One of the most popular inquiries I get is:
How can I raise money for real estate using tokens?. What people mean by this question depends on who they are in the value chain of real estate, but typically they're looking to either appeal to international real estate buyers,
fractionalize real estate into smaller chunks, manage the investment process better, or add innovative new elements to ownership like faster payouts to owners. This blog post discusses some of the issues associated with moving real estate development/ownership into the digital world. At the end of this blog post is a sketch of what an AI-driven future of real estate fraction trading might look like.
Aligning Digital And Real Assets
Most people assume that blockchains somehow create an alignment between the real world and digital world. That a token will simply represent ownership. But how will it do this? The vast majority of tokens available globally do not do this and it requires some significant thought as to how this works. Are the tokens some sort of authorization mechanism for acting on shares or partnership units? Is the alignment to a corporation that owns the asset or the asset itself? Who will ensure that each token represents the appropriate piece of the pie? Do the tokens relate to some sort of financial product like a loan for a project, or is it the project itself? There are many questions to ask about the structure of a tokenized version of any real world asset.
Digital assets do not inherently align with real world assets. There must be mechanisms (contractual, processes, people, etc.) that ensure the alignment. There are an increasing number of companies globally offering various intermediation solutions but there's no system in use in Canada today (that I'm aware of) that is an easy, out-of-the-box answer to this question. The system design is important, and this is one of the stumbling blocks for companies that want to do this.
Raising Capital Or Building Technology?
The vast majority of people simply want to get cheaper access to money (or money at all!). They are not interested in building technology. They're not interested in the hard work that goes into building a new global standard. As big an opportunity as this is (since real estate is trillions a year and real estate management services is massive on its own), this ends up being a big dividing line that most people don't cross. A company that's simply looking to get money fast won't find a good answer in 2023 for doing this with tokens in Canada. And developers should ask themselves whether their already limited pool of investors are actually interested in dealing with new technology. Blockchain systems are still young and most people aren't familiar with how they work or what the advantages might be.
Are There Advantages To Your Tokenization?
If the purpose of the system is merely digitization then blockchains are going to be a complicated solution. Probably too complicated for most real estate in 2023. Digitization itself is often too big an undertaking for many people, so they should regard blockchains as one step beyond that. For most real estate project developers, this means that they will need to wait for someone else to build the turnkey platform for them to use.
What would a turnkey blockchain platform for real estate do for participants? Much faster (and more secure) transfers, reduction in fraud, faster payouts from income earned, interoperability with other blockchain systems (e.g. DeFi, lending, etc.), global standardization (and the accompanying access to global markets), faster interchange to other assets, divisibility, and built-in use of asymmetric encryption. There are many reasons why this area has been so interesting to real estate developers, but the advantages have to be seen in the context of practical challenges to getting to the next level of technology in real estate.
Last year's exemptive relief issued to Fractionvest was a time-limited exemption to permit fractional ownership of real estate. This is a model for future projects that build blockchain systems within the context of securities laws. This crosses another barrier that has kept many people out of tokenization.
Real estate is not normally a security but investing in real estate usually is. A purchase of a single real estate project is not a securities transaction but creating a business that owns real estate and issues shares to many people brings this into the domain of securities laws. A full discussion is beyond what can be done in a blog post but many past tokenization efforts for real estate have failed because they couldn't create their tokens in a way that didn't run afoul of securities laws. Any project involving tokens for real estate should take a hard look at this exemptive relief and ask whether their project requires this. Other jurisdictions have similar laws. Although not every conceivable token system for real estate will end up touching on securities laws, most simplistic real estate tokenization ideas will have a hard time obtaining a legal opinion that they don't touch on securities laws. And it may very well be the critical flaw in the system.
In some jurisdictions there are also crowd equity laws that may be an alternative to tokenization. If this is a path, it may be a good first step down the road toward blockchain but won't be a tokenized system. On the other hand, the high costs of crowd equity compliance may make this not a viable path.
If the above laws don't sound like a good path the instinct of many people is to ask whether they really need to set up their business in Canada (or the US, etc.) Looking to offshore financial centres or countries with progressive regimes for this sort of technology may be a good path but is complex and the ecosystems are usually not very robust. There are also questions about whether people are interested in putting their money into unusual jurisdictions and whether this really helps with the problem since securities laws generally apply based on where the company and the investors reside. So even an offshore company may need to deal with the same laws if the money is coming from Canada (which flows logically from the idea that these laws are consumer protection laws and the government isn't keen on people opting out of that).
There are good reasons to set up structures that involve companies in more favourable jurisdictions but this should be done carefully and with the advice of good lawyers in all of the relevant jurisdictions. Offshore brings a host of new problems including difficulties with banking, increased compliance costs, increased tax compliance costs (which may be offset by reduced tax rates), etc.
The Tokenized Future
To summarize, the tokenized future for real estate depends on people building ecosystems that don't yet exist. Some of the groundwork is here, but much remains to be built. This is a big opportunity for builders but frustrating for people who want to make use of this right now. People who think tokens are
easy money are bound to be disappointed but those who look beyond the financial side and at the wider opportunities to build a better system for real estate will be wandering into a world of interesting possibilities. People around the world are constantly building new ideas in the blockchain space and all of these can be incorporated into real estate to build new systems.
One of the more obvious benefits of converting to tokens is creating a faster system where people can buy and sell quickly. The next level is more participation, and in interesting ways like voting on proposals for real estate improvement or voting on new opportunities for making use of land. It's possible that blockchains will bring about real estate that functions in a more cooperative manner rather than the centralized corporate manner that has dominated development. But this is also a challenge to the status quo and will take time to materialize.
The future of real estate tokens is a world in which real estate can be proven, title fraud is absent, and cash flows are carefully auditable. Users can see their stakes in buildings and they can easily participate in real estate around the world.
Automation Of Tokens
Once real estate is tokenized and those tokens can be easily traded in small increments, the next step is automated transactions. In the same way that automated trading is now the vast majority of stock market transactions, it's possible to imagine an AI-driven future of real estate ownership in which bots act on instructions like
move 1/5 of my real estate holdings into residential multi-family developments in East Africa. Tokens can be instantly sold and instantly bought, and pools of tokens in various projects could become curated sets that sidestep the need for real estate investment funds. Right now, these are pipe dreams, but the technology exists today and the processes can be imagined. The companies that build this future are set to create enormous amounts of value by creating new opportunities and reducing the costs imposed by existing players.