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Blockchain for CRE: Future Promise vs. Current Reality

Blockchain technology is largely shrouded in hype and obscured by hyperbole. Like many groundbreaking innovations, the promise of blockchain has far outpaced the practical development. It is important to understand how blockchain is being applied to the real estate market today, and how those applications are expected to mature in the future. To help cut through the haze, we offer below an overview of the current state and future promise of one of the most impactful blockchain real estate applications, real estate tokenization.

Tokenization is a catch-all term that can be applied to nearly any aspect of the blockchain industry. In this article, we will use the term “tokenization” to refer to tokenized securities. Tokenization can be simply thought of as a form of securitization, selling fractional interests using blockchain-based capital markets for liquidity instead of traditional markets such as the NYSE. This was pioneered by a trio of venture capital firms: Blockchain Capital, Science Blockchain and SPiCE VC. Each company raised capital by tokenizing their funds: either entire LP equity positions or future cash flows from investments. This process revealed benefits in liquidity, investor management and transactional efficiency that can be applied to real estate.

LIQUIDITY
Future Promise:
By tokenizing an asset, the issuer gains access to an expanded pool of liquidity. Instead of being limited to the regional investors and the 9:30 AM – 4 PM trading hours of a traditional exchange, tokens trade freely across borders and at all hours of the day. This global pool of investors and round-the-clock order book will unlock additional liquidity premiums and pricing efficiency. Each of the VC fund pioneers were able to raise over $10 million for their funds, indicating positive investor demand in a nascent market.

Current Reality: There have only been one or two tokenized real estate offerings, which have not yet generated the same demand as the VC offerings. The return profile of real estate is radically different than the returns offered by blockchain companies or the VC funds that invest in them. Entreaties about the risk-adjusted returns and long-term stability of real estate vs. crypto have fallen on deaf ears. This is partly because blockchain capital markets mainly provide access to global liquidity from retail investors, who generally do not understand the benefits of diversification or risk-adjusted returns as well as institutional investors. Retail liquidity also pales in comparison to that offered by institutional investors, who so far have been barred from the market by a lack of custody, insurance, and sophisticated products.

There are many companies working on these solutions, and institutional interest from the sidelines has been extensive. Tokenization platforms like Slice RE have further prepared for the entrance of institutional investors, by tokenizing popular institutional investments like LP equity positions in commercial real estate.

INVESTOR MANAGEMENT
Future Promise:
Blockchains are basically just ledgers, keeping track of who holds what token at any time. By layering on security token protocols (aka smart contracts), an issuer can automate compliance with regulations, operating agreements, PPMs and lender requirements. Lenders do not have to rely on a borrower’s good faith to inform them of changes in the capital stack. Programmable securities can automate the process of dividend payments and create software interfaces for the execution of equity rights.

Current Reality: Lenders are concerned about the commitment of small investors in highly fractionalized cap tables, and don’t yet understand the compliance benefits of smart contracts. Therefore, obtaining leverage on tokenized capital structures can be difficult. Smart contracts are new software and have suffered failures in the past as pioneers have iterated best practices. Securitize, Harbor and Polymath are leaders in the creation of secure, compliant security token protocols. They have taken up the mantle of educating institutional investors and lenders on the benefits of tokenized investment structures.

TRANSACTIONAL EFFICIENCY
Future Promise:
The title to a property can be vested in a single token, reducing transactions from complex multi-party processes to a simple transfer between buyer and seller. The token’s history is publicly auditable, simplifying the title research and insurance process. Such a token can be placed into a smart contract wallet that acts as an autonomous escrow, holding the seller’s property token and the buyer and lender’s cryptocurrency proceeds in escrow until all parties assent to the exchange.

Current Reality: The real estate market is just starting to experiment with cryptocurrency transactions, with no more than a couple dozen deals completed, mostly in the residential space. Startups tackling transactional efficiency include HouseHodl, Velox.Re and Propy. This vertical will probably continue to see sluggish adoption as it requires the acceptance of institutions and the general public. Institutions will likely continue to experiment with blockchain for back-office use cases before getting comfortable enough to roll out public-facing blockchain software. Until institutional adoption and introduction, the general public is unlikely to adopt the technology on a large scale.

CONCLUSION
Informed, rational investors should continue to be wary of startups that promise massive disruption on short timeframes. This can be difficult in a highly volatile market, where newly-announced ventures raise tens of millions in a heartbeat from eager investors foaming (or fomo-ing) at the mouth to get in on the next big winner. Nonetheless, the achievements and progress of the pioneering startups noted in this article are laying the groundwork for new, efficient, automated, and global capital markets within the next decade. Each successful implementation eases the path for further innovation and adoption, accelerating the rate of change. Every real estate professional should keep abreast of this developing technology, or risk being left behind when it explodes into the mainstream.

Henry Elder, Director of Origination & Investment, Slice
Henry Elder (@Henry_Elder ) is the Director of Origination & Investment for Slice, a real estate tokenization platform. He has participated in over $1 billion of debt and equity investments across real estate and tech. He also speaks internationally on topics such as asset tokenization, cryptoasset valuation, and tokenomic design.

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Realcomm News

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The World's #1 Conference on Corporate Real Estate, Facilities,
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UPCOMING REALCOMM WEBINARS

Technology and the Impact to a Commercial Real Estate Strategy – Innovators Weigh In - 10/3/2018

For today’s Commercial Real Estate CIO, new technologies continue to emerge that are changing the landscape daily. Long gone are the days where property management, budget and forecasting and e-mail are the only concerns. Today, digital transformation, smart buildings, occupant experiences, automated leasing, artificial intelligence, augmented reality and cyber are just a few of the new technologies impacting the role of CIO. This webinar will discuss the wide-ranging set of technologies changing the commercial real estate industry and more importantly, the types of strategies necessary to navigate at an ever-increasing speed. Hear from some of the industry’s most successful CIO’s regarding this “Age of Acceleration”!

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Jim Young
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LinkedIn

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Wayne Pryor 2Five1 Consulting
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Susan Gerock Washington REIT
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Phil Klokis GSA/PBS
Phil Klokis CIO Phil Klokis is currently the CIO for the Public Buildings Service (PBS) of the General Services Administration. He is responsible for delivering Infor
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Phil Klokis
CIO
GSA/PBS

Phil Klokis is currently the CIO for the Public Buildings Service (PBS) of the General Services Administration. He is responsible for delivering Information Technology (IT) solutions and services supporting PBS' diverse real estate operations and portfolio management consisting of 1,500 owned assets, 9,000 active leased assets and nearly 350 million square feet of office space.

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Ron Victor IoTium
Ron Victor Founder & CEO Ron Victor is a Silicon Valley based technology entrepreneur with 20 years of experience and expertise launching new ventures at start-ups and fortune
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Ron Victor
Founder & CEO
IoTium

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Marc Petock Lynxspring
Marc Petock Chief Communications Officer & VP, Marketing Marc is a pioneer in leading the Intelligent/Smart Buildings and M2M movements pushing the industry forward and has contributed to transforming and ch
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Marc Petock
Chief Communications Officer & VP, Marketing
Lynxspring
LinkedIn

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Scott Sidman Building Engines
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Scott Sidman
Chief Marketing & Strategy Officer
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