Challenges with Real Estate
Real estate is the single largest global asset class. Yet, it continues to suffer from significant illiquidity. The complex industry requires interaction between multiple participants for a single transaction.
Buyers, sellers, lease holders, brokers and intermediaries, law firms, lenders, title companies, and ultimately the government, must all interact with their own data sets and information – mostly isolated from the information systems of the other participants. Add the complexity of cross-jurisdiction government issues like taxation, recording, and judicial, the impact of inefficient records and data becomes very clear.
Real estate has traditionally been considered an illiquid asset. It has been lumped somewhat together with similar asset classes like equity in private companies, alternative investment strategies, and art.
In contrast, more liquid assets such as stocks, bonds, and currencies can be more readily bought and sold with fast settlement times. There are a few specific things that create market illiquidity including a lack of transparent market pricing, depth of the market, difficulty executing a trade quickly, and differing investment time horizons.
While liquidity has historically been less of an issue for public equity markets, in private real estate markets, liquidity has always been a key factor significantly affecting asset valuation — or more specifically, pricing. In fact, illiquidity discounts can often reach up to 30%-50% of the estimated fundamental value! These types of “liquidation” sales may result in a loss and represent the primary downside risk to holding an illiquid investment.
Illiquid assets in private markets are generally priced on an “as-needed” basis, creating an inherent lack of transparency. Price discovery can be difficult, especially complicated in an economic climate that further clouds valuation.
Most of the commercial real estate market consists of private buyers and sellers, as opposed to publicly traded exchanges. Where public markets offer liquidity and efficiency, private markets create pricing asymmetry resulting from a seller who needs cash and is willing to accept a significant discount to market value to get it. Because the pool of potential commercial real estate buyers has traditionally been relatively small, sellers are limited in their liquidity options.
Illiquidity also means that a private commercial real estate investment isn’t for everyone. Aside from the size of investments being outside the range of a lot of investors, income and profits from real estate are optimized over a longer term horizon and any effort to quickly convert a property to cash will likely result in having to accept a price below market value.
Even after finding a buyer, the speed of the transaction to sell real estate can be 60 to 90 days, but can be much longer depending on the size and complexity of the property itself. Brokerages like CBRE, Cushman & Wakefield, JLL and Newmark Knight Frank will also pull transaction fees, further reducing the net on a sale in an already compressed market.
How We Help Real Estate Markets
Tokenized Property Interests (TPI) is changing the landscape of real estate investing.
XDEX helps transform the full lifecycle of the entire retail buying and selling marketplace, the investment process, streamlining payments and property transfers, tokenizing securities and property assets, as well as digitization deeds, titles, liens, leases, purchase agreements, insurance policies, and so on.
Records encoded on XDEX are secured, transparent, immutable and verifiable by every authorized peer on the network. Trust is built into the system from the foundation using cryptographic math and validation.
Real estate suffers from high minimum costs of entry. Single assets are generally out of reach for the average investor.
By tokenizing real estate, fractional interests enable a broader investor base, which opens the door to a larger investor base.
Rather than investing a lot of money into fewer properties, an investor can spread their investment across more properties through fractional ownership interests.
Fractional ownership interests also means fractional liquidity models. Rather than entirely disposing of an asset, owners can develop a path towards fractional liquidity by choosing to sell a smaller percentage of ownership.
Tokenized Property Interests are easily listed and traded on multiple licensed exchanges. This creates an alternative secondary market approach than just agent-based representation for traditional sale.
Because Tokenized Property Interests can be listed to buy and sell on multiple secondary marketplaces, buyers and sellers are no longer limited to the opaque methods of pricing.
Multiple liquidity pools enable a more accurate assessment of price as trading is no longer limited to buying and selling the entire asset in a single transaction that’s limited to spot market action through exclusive intermediary activity.
It is not easy to buy and sell real estate across international borders. The barriers generally prohibit the average investor from finding and participating in real estate investment opportunities in foreign jurisdictions.
It is also difficult for sponsors to find and secure investment from international investors for their projects.
Tokenization helps facilitate investing across international jurisdictions. Buying and selling real estate becomes as simple as clicking a button as the tokenized property interests are immediately transferrable around the world.
Through Tokenized Property Interests, real estate transaction complexity is reduced to that of buying and selling traditional securities.
Accessing inventory through online marketplaces makes it easy to buy and sell while reducing the transaction fees to a fraction of traditional intermediary costs.
Tokenized Property Interests are natively programmable, which means they can be consumed by any automation through smart contracts.
Traditional management processes can be made easy through seamless integration with accounting systems. This helps with things like distributions and even tax records.