Tokenizing Real Estate

Introduction My name is Julian, I’m the co-founder and CEO of InvestaX. I’m also the co-founder and Managing Partner of IX Swap, which is the first liquidity provider for security tokens which is a DeFi platform. I had a real estate development company before and raised a bunch of money for real estate projects, and […]

12 min read

Tokenizing Real Estate
Julian Kwan

Julian Kwan

CEO and Co-founder InvestaX. Building key digital infrastructure connecting CeFi + DeFi. Creator of the world's 1st Digital SPAC, 1st AMM/Liquidity pools for security tokens/digital securities and 1st Digital ESOP (DESOP). Investor, Advisor and CRO (Chief Representative Officer) of InvestaX's Capital Markets License from the Monetary Authority of Singapore.

Introduction

My name is Julian, I’m the co-founder and CEO of InvestaX. I’m also the co-founder and Managing Partner of IX Swap, which is the first liquidity provider for security tokens which is a DeFi platform. I had a real estate development company before and raised a bunch of money for real estate projects, and then spent a couple of years trying to work out where the marriage of the internet would meet with private equity and real estate deals, which hadn’t essentially had any innovations for many years. The first monumental change was the first real estate crowdfunding platform that started in the US in about 2014-2015. We set up one in Singapore; we were one of the first ones to get a license and did a bunch of deals.

Problem with the first generation

The problem with the first generation of those platforms was that they were not very high tech. When you peel off the crowdfunding websites, those P2P sites, people were investing in pieces of paper, and a lot of the pain points of investing haven’t actually changed. There were certainly some good upgrades, looking at these global deals, being able to invest in different types of assets, and being able to do it online. But there wasn’t much change to the structural value of the deals, there wasn’t any liquidity created, you still often invest in these projects, and you’re stuck for a long time.

Our platform then evolved as we went deep down the hole in 2017, and the ICO, initial coin offering boom was happening. My partners and I looked at the technology stack and went to about 500 cryptocurrency events and built a thesis that blockchain smart contracts would become the underlying infrastructure that all real assets use. If people are willing to send lots of value around the world with non-asset-backed tokens, why wouldn’t they want the same system for real assets? So, we embarked on a mission to build InvestaX and build an end-to-end solution for anyone who wants to issue customized digital securities.

You can watch this interesting video to know more.

Our belief was that in a world of tokenized assets, you’d have a whole basket of currencies, cryptocurrencies, stable coins, unstable coins, and potentially central bank digital currencies that would then marry with all these different types of digital security tokens and NFTs.

We firmly believe that with technology-driven investment vehicles, you will see an explosion of value and create the next kind of booms for the private markets.

The above image is just a very simple history of the traded securities and it points out that every kind of significant expansion of the public markets was when new technology was brought in to marry with that marketplace. Electronic trading then offered up an infinite amount of people who could start to trade.

The current ETF market is somewhere between $6 to $7 trillion. Then when you think about the private markets, up until recently, nothing’s really changed except maybe Docusign. You can see from the analogy used in the public market, we believe that there’s now going to be a paradigm shift in what will happen. As we move into this new technology, we’re just talking about real estate for many real estate projects and assets.

Public listed REITs have clearly proven that there’s a lot of appetite for tradable, digital, institutional real estate.

The public-listed REITs are great, however, they have several issues.

First of all, size is a big issue. You don’t try to move into a publicly listed or re-listed Singapore market unless you have $500 million to $1 billion assets, that costs a lot of money. Also, it’s not applicable to development projects. It’s predominantly commercial real estate. You don’t participate in equity upside; the REIT must distribute, typically not accepted income. But again, the point is that it’s a liquid form of real estate. That’s where we think the high-level value of tokenization for this kind of real estate is.

There are many different ways people try to use it in real estate. The concept of tokenizing a house and putting it on a blockchain is happening via property, the platform that’s doing an NFT representation.

When you start to think about shares of real estate funds and collective investments where you tokenize shares of a fund, the fund itself owns buildings as assets and it doesn’t matter if those buildings have ever heard the word blockchain or not.

It’s a much better way to issue and hold shares, and that’s essential. What you’re doing when you’re buying a share of Apple on Interactive brokers is that you’re not just buying in a trusted environment, you’re buying so you can sell. You don’t necessarily care about voting issues, you care about the economic interest of that asset, and you trust the system. You trust the platform, and you trust Apple’s doing the right thing, and therefore, people are buying and selling these things all day.

We’re at a point now where if we look at what’s been the problem today, the problem for private real estate, for those in the industry; it takes a lot of time and energy to raise the capital, it’s very slow and very inefficient when you’re investing in deals which are often stuck for a long time.

Sometimes, liquidity is not there in most of the private real estate funds and is instead a fixed fund, which makes no sense in cyclical asset classes, but people don’t want to give you the money forever.

A lot of the 2000 vintage real estate funds were wiped out in 2009, 2010, and 2011 when they were forced to sell at the end of the seven years and there are still a lot of issues.

With a tokenized or digitized share, the promise coming down the pipeline is that you would have greater efficiencies and enhanced liquidity, which would depend very much on your asset, its performance, and where these assets will trade.

From an investment manager’s perspective, and a real estate manager’s perspective, your relationship with your investors is typically binary. Each dollar you make, the client doesn’t invest, it’s a static relationship, not very exciting. Then 5-10 years later, you get paid up.

What we’re seeing from web 3 in the NFT world is a very different way to distribute value through an investment community. We’re bringing some of those concepts of web 3 across into the securities market by starting to launch NFT projects for investment groups, and the reason is just like in web 3, if you hold one of these entities, you might have first access to the next deals, you might get a lower trading fee and lower management fees, but it creates a really good, interesting use of bringing both of these two worlds together.

The second really important thing that most people aren’t even thinking about right now is another analogy back to the crypto space. Up until 2017-2018, your cryptocurrency was probably purely a highly speculative play, which certainly wasn’t being used as currency. But now times have evolved the whole perception.

Birth of Defi decentralized finance

The point I’m trying to make in 2018, the so-called birth of DeFi (decentralized finance), to what the greater market thinks is the birth was bringing the banking services lending, borrowing, and collateralization, I should say, and marrying that with cryptocurrency. So, it’s just Wall Street services and banking services brought into the cryptocurrency market. What that meant was an explosion of value because it made the actual assets a lot more usable.

So, in the same instance, we’re now in 1.0 tokenization of real estate where people are looking at tokenizing a fund, a piece of paper. So, it’s a digital representation of a share. There’s still this two-step process, we’re now moving. In some projects in some jurisdictions, there’s a security token, which is a paperless-based offering. So, there is no piece of paper, and there is no font.

The investment structure is tokenized

The entire investment structure is tokenized. That’s very interesting. You also see that structure that I just mentioned, they’re coming out, these decentralized applications where it’s basically an investment vehicle which is completely tokenized.

Then the next evolution of this will be, taking a share of your real estate fund that you couldn’t do anything with, putting it in a drawer for 10 years, and taking it on the platform to lend, borrow, collateralize, stake, etc., to extract a whole lot of value out of it, that’s a fundamental Zero to One change. It’s the same thing you can do with your public market stocks. You can lend them, take a margin, and borrow because they’re digital. People can see trusted metrics because it’s tradable due to these things. In the same instance, what we are very excited to be working on is taking all these private market assets that are very static and putting them into this new format, being able to make them much more usable for investors in a world of digital currencies. If you’re not digitizing your real assets, you’re missing out on that connectivity.

In the last couple of years, you had the first security tokens which were ICOs and failed because no one would give them money as an initial coin offering crypto, so they just started calling them security tokens. Hence, the SEC in the US started saying those cryptocurrencies were launched as securities. They’re security tokens, and they will get you a bunch of money. So, what that meant was that you had the industry being born where some people thought it was illegal because it looks like a security token.

That was a misunderstanding; they were fined because they issued security without following the rules. Therefore, they should have had a broker-dealer, partner, and exchange partner. So, security tokens are totally legal. The regulations on securities in most jurisdictions never referenced the word ‘paper’. They said we’ll follow the license. So, that was how the Singaporean jurisdiction dealt with it. Now, you’re starting to see a lot of investment jurisdictions around the world, moving the fund and company registrations to a distributed ledger, to digital format : Delaware, Wyoming, Switzerland, and Germany. This makes a lot of sense from a regulator’s perspective.

The concept of security tokens and digital securities wasn’t going to be supported or wanted by the regulator. We thought it’d be something that the regulators didn’t want to be about and support, even to a point wherein Singapore, most secondary trading is only available historically to accredited investors. But they put out a consultation paper into the market, which is when they want to upgrade regulations, they usually put it out for public consultation, and people can comment publicly and lawyers can write comments as they like.

And like I said, we have this one exchange license. Now that we’re looking at blockchain, we see the ability for us to issue two to three types of exchange licenses. One of them should be allowed to act for retail to access these deals. Like in the public markets, all the rich credit institutions fund companies until their IPO, and then once it’s public enough, big enough, tradable, and digital, anyone can buy it.

Issue Tokens on InvestaX Platform

The last part is someone who would be issued a token on the Ethereum blockchain, an investor, is being able to hold that security token in their own wallet. So, we’re integrated with public blockchains on our platform, primary issuance, fun new offerings, and investors can choose if it’s issued on public blockchains. There’s third-party custody only to hold that in their own wallet, or if they want to go into the secondary market. The last thing that I probably wanted to show is this.

We’re blockchain agnostic, and we’re very pro public blockchains. I think the world of Wall Street in the last couple of years, it was heavily focused on private blockchains. We believe that all digital assets live on public blockchains. So, if you go and build your own private blockchain, you’ve made yourself more efficient, and you’ve created a better system internally, but you’re missing out on all the value of touching cryptocurrencies, NFTs, and other security tokens.

It also means that, in our case, we went and integrated so far with Polygon, Algorand, Tezos, Hedera Hashgraph, and Ethereum. Other platforms like us, around the world that have licenses are also integrated with these blockchains. When someone issues a real estate security token, it is effectively business terms, and if business terms are agreed upon between everyone, it could launch on three, four, or five platforms around the world, that’s powerful. So, you’ll start to see private market real estate offerings coming in a security token format, launching in multiple countries on platforms like InvestaX. We have partnerships with overselling art checks and all these other groups as well. We’re not there yet, because everyone’s at that first phase of getting their first products out of the door. But this is really exciting and interesting.

I’m on LinkedIn and you could also email me at support@InvestaX.io. I’m in Singapore. Anyone who’s interested in using the platform can also register on investax.io.

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Important Notice: “InvestaX.io is operated by IC SG Pte. Ltd. (“InvestaX” or “IC SG”), a Singapore private limited company (Company Registration No. 201300459N). ICSG Pte. Ltd. (the “Company”) holds a Capital Markets Services license No. CMS100635-1 (“CMSL”) to deal in securities by the Monetary Authority of Singapore (“MAS”), which allows the Company to facilitate the primary offer and issuance of securities and act as an intermediary between issuers and investors. The Company also holds a regulatory exemption under the Financial Advisers Act (Cap. 110) which allows it to provide advice on units in collective investment schemes (broadly, pooled investments). By visiting this site, you agree to be bound by InvestaX’s Terms of Use and Privacy Policy. InvestaX.io is intended for accredited investors and otherwise qualified investors who understand and accept the risks associated with private investments. Investments are not bank deposits and are not guaranteed.

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