Tokenisation and the application of blockchain technology is a key area of discussion in the investment space at the moment. As part of our ‘Real Estate from a New Perspective’ series, Angela Morris, Head of Corporate – Jersey explores the opportunities presented by tokenisation in a real estate context and where we’re headed…
Q: How does real estate fit into the tokenization and virtual assets space?
Tokenization is essentially about the fractionalisation of assets. In the real estate space, that could be anything from dividing up large office development projects into small segments, right through to apartment blocks where you could effectively go beyond just dividing up into separate apartments, to rooms or parts of that apartment. Those fractions – or tokens – can be purchased, or transferred, between investors on distributed ledger technology, such as the blockchain. That’s the theory.
Q: What opportunities does tokenization open up in terms of real estate investment?
It’s ultimately about efficiency and accessibility - and real estate in particular is a good model for how tokenization can work. As an asset, it is illiquid and there are high barriers to entry – so it is ripe for a tokenised solution, breaking that asset down to make it more accessible and making that market more efficient.
Bringing the concept of tokenisation into the real estate space would essentially open the net wider to more private market investment. You could draw comparisons to a REIT – but even then, there are requirements for brokers and additional costs, so there are clear potential benefits there. It could bring about a sort of democratisation of the real estate market.
From an investor perspective, it also has the potential for greater portfolio diversification – if you can hold tokens in a wider selection of real assets rather than fewer higher value ones, that can help with risk mitigation and portfolio stability.
Q: Are there specific challenges attached to tokenization and real estate?
The biggest single challenge is around the lack of consistent regulation. When we’re talking about fund managers and institutional investors, in particular in Europe, there’s still a long way to go to meet the confidence levels required to move on in an area that is traditionally highly regulated and formulaic. The concept and the potential is fantastic, but it’s a case at the moment of waiting to see how regulators approach this area and whether the ecosystem can support it in practice.
The risks around the transferability of tokens in a real estate context is a case in point. An investor can buy a token in an apartment easily enough, for instance, but that token can then be transferred to someone else with potentially little to no information around who that next investor in the line is. As well as posing a money laundering risk, there are also operational challenges - paying out rents, maintenance fees and so on. That lack of visibility could be a challenge. There are ways to address that - whitelisting wallets on platforms, for example, so that tokens are only valid linked to a certain wallet. But this is still largely theoretical – we’re in something of a holding pattern at the moment until we get that regulatory overlay.
Q: How do you see this space evolving in the coming years?
There is definitely appetite to seriously explore tokenisation in a real estate context, there are so many upsides and the challenges are definitely surmountable. Looking forward, I think Jersey can play a role – the fact that Jersey already has such strong links with the UK real estate market puts it in a strong position, whilst we are also seeing moves from the regulator to enhance the virtual assets and tokenisation regulatory landscape. Only this summer, for example, the JFSC published new guidance on the tokenisation of real world assets which brings some welcome added clarification to Jersey’s regulatory regime and can also help shape thinking around the application of tokenisation more widely.
Add to this Jersey’s existing high AML standards and its broad network of corporate service providers, and there’s a compelling proposition for Jersey in providing AML, governance and administration services to real estate tokenisation solutions.
On a wider level, I think we’ll begin to see much deeper thinking around the operational streamlining of tokenisation in the real estate sector, as well as the market access benefit. Smart contracts, for instance, underpinned by blockchain technology can effectively pay down rents through digital currency on an automated basis to whitelisted wallets.
At some point, we will have to move on from the theoretical and take a big step into the unknown. It might just take one investor to take the plunge and show the market it can work in practice, and the rest will follow.
For more information about this topic, please get in touch with Angela using her details below.
Visit our real estate services overview page for information on our structuring and administration services.
Key Contact:
HEAD OF CORPORATE - JERSEY