II. Using crypto-assets to sell real estate
Real estate assets are tangible and unlike financial assets, they need to be actively managed. The price of real estate is subject to economic trends, locations, regulations and has no fixed maturity. The cost of entry in a real estate investment is significant and transactions costs are usually high. As a result, the liquidity of real estate assets is today is pretty low.
The 2008 subprime crisis outlined the incapacity of traditional finance to give access to real estate in a responsible way. Back in the days, financial actors were outrageously overselling loans to insolvent households. After Lehman Brothers bankruptcy, real estate interest rates soared at the same pace of houses foreclosures.
Thus, new players emerged, with new models, leveraging new technology. Lending activities started on a peer to peer mode. Peer to peer intermediaries provide platforms matching individual borrowers and lenders. The platform brings value by assessing the creditworthiness of profiles and by processing all payments.
Lending Club is a peer to peer Lending platform founded in 2006. The company was approved by SEC in August 2008, one month before Lehman Brothers went bankrupt. Its success increased quickly in the aftermath of the financial crisis. As of today, loans are offered to individuals ranging from $1000 to $35000 and to businesses ranging from $15 000 to $350 000. Interests rates range from 5% to 30%, depending on the borrower, the loan category and creditworthiness. Lending club takes fees both from lenders and borrowers (1% to 5%).
Decentralized lending paved the way for further real estate crowdfunding. In the US, crowdfunding is regulated since 2012 JOBS Acts. This regulation enabled private real estate investments, offering stable income linked to a secure and tangible asset class.
There are two crowdfunding models for real estate:
companies can raise up to $50 millions from anyone. Investors are providing capital before the investments are done
companies give access to specific assets for investment and the relevant information (underwriting, business plan). To do so, investors must be accredited, which means having a minimum annual income of $200’000. The minimum entrance ticket to invest is higher in the US than in Europe.
In 2013, Realty Shares was founded in San Francisco. It’s a real estate investment platform which gives investors direct access to commercial real estate investment opportunities. As of today, Realty Shares raised more than $100 million.
No matter how innovative they are, these models have drawbacks:
they rely on a central party which takes fees to provide the digital platform
they require a high minimum entrance fee
there is the possibility to invest without minimum entrance fee in a pool with less information on underlying assets
Blockchain can be used to build up an automated and decentralized real estate marketplace, in which real estate tangible assets are materialized by crypto assets. Transactions can be entirely automated, with payment occurring when the property change ownership happens. From now on, lending, investing and renting can be done in a decentralized way.
Decentralized real estate marketplaces
Using blockchain allows traceability of transactions, immutability and an easy access to proof of ownership. The main advantage of using a decentralized ledger relies on the lower transaction fees and the speed of the process. Real estate industry standards fee is around 5%, the technology could bring it down of few percents.
Moreover, by using dedicated cryptocurrency to run the system, a new «economy» is built. The value of the underlying cryptocurrency is related to the network’s number of users and the number of transactions done on a daily basis. On a long-term perspective, the overall value of the token economy and the overall value of circulating coins should increase.
NB: there are as of today a few frameworks to value crypto assets. Most of these frameworks are derived from the monetary equation MV=PQ. Though, crypto assets valuation and pricing mechanisms still need to prove.
Founded: May 2015
Founder: Natalia Karayaneva
Location: Menlo Park, California
Funding: $15,5 million raised through ICO
Propy is a Silicon Valley company, founded in 2015. Propy’s token (PRO) sale in 2017 attracted 6000 participants. It raised more than $15 million. Today, Propy employs over 50 people around the globe.
Propy has three online components:
1. Listings platform
2. Blockchain transaction platform
3. Blockchain registry for land records
Propy facilitates a connection between the seller, buyer, realtor, title agent, and/or notary. This enables the seamless purchase of real estate online. The Propy listings platform features properties from all over the world. Including the US, UAE, Russia, and the UK. People can use US dollars, Bitcoin, Ether, or Ripple to buy these properties.
The underlying blockchain transaction platform is designed to comply with the applicable jurisdiction. No matter where they are based, buyers and sellers have appropriate legal protection. The use of blockchain technology then ensures the traceability and accountability of both funds and document transfers.
Propy’s transaction platform facilitates remote home-buying. Documents are verified and signed online. The transfer of legal rights is recorded on chain but also submitted to land registry offices for recording.
“The process of buying real estate today is not transparent and not secure — even in the US,” says Propy’s founder, Natalia Karayaneva. “The bidding mechanism of blindly providing offers is manipulative. This is why it’s important to not only automate payment and title deed recordings but to also automate the auction and offer mechanisms.”
Propy is collaborating with state and local governments regarding their property title registries. Currently, programs are running with governments in the United States and Ukraine. Propy has already designed and is testing a blockchain land registry in the US State of Vermont. It will operate alongside an existing local government’s Land Records Management System (LRMS). They operate a pilot program in Ukraine which aims to transfer the existing property register to the blockchain.The main challenge for Propy in 2018 is being able to adapt and integrate these services.
Similarly to traditional marketplaces, a decentralized marketplace is usable only if there is a sufficient quantity of assets and users to match offer and demand and create liquidity. From both regulatory and users perspectives, it will need time to gain traction.
Tokenizing real estate
Real estate is a heavy investment to carry on. Many people can’t actually afford to invest in property. Decentralized funding could democratize property investment and make it more accessible. Blockchain can enable crowdfunding and invest in a decentralized way, using tokens as proof of ownership. This method is called «tokenization» of real estate.
NB: this is very different from doing an Initial Coin Offering, which is a way of decentralized funding. Here we’re representing physical assets by cryptographic assets.
Real estate investment market suffers from a lack of liquidity i.e. the turnover of real estate assets is very low due to a high barrier to entry and a complex process to stake in. Crypto assets are fungible and easily tradable on a secondary market. They are also tradable and usable on a global scale. In the end, the liquidity of real estate assets should increase.
Founder: Martin Mischke, Jakob Drzazga
Funding: $7,7 Mio through ICO + $5 Mio of traditional equity
Brickblock is founded in 2017, legally based in Gibraltar. The founders, Martin Mischke, Jakob Drzazga, and the major part of their team, around 20, is based in Berlin, though the product can be used by global clients. It is designed to be a turnkey solution for clients.
Brickblock is a platform automated with smart contracts able to recreate a real estate physical asset or an Exchange Traded Funds. Investments in Real Estate assets are distributed to investors under the form of securities. These securities are tradable on Brickblock dedicated exchange and secondary market. By using smart contracts, there is no need for a middleman to process transactions. Investors on Real Estate assets are getting returns in the form of ETH, enabling small investments in real estate assets. Real estate developers and asset managers are able to complete their financing at a quicker rate by the eased and increased exposure to global investors.
Brickblock did a traditional equity funding round combined with a public tokens sale. They ran two phases of an initial coin offering from last semester of 2017 until the middle of May 2017, raising $7,7 Mio. In May 2018, Finch Capital announced a traditional equity investment A round of €5 Mio into Brickblock.
As long as it is backed by a real-life asset, the system uses three different tokens to avoid volatility
- Brickblock tokens (crowd-distributed through ICO and to founders, now listed)
- Asset-backed tokens representing the economic representation of the asset
- Access tokens needed to list a fund or an asset ie to access to Brickblock system. Access tokens are acting as the service fee / Service backed assets
The full platform is expected to have the first real estate assets by Q4 2018, and are developing a secondary market exchange for asset-backed tokens. Brickblock partnered with traditional real estate actors, such as RFM Construtora and TRX investments and in discussing with parties from the UK and Germany. Already with these partnerships, Brickblock has over €1 billion assets and Real Estate funds ready to utilize their platform.
In the latest news, Brickblock’s full smart contract ecosystem was successfully audited by ConsenSys Diligence. Last week, Peakside Capital & Brickblock announced a partnership. Peakside Capital is set to be the first institutional real estate fund management firm to employ the technology.
The business model is multi-faceted: the protocol provider takes fees to provide tokenization services. At the same time, it uses a specific token, whose value should increase at the same pace as the value created on the platform. Blockchain “businesses” are highly scalable because almost fully automated. They are more efficient and less costly to maintain than traditional models because of their decentralized nature.
On the other side, the regulatory certainty is pretty low. The degree of regulation friendliness varies according to countries and regions. The technology is still in its early days and regulatory authorities are having hard times to cope up with the concept.
Last but not least, the biggest challenge of token-based systems is to be user-friendly enough for someone who’s not part of any tech community. For now, understanding the technology per se and in practice is limited. If cryptocurrencies start getting to market, tokenized systems would be still in the shadow.
As of today, buying a real estate asset can be a burden. Decentralized marketplaces resolve one side of the equation by reducing overall fees and offering a global and highly scalable solution.
Investing is even more complicated, requiring a high entrance fee and today’s systems are quite opaque. Tokenization i.e. representing real estate assets by tradable crypto assets enables smaller investments and give a higher market liquidity.
Both technological innovations are operating and traditional actors start to jump in and look into partnerships. On the other side, there are a lot of new organizations competing to make the most out of the technology. A few will succeed, a few will merger or partner and a lot of them will die.