In just over a month or so tens of thousands of Chinese retail investors will pour into the Beijing International property and investment expo. Its a chance for foreign and domestic developers with overseas projects to showcase a chance for the Chinese investors to stump up cash in exchange for ownership of residential and commercial opportunities. The reality is that the vast majority of these investment opportunities are still at a single asset level and the average ticket size for investors > $100k. A house in the United States selling at $400k would typically garner the interest of a few mass affluent families in China as potential investors. That limits the number of potential investors to a small number albeit off a huge base. Not everyone can afford the ticket size!
According to a recent report by Oliver Wyman, the management consultants, mass affluent class (individuals with RMB 650,000 [c. £73k] to RMB6 million [£676k] investable) in China currently number at around 15m people. Per the report this number is projected to grow to 33 Million by 2030. This provides a fertile bedrock for financial services product innovation teams that are looking to go lower down the value segments to seek even wider participation.
We can also see that the culture in China is one where Saving is a top priority which bodes well for products that may be seen as safer investment opportunities (pseudo savings opportunities):
The key question then is:
How can FDI into property be turbo-charged?
The answer…one word:
Tokenisation of real estate assets for retail investors.
This needs a few forces at work. Primarily:
- A friendly tax regime for inwards investment into countries looking to attract emerging market retail investment into real estate
- A friendly local land law establishment (by this we mean the full gamut of stakeholders ranging from County and State level legal representatives, Land title companies, and other conveyancing value chain participants); an acceptance of smart contracts as they link title deeds to investors to accommodate for (and this is the important part)…not only single ownership but partial ownership.
- A different kind of distribution than what is in place for the sophisticated world of REIT and Real Estate Fund investments where larger tickets and sophisticated knowledge leads to lack of investment from the Chinese mass affluent customer
- A mechanism by which retail investors are able to literally construct their own portfolios and take on a balanced risk across different Countries, Cities and even locations e.g. Imagine owning tokens across San Francisco, New York, Boulder, Austin, Boston and Seattle. These become almost like personalised indices which can then perhaps be copied by other retail investors much like the trading platform, eTorro allows you to copy the trading strategies of the best crypto traders you could be copying the best portfolios for real estate exposure in the US, UK or other geographies
- The establishment of developers and real estate agents finding ways to participate in the new value chain for partial or fractional ownership through the purchase of tokens
- A significant amount of market education around the value of tokenisation and how it can significantly cut down the administrative cost to the extent where there should be a view that this will lead to certain parts of the “dinosaur” value chain to change in its entirety or be shut down to make way for the new way to do things. I should however preface that rather bold statement by saying that this will NOT be a step function and happen overnight but rather we are likely to see a gradual change with the usual early adopter pattern of some states or regions jumping on early
Blockchain, like many new technologies has its share of sceptics. Many of these sceptics hail from the world of Venture Capital (full disclosure I was one too with Lean Investments) where it seems like asking entrepreneurs a sarcasm loaded “does this really need to be on the blockchain?” is almost expected. Here I ask the reader to consider the amount of money you would have to spend to get legals done for fractional ownership of land or property each time there was a transaction. There is a lot of fidgeting around with paperwork and our society has created an opaque and complicated process that lawyers have relished.
The world of crowdfunding saw the investment into parts of a company get covered by technology and one could argue that this too could be done. After all crowd investment into real estate has also been around for a while. But if you take a closer look you will find a lot of Smoke and Mirrors and much larger commercial property opportunities that can carry a front end that brings together data from a large collection of investors and then creates some form of a SPV (A special purpose vehicle) that then facilitates the partial investment into the asset as a debt instrument rather than equity). Behind the scenes a number of people then run around trying to make the opportunity legally binding. Customised software has added a lot to the business opportunity, as has the use of automated signature software such as docusign and Hellosign. But we are now in a world where Smart Contracts are able to be set up in a way that allows for the automatic execution of certain rules. Being coded in languages like Solidity, the contracts can be triggered through certain data and are enabling startups like us to make sure that property tokens can be generated, transferred and traded in an easier and cheaper way than what may have been possible before.
At the end of the day the Chinese or Indian retail investor will not care about the technology that is used. Blockchain or not the idea is to make sure that the retail investors of the future are able to overcome the basic barriers that plague the industry today that range from:
- Delayed transfers from the Emerging Market to the Investment destination (not all of the world uses Transferwise yet); lack of understanding of ‘exact dates’ that money will exchange hands between the Buyer/Investor and the Developer, thanks to the middle men that continue to sit on capital in transit and “slow down the velocity of money”
- Complex, expensive and alien conveyancing processes and legal support to take control of a title deed or indeed some fraction of the title deed
- Most importantly the availability of these opportunities as an investment destination for more than a “select few” and instead allowing for smaller tickets of investment into “tokens” that allow for wider participation than ever before into coveted properties
- Enabling the facilitation of payment not only in Fiat currencies but also in certain crypto-currencies (this will also require sophisticated hedging products to counter volatility)
We are hard at work around unlocking opportunities where tokenisation allows for a fundamental reshaping of investment portfolios for families world over. Our hypothesis is that this will in turn accelerate Foreign Direct Investment into countries that embrace the technology as an enabler for product innovation.
We are currently thinking about a few areas which you can expect some follow up posts on:
- What will the new world of Crypto conveyancing look like?
- How will the world of title insurance change as a result of the changing process?
- How will the international tax regime adjust to make way for the increased transfers of money into tokenised assets
- How will compliance and regulation change to ensure that funds are only taken in from places not on sanctions or exclusions lists
- How incumbents that have experience with securitisation of real estate assets can work with startups to provide regulatory umbrellas and coaching
- How Asset Managers will start to partner with startups to create new business models
If you share our passion for the space and are building or investing in this space please do reach out at [email protected] We would love to connect and build the future together. Real estate is about to get “Real”!