Traditional real estate management companies are increasingly looking at token markets. The value proposition is convincing: a broader investor base, lower transaction costs, higher efficiency. The question is whether they can convince buyers to invest their money.
The tokenization wave is reaching the European property market. The first deals were closed in Switzerland and Germany earlier this year. Just last week, two French real estate firms closed a property deal on the blockchain for the first time in France. That has set a precedent for other firms to look into property tokenization as well-
In March, Brickblock was the first company to tokenize a property in Germany, in the city of Wiesbaden, via its blockchain-powered Fonds-as-a-Service platform ScalingFunds. That was the first of many projects to come.
Brickblock’s new cooperation with Germany-based Peakside Capital is a project on a much larger scale. The two firms last month launched a real estate fund for the German market. The fund is looking to raise $225m.
Stefan Auman, Founding Partner at Peakside Capital, says, “I am convinced that ScalingFunds is the future of fundraising and fund management. Their innovative approach will help us to reduce the back office work and allows us to focus on what we do best – bringing value to our clients.”
A combination of an open-end and a closed-end real estate fund
Compared to traditional real estate investments, there are virtually no minimum investment sums when buying tokens. That opens up the asset class to a broader range of investors.
“Now, we can offer our products, which meet the quality needs of institutional investors, to investors that could previously not participate in the offering due to high minimum investments. Moreover, we are convinced that the underlying blockchain technology provides additional security,” says Aumann.
In a way, Peakside’s tokenized fund is a combination of an open-end and a closed-end real estate fund. Buyers can resell their tokens immediately via a digital exchange, without holding periods.
Success will depend on sales rather than technology
While tokenizing real estate assets makes perfect sense in theory, the biggest challenge will be attracting liquidity. So far, there is no liquid secondary market for security token trading. Thus, investors can easily buy tokens, but how can they sell it?
That’s a dilemma most STOs face. While security tokens promise higher liquidity, that’s only going to be possible once there is mainstream adoption. That, however, is unlikely to happen until potential investors can see the liquidity before they invest their money.
It’s a chicken-egg problem. Investors don’t want to invest unless there is liquidity in the market. But to create a liquid market, investors first need to be willing to invest.
Issuers can support liquidity by keeping a reserve and guarantee repurchases. But that can be very costly for the issuer. Another way is to include a buyback-and-burn program into the smart contract, meaning, the issuer will repurchase tokens automatically from the open market and burn them to reduce supply and drive the token value.
Another option is to work with market makers. Those are firms that facilitate trading in securities by providing a pool of tokens – which they own – so that buyers and sellers can trade easily without having to locate and deal with other individual traders. In other words, they make securities “liquid.”
Peakside Capital is not the only property token fund that is currently setting up in Germany. More are on the way. It’s a great concept, but each of those funds will succeed based on their tech platforms, but based on their ability to sell the investment.