UPRETS INSIGHTS | Does Digitalization Democratize Real Estate Assets?
As the Blockchain technology continues to mature, there has been a shift in focus from Initial Coin Offerings to what now people are vouching for and embracing, Digital Security Offerings. DSOs in the simplest terms refer to the digital representation of a real asset on the blockchain.
Real estate is one of those areas that is embracing digitalization to solve some of the traditional challenges that make it tiresome and hard to sell and buy properties. Real estate digitalization is, therefore, the process of representing the ownership interest in a property using a digital security. The digital security can represent different things such as partial ownership of the asset, interest in debt acquired by the underlying real estate property, equity in a legal structure that owns the asset or even a claim on a stream of incomes generated by this asset.
Real estate remains to be the largest asset class in the world. This US$ 228 trillion industry is even bigger than stocks and bonds combined. The Middle East has always been a leader when it comes to digital assets. Liquefy recently announced its partnership with a consortium of Gulf families where it will digitize real estate assets worth US$ 1billion. The first project that will be digitized under this partnership is a US$600 million luxury hotel located in Mayfair District in London.
Adrian Lai who is the CEO of Liquefy, noted the following, ‘as blockchain technology continues to progress, we can see that the real estate sector’s interest in digital securities is on the rise. The number of deals and pipelines in this sector has grown exponentially over the past year. We are certain that blockchain technology has a huge potential to enable new business models within the real estate sector. Such models will increase liquidity in this sector and also lower costs’.
Factors to Consider when Digitalizing An Asset
Many people who advocate for the digitalization of real assets argue that they will improve liquidity. Indeed, traditional assets such as private company stocks and real estate assets are known to be illiquid, costly, and difficult to transfer ownership. But for digitalization to work, the following need to be put under consideration
1. Value of the Underlying Asset. There must be a demand for the asset for it to become liquid. For instance, the luxury hotel that Liquefy will digitalize is situated in an affluent area and demand for such properties is always high. Failure to carry out research and audits may cause you to end up with worthless digital securities. Some companies doing ICOs have ended up burning some of their digital securities after they got it wrong from the start.
2. Security Regulations. Many people were duped by the ICO craze of 2017 and 2018 and ended up with worthless digital securities but they could not take any legal action. The reason why most people appreciate Digital Security Offerings is the fact they are compliant, unlike ICOs which aim at avoiding regulations. Compliance will vary from one region to the other. However, there are organizations such as STOCOOP that are working very hard towards developing a global compliant framework for digital securities.
3. KYC/AML/Accreditation. You must determine who can invest in the digital securities that you want to digitize. All these steps can be done automatically on the blockchain which makes the process faster and easier. In the case of the partnership where Liquefy will digitalize the luxury hotel in Mayfair District, the EU regulations will define who becomes an accredited investor.
Does Real Estate Digitalization Bring about Asset Democratization?
Democratization, in this case, refers to the process of making digital securities available to more people by lowering entry barriers and costs. The real estate industry is known for its many barriers that make it hard for people to invest.
Most of the Digital Security Offerings are not able to fully democratize real estate assets even after digitalization due to the underlying regulations.
For instance, in the US one must be an accredited investor to participate in the security market. One must have earned an income of not less than USD 200,000 or USD 300,000 combined with a spouse in each of the two previous years to become an accredited investor. A person with a net worth of over USD 1 million also qualifies to be an accredited investor. However, the net worth should exclude the value of his or her primary residence. Other regions such as the European region also have restrictions when it comes to security investment markets.
Some people justify these investment restrictions. The argument is that it protects small retail investors against staking money against an investment that they do not understand well which raises the chances of losing more money than they can afford. However, this approach only allows the wealthy population to take part in attractive investment opportunities. Recent research shows that more than 93% of Americans are thus locked away from such opportunities as they do not meet the minimum threshold.
Digitalization Brings Democratization of Information
The traditional real estate market has scarce information and many intermediaries. For instance, a potential investor may have to call maybe five or so different individuals to gather all the information that he or she needs to make an informed decision. A blockchain platform avails all the information that an investor needs in real-time. Information such as appraisals, audits, rent roll, compliance data, and insurance binders are some of the information that a public blockchain can host.
The digital securities market is still young, but real-life applications are already happening. UPRETS is among the pioneers in real estate digitalization and works closely with various stakeholders to solve some of the problems in the real estate sector. There is a need to involve various players in this industry if some benefits such as liquidity and democratization of real estate assets are to be realized.
UPRETS is a platform focused on simplifying investment in real estate.
We are dedicated to providing a convenient, compliant and advanced real estate digital securitization platform for property developers, asset owners and investors globally.
By utilizing UPRETS platform, real estate developers and assets owners can create digital securities for their properties, allowing investors to benefit from the rental dividends and capital appreciation of the properties in major global cities.
Backed by a publicly listed real estate conglomerate (NYSE:XIN) and our award-winning, patented blockchain technology, Xbolt, we bring a network, experience and luxury assets to the platform.
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