Investing in real estate can be a good source of return, but it is increasingly neither cheap nor easy to do so. However, breaking up or fractionalising the ownership of the property asset allowing an investor to own part of a property rather than the whole, means the market has the potential to open up. The investor also does not have to physically manage the property either.
By tokenising the ownership of property, there is the potential to sell to a far wider audience and with much greater ease. This ease of liquidity should, in theory, make investing in properties around the world or in different types of property far more accessible and appealing. The more accessible an asset is, the more it starts to release value. The Dubai Land Department is an example of the potential here, forging ahead with exploring the scope for fractionalisation of ownership in hotels and high-end residences.
There are a few approaches to this breaking up of property ownership and several layers to any chosen approach. One option is to have a special purpose vehicle (SPV) which purchases and holds a property as one of its assets with each investor having a share in the SPV. The directors of the SPV would make the decisions about the use of the asset.
Another option is to create a mirror image of the property asset in the MetaVerse. This mirror image is the property, but digitised. The digitised property is then broken down into parts to create tokens, which people can trade on a platform. A variation on this has been seen before with digital art.
This makes tokenisation sound straightforward, but there are numerous reasons why it has yet to take off.
Effectively, a token is like a share and the initial sale of these tokens (assuming this takes place in the UK) would be a regulated activity. This means that developers, for example, would have to take advice to establish whether or not they need FCA authorisation. The location of the platform used will also have a bearing on matters such as tax and the ease with which the tokens can be traded because of the different regulations in different jurisdictions. The underlying real asset also needs to be maintained and insured; a smart contract would be useful to trigger the terms on which monies are taken from a general pool to fund this.
More practically. we may well need to see the Land Registry become digitised in order to truly open up the possibilities of linking tokens to property proprietorship.
Mishcon de Reya is working with clients to help them realise the future potential of fractionalisation. Please contact us if you want advice on your project.