Earlier this month, Building 4 of the Upper Riverside Development in London’s Greenwich Peninsula district became the first real estate project in the city to be tokenized. Through the division of the building into digital tokens and the sale of those tokens, the Hong Kong based developer Knight Dragon expects to raise $1.67 million (£1.4 million) in exchange for an 80% share of the building’s future profit. This blockchain approach to financing buildings is attracting increasing interest and these types of projects could lead to a seachange in real estate financing, driving smart technology adoption.
"At a corporate level, Knight Dragon has just revolutionized the entire European property market and will now move to do so internationally. At an individual level, for a relatively modest investment, individuals can own a piece of Central London real estate profit,” says Sammy Lee, Founder and Vice Chairman of Knight Dragon. “In the same way an asset can be securitised by dividing it into shares, tokenization allows an asset to be divided into individual tokens. The tokens represent a specific share of an underlying asset. In this case, ownership of KDB4 Tokens will represent a fractionalised interest in a contractual right to share in the gross profit of Building 4. Building tokenization is set to revolutionize the global property industry and we are pleased to be a leader in this revolution.”
Knight Dragon will divide the 191-unit real estate asset into 100,000 virtual pieces, each represented by a digital token named KDB4 (Knight Dragon Building 4). The company has set the initial value of each token at $1,670 (£1400), potentially allowing them to raise $1.67 million (£1.4 million) by selling all the tokens. In exchange, token-holders will be entitled to a share of the 80% of Building 4’s gross profit that has been made available by Knight Dragon, which they can sell in a secondary market. Tokenization also creates liquidity for property developers, who can use those funds to attract more investors by developing higher-value assets with smart building technology.
"The world is seeing a blockchain revolution and is preparing for the immense changes and benefits which will be driven by Web3. Knight Dragon will be one of just a few global real-estate developers bringing a new source of value to investors by offering fractionalized economic rights, in this case via fractionalised profit share, through tokenization,” said Richard Margree, CEO of Knight Dragon. “Tokenization also potentially solves real estate's largest problem: asset liquidity. Traditionally, multiple parties are involved in legal transfer of property. Tokenization eliminates the requirement for any third-party involvement, allowing ownership to be transferred directly from investor to investor."
Just a few years ago it would have been inconceivable for someone to own fragments of a property and trade them on a daily basis, but the rapid evolution of blockchain technology within financial sectors now opens up a new world of investors for real estate. Typically, a real estate investment requires tens of thousands of dollars and several months to complete all the necessary due diligence and paperwork, making only large institutional investments worthwhile. Tokenization, however, enables fractional ownership of the asset’s value and automates many aspects of the client onboarding process, thereby decreasing transaction time and cost enough to open up real estate investment to a wide range of non-traditional capital providers, right down to individual small-scale investors.
“The tokenization of real estate assets can play a significant role in the real estate industry. The notary visit, the considerable transaction costs or the land transfer tax become technically obsolete through the use of tokenization. The result is an increase in efficiency through corresponding financial and time savings. In short, tokens are positioned on the same level as conventional securities,” says Alessandro Lanzarotti, Senior Consultant at Ernst & Young. “Tokens do not only make the replacement of conventional securities by blockchain technology possible. Also, they can convert any tangible assets into tokens and make them accessible to all investor groups.”
The tokenization of buildings could address fundamental challenges in the financing of real estate projects in ways that an initial public offering (IPO) and real estate investment trust (REIT) can’t. The cost of going public is generally between 15% and 22% of the transaction value and REITs usually have a front-end load of between 10% and 15% of the transaction value. These one-time fees and commissions charged when investors purchase shares are not applicable for tokenized assets, as investors can easily buy tokens on a liquid secondary market. Traditional listed securities have to go through a range of intermediaries, some of which still maintain manual processes, making them unable to facilitate small-scale transactions, by eliminating intermediaries, token transactions lower barriers to entry and counterparty risk.
According to Ken Lo, Director of KDB4 collaborator Atom 8, “the tokenisation project represents investment democratization, bridging opportunities that were traditionally out of reach for many investors, such as Central London property. The KDB4 token, and the many which will follow, represent an exciting new asset class in the Web3 era.” While Robert Lui, the Digital Asset Leader at Deloitte who contributed to the KDB4 project, concluded that "real estate tokenization could become a new key to unlock value from property which is one of the largest assets in today's private market. It has the potential to become a primary new funding mechanism in addition to existing current capital market solutions."
It is still very early stages for real estate tokenization but the signs of momentum are evident. The value of real estate’s digital security market was over $25 million in December 2020, according to the Security Token Market. By June 2021, that had grown to over $32 million, a 25% increase in just six months. Regulation around real estate tokenization has become stricter since but those who find the right formula have found success. US-based platform RealT has tokenized over 230 properties with investors around the world, while Canada-based Polymath has tokenized over $2.2 billion worth of commercial real estate in recent years for RedSwan. Now with Knight Dragon and others opening up the UK and EU markets, can we expect an acceleration of the tokenization trend and the knock-on growth for value adding smart building technology?