Prohibitive, Deterring YET! REITs, Funds and Web3
Decentralized web known as Web3, a challenge, an opportunity or a potential revolution that will affect the real estate industry, introducing new sets of challenges, tools and opportunities for funds and Real Estate Investment Trusts (REITs).
While there may be some challenges to adopting Web3 technology, such as the need for education, and lack of adequate legislation overall, it presents a great opportunity for funds and REITs to enhance their operations and increase their competitiveness.
The case still stands where the world is on the search for the pioneer fund or REIT which will take the effort, and I would say the risk, to adopt an architecture that is none conventionally put together, and have the will and the commitment to walk all the walk with it towards fruition.
My thesis is one of pioneering while preserving legal integrity and commercial viability which can only be served by having an overview of the landscape, putting the facts together. So I took the endeavor of sizzling through the opportunities and challenges and here are my views and findings.
Let’s dive into the advantages of tokenization prior to us passing through the challenges as well as the benefits of early adoption.
Web3! The what and a part of the why
Web3 aims to create an increasingly open, inclusive, and user-centric internet by enabling direct peer-to-peer interactions, enhancing privacy and security.
Web3 is built on the principles of decentralization, transparency, and user sovereignty, leveraging blockchain technology and decentralized networks to enable peer-to-peer trustless transactions, and the development of decentralized applications (dApps). It introduces concepts such as smart contracts eliminating the need for intermediaries.
The Benefits of Automation
One of the main benefits of Web3 in real estate is the ability to streamline and automate various aspects of the industry, such as property management, leasing, and transaction processing. The transaction logistics will change forever -to the better- while self-executing contracts known as “Smart contracts” with the terms of the agreement directly written into code, can help automate lease agreements and rental payments, reducing the need for intermediaries and reducing the potential for errors and disputes.
Makram H. Hani
Chair FIBREE Dubai
Wealth for all with sustainable and efficient fractionalization
I am sure you have read at least one study about how inefficient, and unattractive to investors current methods of fractionalization are. Web3 presents new sustainable and efficient opportunities for fractional ownership and investment, allowing funds and REITs to offer more accessible investment opportunities to a wider range of investors. Tokenization of real estate assets allows for fractional ownership and investment, enabling investors to own a portion of a property and receive a proportional share of the profits. This opens up the market to new investors who may not have had access to real estate investment opportunities with efficient, sound investment grounds previously.
The benefits of tokenization to funds and REITS are plenty, and I need not to remind you of the challenges every time I talk about the benefits and the size of the opportunity, So you have not to worry as we will be discussing that in detail as well.
The WHY?
Liquidity, Accessibility, Transparency, Speed in Transactions, Security, Flexibility in Asset Types, Efficiency, Marketability, Control are some of the benefits that we will be listing today, yet all of those are usually seen and talked about. So let’s also take a look at aspects of real current pains and opportunities that currently live in the process and are not discussed that much . Every sizable acquisition has a challenge of capital availability, readiness as well as the cost of capital. Every sizable exit may be challenged due to timing or capital market conditions by a discount to valuation. Those two are pains funds and REITS live and tokenization stands to ease. Let’s start with the obvious and stroll together through it.
Liquidity: Tokenization can make it easier to buy and sell fractional ownership of real estate, potentially improving liquidity and making it easier for Funds and REITs to attract investors.
Lower Costs: Every investment manager should be looking at reducing costs to increase returns. Yet, with current inefficient structures and processes there is a limit to how far you could go. Tokenization can reduce costs associated with buying and selling real estate, such as brokerage fees and administrative expenses, which could result in lower overall costs for investors. At the same time with adequate regulation that is built to fit the structure’s direct and indirect costs, these can be significantly reduced which can be major over the lifetime of the asset.
Accessibility: Obviously tokenization can make it possible for smaller investors to participate in real estate investments, which may have previously been out of reach due to high minimum investment requirements.
Transparency: Tokenization can provide investors with more transparent access to information about the real estate assets held by a REIT, potentially increasing trust and confidence in the investment. Related pains that everyone in the industry talks about and may be eased, have to do with REITs that are considered inefficient ways to purchase and hold real estate. Why would you, for example, see REITs trading at 30 cents for the dollar?
Speed in Transaction Times: Tokenization can speed up transaction times for buying and selling real estate, potentially making it easier for funds and REITs to take advantage of market opportunities.
Security: Tokenization can provide enhanced security measures, such as using blockchain technology to protect against fraud and tampering.
Flexibility in Asset Types: Funds and REITs today always have a minimum ticket price when approaching the market. Tokenization can allow REITs to invest in a wider range of asset types, such as smaller properties, which may have been difficult to access.
Efficiency: Tokenization can automate processes such as governance, compliance and regulatory reporting, reducing the need for manual processes and increasing efficiency.
Marketability: Tokenization can make it easier for REITs to market their investments to a wider audience, potentially increasing demand for their offerings.
Control: Tokenization can allow REITs to have greater control over their assets, such as enabling them to easily track ownership and property details in real-time.
Capital Readiness: When acquiring assets of a certain size funds and REITs need to have their capital stacks efficiently sourced and most importantly available. Tokenization can stand as one of the capital stacks, which may hold characteristics other parts of the stack may not. Giving funds and REITs the ability to tap into a wider pot of investors who represent a diversity of interests and approaches to investment may represent a crucial tool.
Exits made different: This is concerning the commercial terms or the deal. The commercial terms you get, which are associated with many parts of real-estate buying, selling and financing. The market including private equity companies, insurance funds and other institutional buyers may have certain agendas, or complications when deciding to acquire an asset. Yet this is not the case with the retail investor market in general. People who have saved money or received a bonus may be in a perfect position to invest when institutions aren’t.
The challenges
All the above is great news yet there may also be challenges in adopting Web 3 technology in real estate. There may be a lack of understanding or awareness of the technology among industry professionals, especially while the technology itself is still evolving, meaning that there may be some technical challenges to overcome.
Although that is the case, the two biggest challenges stay adequate legislation and lack of standardization. The none-existence of comprehensive legislation is a deterrent from adopting tech as the prohibitive nature of such approach makes it less feasible, time consuming and more complex to go such a route of adoption. When we talk standardization, we don’t only consider tech standardization, but also in terminology, processes and methodology and also legislation.
Another couple of deterrents are interoperability and integration with legacy systems. The interoperability of different web3 platforms and systems can be a challenge, as different systems may have different standards and protocols. But more so is the integration of web3 technology with legacy systems and processes, which is another research on its own, is often a facing big maintenance costs during operation, like API-management.
Is it logical for Funds and REITs to start the process of adopting Web3?
While any pioneer adopters today will be faced with challenges to adopting Web 3 technology in real estate, it is my deepest conviction the benefits and opportunities presented for funds and REITs outweigh any potential drawbacks. Funds and REITs can increase their efficiency, reach a wider range of investors, and stay ahead of the competition in an ever-evolving industry in addition to plenty other benefits by embracing Web 3.
I am committed to the future of real estate.
Are you?