Yesterday, the suggestion that it might be possible to slash the cost of home ownership by 90%, while creating trillions of dollars in global wealth-building opportunities, and inviting millions of unbanked in developing nations to participate – might have been received as a lofty altruistic figment with no chance of materializing. But that was yesterday. Peer through the lens of tomorrow, and observe how tokenization stands to drastically alter the landscape, and pave roads to new possibilities.
Tokenization is the process of assigning a digital proxy for real-world assets. For example, 700 Million digital tokens can be generated to represent fractional ownership of the $700 Million Mona Lisa painting. At $1 per token, just about anyone would be able to invest in a fraction of the Mona Lisa smile. I believe that this burgeoning innovation has enormous potential. Let us consider its application on real estate, in a thought experiment using the city of Toronto.
Jack owned a two bedroom bungalow in Toronto which was last appraised at $1 Million. The land – at $900,000 – was substantially more valuable than the $100,000 dwelling building. Jack decided to tokenize his property, which had an outstanding loan of $400,000. In this thought experiment, we make the assumptions that land and building ownership can be separated, and that legal and regulatory frameworks exists for the tokenization of real estate.
Jack engaged a security token and custody service to convert the title of his land (excluding the building) into 900,000 digital security tokens – all of which were assigned to Jack. The 900,000 security tokens, which represented 100% of the land, were initially valued at $900,000 or $1 per token. These tokens were stored securely with the custodial service. To unlock the value in his land, Jack logged into his account with the custodial service – which operated a token trading platform – and attempted to offer his 900,000 tokens for sale on the open blockchain powered exchange, where investors from all around the globe had access to purchase fractions of Jack’s land. Jack quickly realized that he was only able to access 500,000 tokens; his bank had a lien on 400,000 to secure his outstanding loan. Jack offered his 500,000 tokens for sale, and within a few days the tokens were all purchased by real estate investors from Kenya to New York; with some investors buying as little as $25 worth of tokens. Historical records revealed that in Jack’s neighbourhood, real estate had a long history of 5% annual appreciation in price on average. Having conducted their research, investors decided to diversified their portfolios with exposure to real estate in a desirable neighbourhood in Toronto through Jack’s Security Token Offering.
Jack now had $500,000 in the bank and a mortgage of $400,000. He paid off the outstanding mortgage, and decided to hold on to the 400,000 tokens – representing about 45% of the land – as an investment. Jack was mortgage free; his home sat on a piece of land that was fractionally owned by thousands of investors around the globe. He had $100,000 in the bank and a $400,000 real estate investment with a 5% yield. What’s more, the real estate investment was in security tokens that Jack could sell on short notice in fractional pieces – at any time without any complex paperwork – as his financial requirements demanded. I think that Jack would agree that he was much better off after tokenizing his property.
Parsing out this exercise, we see the huge potential in tokenization.
Tokenized Land: A new asset class
Separating land from a dwelling building, enables us to treat the land as a pure investment asset. Owners of the land can sell their fractional piece on an open exchange that is accessible from anywhere in the world, 24 hours a day, to the largest pool of market participants ever made accessible to a regulated trading ecosystem. Security Token Offerings for land can include smart contracts to allow for voting or no voting rights. These rights would allow owners to collectively decide upon changes in land use – for example from residential to commercial. On the other hand, public land may be tokenized with no voting rights as a pure stable investment.
Access To New Markets
Fractionalizing land into small dollar value blocks, assigning the blocks to unique security tokens, and offering those tokens for trade on a blockchain exchange – opens a pipeline to a flood of new investors. The arrangement yields benefits on both the supply and demand sides. It increases liquidity by creating access to investors who were previously unserved or underserved, and by providing a seamless platform for the more than $200 Billion invested in cryptocurrencies – to be diversified into asset-backed tokens. While the simplicity of the solution lies in the ability for direct peer-to-peer investment transactions, it would not come as a surprise if creative intermediaries introduced ETF-type products for investing in highly coveted neighbourhoods.
Custodial Services
The custodian represents a necessary trusted third party with administrative responsibilities. You may be wondering: what happens when someone moves, how do we decide who can live on the land, what if the land remains vacant for a long period of time – how do the taxes get paid, and who is paying the custodian? This can all be handled by the custodian and smart contracts. Transactions to change land users , will always involve the custodian. The transaction would involve the sale of the existing building, and the transfer of rights to use the land – under a smart contract. Excluding costs, the new land user would be purchasing Jack’s home in a lovely neighbourhood for $100,000. In reality, there would most likely be premiums offered by purchasers for real estate in the right location. Regardless, advocates for affordable housing should take note of this potential disruptor. Vacant land would have taxes paid proportionately by token holders through maintenance micro transactions – initiated by smart contract. And the custodian would also be compensated via smart contract at a predefined rate.
Unleashing Trillions In Investment Assets
According to Forbes, the total value of U.S. homes is more than $31 Trillion; that’s just in the United States, and it does not take into account, commercial, industrial, or public lands. The potential asset pool is substantial.
It should be noted that the tokenization of assets in the real world is more than a thought experiment. CoinDesk reported that Switzerland’s primary stock exchange announced that it was developing a blockchain based platform to enable the tokenization of traditional securities. SIX Digital Exchange explained that their platform would “enable the tokenization of existing securities and non-bankable assets to make previously untradeable assets tradeable.”
What do you think, could the tokenization of real estate be the answer to the affordable housing problem?