Real estate tokenisation - what does it mean for investors?

Analysts highlight certain aspects to consider before investing in this fast-developing trend

Feb 10, 2022

Singapore

REAL estate tokenisation is a trend that's been gaining traction as it lowers the barriers to entry for investors, while providing access to real estate assets they may not ordinarily get exposure to.

Still, analysts highlight certain aspects to consider before investing in this fast-developing trend that offers a faster and cheaper way of fund-raising and financing for real estate owners.

As tokenisation lowers the barriers to entry, it results in a bigger pool of investors. It also improves liquidity via reduced settlement time and in theory, facilitates secondary trading on a digital securities exchange.

In addition, tokenisation, which involves generating a virtual token that represents ownership of a real estate asset, also makes cross-border investments easier, while a distributed ledger offers the benefits of secure transaction records and transparency.

"The minimum sum to invest in tokens may be lower than purchasing shares," highlighted Lee Nai Jia, deputy director at NUS' Institute of Real Estate and Urban Studies.

As tokens can be applied to a range of assets, investors could also garner exposure to real estate assets that aren't typically found on the stock exchange, such as shophouses or student accommodation, Dr Lee added.

Noting that a tokenised offering can be smaller in quantum value than a publicly traded equity, Savills Singapore executive director Alan Cheong went on to point out: "The cost of listing on an exchange is much greater than a private offering, something that is suitable for smallish or boutique securitisation.

"A public offering carries a much higher cost of compliance because the shares are open to subscription by both sophisticated and unsophisticated investors. Tokenisation can restrict those to only the former group, which has a much less onerous checklist to follow."

RealVantage co-founder and chief executive Keith Ong said: "Investors are now able to participate in deals that are typically available to institutions, such as development projects or large commercial assets, which would usually require larger pools of capital."

Deals available through RealVantage are also managed via sponsors and property managers, making it less of a hassle for investors, he added. The deals on its platform typically range from a period of 1 to 5 years, while returns can start from 7 per cent, depending on the level of risk.

RealVantage recently landed a capital markets services (CMS) licence from the Monetary Authority of Singapore (MAS), which allows it to cater to Singapore-based retail investors. Prior to this, it could only seek investment capital from accredited investors and investment groups outside Singapore.

Meanwhile, Straits Trading is listing a 64-storey, high-rise residential development in Melbourne on SDAX Exchange which is tagged to a real estate token. Straits Trading - which invested in SDAX Exchange's Series B round - had 2 listings for its Aspire Real Estate Investment Product, with a minimum investment amount of S$5,000 for Tranche B and S$2,000 for Tranche C. At the interest rate of 6 per cent, all the tokens were taken up.

Raymond Poh, chief of SDAX Exchange, said: "The exchange targets to see a significant increase in listings on the platform in the next 6 months to provide investors with investment opportunities to suit different risk profiles, ranging from investors looking to establish a secondary income stream or opportunistic investors."

SDAX Exchange, which holds a Recognised Market Operator (RMO) licence, is open to accredited investors and institutional investors.

While some investors might prefer to invest in a Reit or developer, investors end up with exposure to a portfolio of properties and/or different business segments. In contrast, investing in tokenised real estate allows investors to focus on a single asset, and if they choose, to build their own portfolio by investing in various asset-backed tokens.

"By listing only one single building, investors can choose and invest directly, as if shopping for a building," highlighted Yea Changwhan, co-founder of Kasa.

Kasa Korea is an real estate securities trading platform that enables investors to buy and trade fractional ownership of buildings through digital asset-backed securities dubbed DABS, priced at 5,000 Korean won (S$5.60) per unit.

Kasa Singapore, which is expected to be up and running in the second quarter of 2022, will restrict its community to accredited and institutional investors. It holds the CMS and the RMO licences issued by MAS.

Still, analysts flagged that there are some aspects to consider before taking the plunge.

For starters, investors need to understand the product and the process, and in this respect, investor knowledge could be a potential barrier to going mainstream. "Hence, the investor may find it difficult to sell to others," Dr Lee warned.

Knight Frank's head of research (Asia-Pacific) Christine Li said: "Real estate projects would have to be validated by an accredited institution and an established platform that facilitates secondary trading.

"Currently, the enabling infrastructures are underdeveloped, not well-established and lack comprehensive regulations. Conflict resolution, such as bankruptcy proceedings, can also be hampered by inadequate legal frameworks governing crypto-assets."

Li also advised investors to look into the quality of the underlying asset as well as the rights represented by the tokens.

She added: "Most of the time, it is a tokenised security of a real estate-related asset, such as the vehicle holding the asset or the bonds that finance it, rather than a security token created out of real estate. That means rarely would it confer direct ownership rights on the underlying assets."

Savills' Cheong flags a more practical consideration - while an established blockchain template is hard to hack, the weak link lies in human error. For instance, investors could lose the private key linked to the digital wallet that stores the cryptocurrency.

"The older generation and those who have a tendency to forget matters are more at risk. Then there is also the event of an untimely death of the crypto-holder," said Cheong. "With the high level of security surrounding this store of wealth, the next of kin may find it difficult to inherit the digital currency, or perhaps not even realise that the deceased had them at all."

Li also raised the question of opting to tokenise a project for financing, as it could signal to the market an inability to secure institutional financing on the part of the developer.

Where liquidity is concerned, Kasa's Changwhan reckons that secondary market liquidity should improve in the future as investors gradually warm up to this relatively new trend.

"In Singapore, where investments in DABS are limited to accredited investors, liquidity for secondary trades will grow over the next 3 to 5 years," he added.

Aside from the typical regulations linked to financial products, Kasa Singapore is also studying ways to implement safeguards, such as depositing customers' funds with an external custodian as a form of ring-fencing.

Ong said: "We encourage investors to go through the full life of the investment to yield its maximum benefits. For deals on RealVantage, we consider exits on a case-by-case basis and have so far been able to facilitate exit requests from investors as required."

For its part, Kasa Singapore plans to focus focus on high-quality real estate across key cities in markets such as the United Kingdom, Singapore and Australia. Investors would earn rent through a fixed dividend, and potentially benefit from capital gain if the building is later sold at a profit. Dividends can vary, depending on the type of real estate asset and geographical location.