Blockchain Technology Is Making Waves, CRE Next?
December 15, 2017 | James Sprow | Blue Vault
Australian Securities Exchange (ASX), the main stock exchange of Australia, has announced that they will soon start using blockchain technology to process equity transactions. France recently approved trading unlisted securities using blockchain technology. According to the French Prime Minister Bruno Le Mair: “Using this new technology will allow fintech institutions and other firms to develop better ways of trading which will be faster, cheaper, safer and more transparent.”
Now, the question is not “if?” but “when?” blockchain technology will be available to investors in commercial real estate. Blockchain will enable the tokenization of property. With the startups currently entering the industry utilizing blockchain, real estate properties can be broken down into a number of digital “tokens,” each representing an equal fraction of the property’s ownership. Property tokens will be bought and sold on the blockchain, like other cryptocurrencies (think Bitcoin) in a secure, peer-to-peer environment.
With tokens, it will be possible to make partial investments in real estate without the need to rely on a REIT. This has the potential to open the market for investments in commercial real estate to a larger number of investors, cutting out some of the intermediaries that are currently involved in commercial real estate investments. Smart contracts will automatically distribute and transfer any dividends earned from property investments. For example, if 100 investors have purchased the tokens related to a shopping center property, they will automatically receive the income generated by the property, based on the number of tokens they hold.
Commercial real estate construction projects can also be funded as initial coin offerings (ICOs) to help developers raise funds for their projects. Instead of relying on large investors or traditional IPOs, project developers can utilize crowdfunding by listing them on sites that use blockchain technology and issue and sell tokens representing ownership interests in the projects.
Currently, investors in nontraded programs such as nontraded REITs and nontraded BDCs have few options when they wish to liquidate their holdings. Blockchain technology may soon enable a secondary market that is efficient, transparent, competitive and less expensive, to allow investors who wish to buy or sell shares in unlisted programs a better way to do so.
As Australia’s main stock exchange takes the plunge to implement a blockchain distributed ledger platform, we may see the step as just another confirmation that the future of clearing and settlements systems for all kinds of securities is in blockchain. Entrepreneurs are seizing the day to apply the technology to commercial real estate investment and secondary trading of unlisted shares. This could eliminate two of the greatest disadvantages of investments in nontraded REITs and BDCs: illiquidity and lack of transparency in market values.
