In the first part of this feature, Max Bowie outlined the potential trading value currently hidden within real estate assets. In its conclusion, he describes how some believe distributed ledger technologies could be the key to opening up the potential benefits of this market to a broader base of investors. To read Part 1, which examines real estate’s data problem, click here.

Real estate markets face a chicken-or-egg predicament: The markets need liquidity to generate timely market data, but need market data as an input to foster liquidity. And data accessibility isn’t the biggest challenge to creating a more transparent and efficient marketplace, according to Annerie Vreugdenhil, head of innovation in ING’s wholesale banking business. She says there are more fundamental, property-specific impediments to trading real estate as an asset class—especially outside the largest markets.

“In many countries, land registries have existed forever, so everything has been recorded—on paper, but in a very solid ledger. But there are many countries in the world where that’s not the case, so if you are buying property, finding out whether the seller actually has the title to sell to you is very hard,” Vreugdenhil says.

Here, she says, blockchain could solve some of the inherent issues. “I think at some stage … for buying and selling property, and especially for registering the title, blockchain would be very helpful. … If you want to establish a ‘real truth’ or a distributed ledger, it’s very good for that,” she adds. In fact, blockchain and related technologies such as digital assets and tokenization may yet play a bigger role in democratizing access to new asset classes such as real estate.

As we see the tokenization of these assets, you’ll see that data adapt to be more granular.

Phillip Silitschanu, Token IQ

The current quality and availability of real estate “market data” reflects the way property is still bought and sold by large property companies and investment firms, whereas, being able to divide an asset into digital tokens would open it up to a broader investor base, says Phillip Silitschanu, director of strategic relationships at securities token issuance platform Token IQ. For example, instead of trying to raise $2 million each from 10 investors to fund a $20 million development project, a developer could lower the entry amount to $50,000, exposing more investors, and making it easier for investors to trade in or out of those positions.

“As we see the tokenization of these assets, you’ll see that data adapt to be more granular,” Silitschanu says.

New York City Real Estate Coin (NYCREC) is one such company pioneering the tokenization of New York-based properties, and far from the perception of many crypto entrepreneurs, has a management team with more than 170 years of combined experience. NYCREC co-founder Barry Cohen says many players are approaching the same challenge—democratizing real estate investing and increasing liquidity—in different ways.

“Some are trying to tokenize fractional ownership in single buildings. We’ve seen some tokenize shares in a portfolio of real estate assets, other people operating ownership structures that have community governance models, and others creating models where they act as a platform where buyers and sellers can meet,” Cohen says. “Lots of people are trying to do this in different ways. … Once you tokenize something, you have the ability to do many different things with it.”

Worth the Risk?

Another example of a company already operating in this space is Relex, a cryptocurrency crowdfunding platform focused on real estate developments, which recently announced a crowdfunding campaign to raise investment for additional development of the My Thuy International Port in Vietnam, sees the potential for blockchain- and cryptocurrency-based crowdfunding to speed up and streamline the fundraising process for real estate projects, says Relex founder Keith Hilden.

“Investment for these projects usually comes in over a 12-month window. When you take a crowdfunding model, and blockchain technology, which allows you to monitor those investments more efficiently, that reduces the time taken to raise investment and perform due diligence, so a fund can disperse capital quickly,” he says. “When you get investors involved earlier, developers don’t have to be so reliant on debt and occupancy rates, and investors can exploit the difference between wholesale and retail returns, so they can make three times the returns.”

Hilden says a combination of a culture of “proxy developers” rather than passive investors, and a distributed ledger that takes any guesswork out of when money gets dispersed to investors, creates the kind of transparency that raises the investment score of an asset, and makes projects that utilize this approach more attractive to potential investors.

But will the speculative and unsecured nature of cryptocurrencies simply add greater risk to an asset class known for bubbles and crashes?

NYCREC’s Cohen warns that the new world of tokens and blockchain may still deter institutional investors with fiduciary obligations, leaving high-net-worth individuals and other accredited investors such as family offices that are able to absorb those discrete risks when others cannot. Though appealing to a different client base, IPSX’s Gahan says the exchange “took the view early on that we needed to create a fully regulated market … because the real estate world is renowned for a lack of transparency.”

We get concerned about trying to create liquidity where it doesn’t exist … which distorts the market

Gerry Frigon, Taylor Frigon Capital Management

But even with improved technology, challenges are likely to remain. Gerry Frigon, founder and chief investment officer of San Luis Obispo, Calif.-based investment advisor Taylor Frigon Capital Management, says blockchain can be a useful tool for building out this market, but notes that there are still market-structure concerns that will need to be addressed before it can move into the mainstream.

“We’re believers in distributed-ledger technologies, regardless of whether it’s for digital assets, equities, or other asset classes. We believe that’s the future. It’s an important trend in terms of how things will be brought to market and democratized in the future,” Frigon says. “That said, we get concerned about trying to create liquidity where it doesn’t exist … which distorts the market,” where increased frequency of trading may only benefit a few traders, rather than the listed company or security, or the markets as a whole, when a more fundamental approach may be more suitable for a particular asset, he adds.

Frigon says the majority of the firms’ high-net-worth individual clients—which comprise roughly 60% of its business, with institutional investors accounting for the other 40%—already have exposure to real estate through business ventures as developers or as professional real estate investors, and notes that the firm is currently generating better returns from REITs than it would expect from investing in physical real estate assets. “Is it really necessary to trade a piece of property on a second-by-second basis? … I’m not sure if it’s in the long-term interest of the capital markets, in general,” he says.

But one of the big advantages of trading real estate in a more liquid manner is that the market will become more transparent and fungible, and that data will become more accurate and timely. IPSX’s Gahan says the “shares” of real estate assets and their underlying attributes will behave similarly to corporate bonds. “We’re talking about institutional-grade real estate assets, not low-value development projects. We’re talking about yielding predictable—boring, if you like—returns … that make you willing, on a risk-adjusted basis, to buy an asset,” he says.

As the real estate market opens up, these new investors gain exposure to the asset class—but also share in its risks. The credit crunch and financial crisis exposed the inefficiencies and lack of transparent pricing and valuation around corporate debt and other credit instruments. With the evolution of technology and data availability that has taken place since that time, for the sake of those new investors, it shouldn’t take a bubble to create an efficient and transparent marketplace for property investing.