Is fractional ownership market for homes close to come?

If you read articles about real estate and blockchain, you have probably gone through the word “tokenize” several times. What does it exactly mean?

Tokens are the digital entity used by Ethereum platform to represent value shares, assets, proof of memberships and the likes. Tokenize a property simply means to set the number of tokens representing a real estate property. Once the initial sale is done, tokens will represent the property shares and owners can trade them using the alternative coins issued in the platform. The whole process is possible because of the Ethereum “smart contract” feature: these entities are compatible with any wallet and exchanges that use a standard coin API. Why bet on Ethereum? Well, according to “Enterprise Ethereum Alliance” (which includes corporations like Microsoft, Inter, BP and others):

Ethereum’s intrinsically trusted system is the most promising solution for enterprise Blockchain adoption, given its maturity and multi-purpose design. — Ethereum Enterprise Alliance

The current issue is that properties are not in a blockchain and transactions must be recorded in local countries registries: this requires current platforms to get properties’ rights through notaries, add the property into their blockchain and then offer tokens to traders. Another way around, when a platform liquidates a property, they will have first to acquire tokens from owners (users) and then sell it through a typical real estate sale. Actually, those platforms work like real estate investments funds: the main difference is by participating you don’t get a % of the fund but a % of a property of your choice. Presently, this is the best approximation of property fractional ownership.

Current projects

Tokens are great tools to build new business models, and real estate is not set apart. According to MSCI “The size of the professionally managed global real estate investment market grew marginally from $7.1 trillion in 2015 to $7.4 trillion in 2016.” Those numbers give room to new ventures with innovative business ideas.

ICOs tends to follow those trends:

  • Properties are tokenised; users buy and trade tokens through alternative coins and get rewards from renting (which is managed by the platform)
  • Owners tokenise their own property and sell part of the tokens. Buyers have the chance to own properties in highly demanded locations without management headaches (there is, usually, insurance to back the property). In this business model, owners can reduce their mortgage
  • Fund development projects: several ICOs are available in Russia (due to foreign currencies shortage). It seems a very promising model for the construction industry

How do those projects differentiate? Well, to understand projects in detail, it’s required to go through ICOs’ whitepapers. Platforms tend to propose different terms on:

  • Geo focus: some platforms focus on USA real estate properties, others tend to favorite legislation blockchain-friendly. Others are targeting underestimated markets (like Spain, for example)
  • Number of tokens: unlimited or fixed. This is a complicated element since it will reflect on the value of the future tokens (hence the alternative crypto currency rate). I’ll dedicate an article on this subject soon.
  • Voting mechanism: the mechanism to add a property to the platform is different. Sometimes, tokens holders decide whether to accept or reject a property tokenisation. In other cases, it’s the platform management to verify and accept the property.

Platforms apply management fees. The % strongly depends on previous aspects (if management scout for new properties and handle properties renting, fees are higher).

Current and coming ICOs seems to gather attention and interest from investors, but what are the main risks?

  • Cryptocurrencies value: the value of the alternatives currencies is backed by the asset. So, if assets change their market values, the currency should also change accordingly. Further elements which could impacts rates are: number or tokens released, profit/loss realized with renting, paid dividends, speculations. All those elements could be too complicated for small and uneducated investors (but this is not much different from other markets like Forex, for example)
  • Platform default: what happens if the platform goes bankrupt? You are likely to lose your investment! Remember, you are using an alternative cryptocurrency which is managed by the platform (differently from Bitcoin or Ethereum who are unlikely to be discontinued). In the unfortunate case of bankruptcy, assets will be liquidated, and you’ll get your part according to local civil law.
  • Cyber-security: Ethereum-based platforms are secured but since code is customized, hackers can find their way. It’s not a long time ago when a 30M dollars hack was performed to a parity wallet. Regarding this point, consider that all software has bugs, but when those pieces of codes are responsible for millions of dollars of transactions, coding errors become serious business.

All risks related to classic investment apply as well.

Back to our title question, we can say that ICOs are trying to meet the investors’ request to facilitate real estate investments, even for small investors. A real fractional ownership is impossible, and we can only guess at it (but how long will government take to change corresponding civil laws and implement a blockchain registry?). Current developments seem to go ahead of limitations.

To learn more about current real estate platforms development, don’t hesitate to contact me.

Also, if you want to learn more about the Sweden blockchain test, read my previous article

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Mauro Biasolo

Blockchain|Funding|Startup Grind Veneto Co-director|SAP Financial expert|