concerns about liquidity than retail investors.

Additionally, the mechanisms of a fund investment are not the most crucial element, says Marriott. “The really important factors are the real estate and crucially, who is managing it.”

The market is still in its early stages; an interesting development has been in terminology. Not that long ago, there was a lot of chatter about real estate coin offerings, but since the widely-publicised travails of Bitcoin and other cryptocurrencies, digital securities has been preferred by those promoting the technology.

“We are still a long way off having digital securities as part of the real estate investment landscape, and I am not sure how much benefit there would be in being a first mover,” says Marriott. “But this is something to keep an eye on.”