Episode 10 — A conversation with Henry Elder about how real estate investing, which is one of the oldest forms of investing (it’s been around since practically the dawn of human civilization), is getting a fresh coat of paint through the application of blockchain technology and cryptocurrency.


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Host:
Chitra Ragavan
Chief Strategy Officer
Gem

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“The best investment on earth, is earth,” said the well-known New York real estate investor and philanthropist Louis Glickman. Well, anyone who has bought and sold property can attest that the processes involved, so archaic, inefficient, and paper-driven, feel as dated as middle earth itself.

In investment parlance, real estate, which is one of the oldest and most reliable forms of investing, is considered an “illiquid” investment. What that means is that It’s difficult to buy and difficult to sell and the returns are very slow. The bottom line is that if you want to make a quick buck, real estate is generally not the market for you. Some would argue that this friction and inertia is in fact what makes real estate safer than other forms of investing. But illiquidity and stringent regulations limit the pool of investors, typically by geography and income. It’s difficult for foreign buyers to participate in US investments for instance without a lot of pain and often, beginner investors with average incomes find the market difficult to penetrate. The illiquidity is exacerbated in private investments like commercial real estate, according to Kevin Young of Harbor. The company, which launched its blockchain platform for private securities last November, is in the vanguard of companies that are trying to push the slow-as-molasses industry into the future using blockchain technology and cryptocurrency.

The process of digitizing real estate is called “tokenization,” which simply means taking a real world asset, like a skyscraper, and representing it on a blockchain ledger. The goal of tokenization is removing barriers to investing through something called “fractional ownership.” It’s like taking a building and digitally slicing and dicing it into “fractional” units which can then be sold to multiple investors. Think of a digital apple pie being “sliced” six different ways and offered to six hungry pie lovers. Only, the pie here is the skyscraper and the recipients get digital “tokens,” saying they own a piece of that building. And the value of all the pie slices, or digital tokens, adds up to the value of the entire building.

Because blockchain ledgers are global, anyone interested in American apple pie, or that skyscraper, anywhere in the world could, in theory, buy a slice or piece of it, as long as they comply with certain regulations. Since the tokens are fully digital, you can build regulatory compliance right into the tokens, or into the software that trades them.

Tokenization will bring in new liquidity through new blockchain capital markets instead of the traditional capital markets, according to Henry Elder, Co-Founder of Digital Assets Advisors, an early entrant in the real estate tokenization space. “This global pool of investors and round-the-clock order book will unlock additional liquidity premiums and pricing efficiency,” he said in this Blockchain Beach article.

Selling shares of property is not a new idea, noted a recent article in CoinDesk titled, “Real Estate ICOs Are Moving In, But Investors Aren’t Floored,” pointing to the existence of Real Estate Investment Trusts (REITs), which are like the mutual funds of real estate. Proponents of tokenizing such as Henry, say that over time, having real estate documents and transactions on the blockchain using “smart contracts,” could streamline the approval processes, democratize real estate investing, reduce fraud, increase the speed and integrity of the transactions, and vastly increase the global pool of buyers for property owners.

But pushing nascent technology on an archaic industry is easier said than done. To date, only a couple of properties have been “tokenized” and sold via blockchain enabled fractional ownership. One of the first examples of this was the tokenization of the St. Regis Aspen resort, valued at $224 million.

Another example is the tokenizing of a 12-unit luxury East Village condo valued at more than $30 million, described in this Crypto Morro blog by David Kariuki. That property was tokenized on the ethereum blockchain network. The sellers accepted both crypto and fiat as payment mechanisms and investors in the project were given the option of holding their interests in either token or paper form, Kariuki said. The project was a collaboration between New York real estate company Amiran Group, blockchain company Fluidity, and broker-dealer Propellr Securities.

Many real estate investors like Henry acknowledge that it could be years before they see serious adoption of tokenized real assets. I invited Henry over to our Gem studio recently to talk about how he fell down the rabbit hole and where he sees the market going because of this new technology. He believes that the initial foundation for this space will largely be built by institutional investors who have the deep pockets to try something bold and new. “However, the pipeline that they’re creating, the technological rails effectively that they’re creating to be able to do that,” says Henry, “can easily start onboarding more retail investors once those companies have reached the size where they can deal with those investors.”

However, Henry believes the real benefits of blockchain technology will come from a rehaul of the stultifying title and deed processing using immutable blockchain ledgers. “ . . . Because this is a paper-based, high-friction, manually verified process. It’s totally ripe for disruption,” says Henry. “ . . . you’ve just got a lot of bureaucracy that you have to like weed your way through in order to start moving title onto the blockchain. But once it happens, you do open up that form of fractional ownership.”

If these obstacles to innovation are overcome, and Henry acknowledges they are serious ones, the upside is massive, he says. “I don’t think that blockchain is necessarily going to give us 10x or 100x process efficiencies in real estate. But I am absolutely 100% certain that it will give us 5%, 10%, 15% efficiencies. And when you extrapolate that across the hundreds of trillions of dollars of real estate across the globe, that’s a massive amount of money. That is huge. Like unfathomably huge.”

Topics Covered in This Episode

  • Real estate as the ultimate imperishable good
  • Real estate has built in scarcity
  • What does it mean to tokenize real estate
  • Why does real estate need blockchain technology and cryptocurrency
  • Pain points and friction in the system
  • Real estate is rooted in the past
  • How real estate differentiates between haves and have-nots
  • How tokenization creates liquidity in the market
  • Initial customers will be institutional investors
  • Tokenization of a real estate property in New York
  • Complexity of global market and tax implications for overseas investors
  • Crossing the educational hurdle
  • Dealing with the high international demand for us real estate
  • Maturation of investors regarding blockchain technology
  • Real estate tokens are securities in terms of regulatory framework
  • How he fell into the rabbit hole of real estate blockchain
  • A generational way to change the way people invest in real estate
  • Examples of real blockchain deals to date in real estate
  • The Two Token Waterfall
  • Still in the realm of the theoretical
  • Fractional ownership vs. fractional investing
  • Putting deeds on the blockchain
  • Real estate is an archaic industry
  • Level of efficiencies from blockchain technology
  • Closing thoughts

About Your Host, Chitra Ragavan

A little background about me — I’m the Chief Strategy Officer at Gem, a Los Angeles-based crypto portfolio startup. Prior to Gem, I was Senior Counselor to the CEO of Palantir Technologies. Before entering the software startup world as advisor to CEOs, I was a long-time journalist at WTTW/Public Television in Chicago, National Public Radio (NPR) and U.S. News & World Report Magazine (U.S. News).

My goal is to provide independent and thoughtful analysis of the events and news shaping the industry.

By way of full disclosure, I am a crypto investor. If we ever mention a specific cryptocurrency in the context of a discussion, I will fully disclose my investments, if any, in that currency and expect the same from my guests. I’ll avoid any and all conflicts of interest in the course of these discussions.

You can learn more about me on LinkedIn, my website, or my Instagram.

Enjoy your crypto journey, unicorns!

Chitra Ragavan