Tokenisation of Securities: Real World Applications — Property (Part 1)

Tokenisation of Securities: Real World Applications — Property (Part 1)

The token economy is evolving and tokenised securities, through their institutional appeal, are gaining popularity in the investment world. With industry experts tipping 2019 as the year of the security token, it’s time to expand our views on what tokenisation can really offer investors.

Blockchain has created a borderless environment for token-based projects to emerge and change the rules of how we interact online — covering everything from supply chain solutions to employment contracts, property transactions and much more. Blockchain technology promises a new and exciting frontier, offering a safer, more secure and transparent future.

Looking to the future, the property market is a sector that could greatly benefit from tokenisation. The UK property market, in particular, has gained a reputation as being almost impenetrable to many. Prime properties are the preserve of big investors, with property purchases involving huge quantities of paperwork and multiple agents. The result is a current market full of illiquid assets.

Security tokens have the potential to disrupt the property market, creating opportunities for startups and new investors to get involved. Unlocking equity and fractionalising ownership not only opens doors but also turns traditionally illiquid assets liquid.

How Can Property Be Tokenised?

To understand how a property can be tokenised, it’s important to grasp the basics of security tokens.

In a nutshell, a security token is:

A token that represents a digital form of equity, loan, fund or financial instrument.

Michael Kessler, CEO of Tokenise, expands on the finer details of tokenising a property:

“Property itself is relatively easy to tokenise. The most common form is to place it into a company and the shares of the company can have a token attached to them, giving equity rights to shareholders. However, it is possible to have fractional ownership of a property and literally own a small section of a property (a bit like a giant syndicate buying it together).

The other way it can be tokenised is not to have direct ownership at all, but to be granted certain rights. As an example, if the property is a hotel then it could give rights to receive a percentage of profits, or it might give usage rights, like a timeshare. This could equally be applied to a commercial property, like an office. The rent could be divided amongst the token holders, and the management and direct ownership of the property could reside elsewhere. It could also have mechanisms built into the smart contract (token) that, on the sale of the property, any uplift in the value is divided amongst the token holders.”

No matter the mechanism of tokenisation, all tokenised shares have a value. They represent a share in a particular property — so unlike other token types they are viewed as securities.

What Are the Benefits of Tokenising Property?

One of the major benefits of security tokens is that they are designed and created to comply with financial market regulations, and exchanges will require a licence to trade them — so they offer less financial risk than a utility token. The fractionalised method of purchase is also beneficial to emerging investors who want to invest in property but may have found barriers to entry via stake cost or competition. Michael shares his views on the benefits:

“It can give more people direct asset ownership. Once the raise has occurred and the tokens are issued, those tokens can then be bought and sold. The property carries on functioning as previously and the tokens create liquidity. If, for example, the hotel that was tokenised is highly profitable, then the value of the tokens goes up. The token holders may then decide to sell some of their tokens to realise a gain. Conversely, if there is a fall in property values, then people might wish to exit their investment and invest in a different asset class, or use the proceeds for another purpose. This can also be used for property development, reuse or refurbishment. It is a way to raise capital and then create liquidity into what was, and is still currently a very illiquid market.”

The liquidity of tokenised property is an attractive prospect that could open up the sector to a much wider audience, which in turn keeps the market liquid as assets can be more easily traded.

In Part Two

In the second instalment of our exploration of property tokenisation, we will take a closer look at the mechanics behind tokenising a property and how this is facilitated by the immutability of Distributed Ledger Technology (DLT). We will also consider the types of property that might benefit from tokenisation, and how the Tokenise platform aims to facilitate the sale and trade of property tokens, in a bid to add liquidity to this asset class and open up investment opportunities to a whole new pool of global participants.