There are some blockchain entrepreneurs who think the parts are worth more than the sum.
These companies want to redefine real estate by allowing fractional ownership of homes and commercial properties, creating new ways of investment.
One, Meridio (formerly known as Pangea), is collaborating with national commercial real estate firms including Cushman & Wakefield to create tokenized shares backed by property.
Another, QuantmRE is developing a stablecoin that will be backed by ownership of a fraction of a home. This offers homeowners looking to tap their equity an alternative to home-equity loans and individual investors “mini” stakes in real estate.
“We turn that equity into tokens, and that cryptocurrency is backed by your asset, which is your home,” explains Sullivan.
“We allow you to chop your house into tiny pieces,” QuantmRE CEO Matthew Sullivan tells ThirtyK. Because homeowners are already accustomed to using home equity as collateral and know how to make money from their houses through platforms such as AirBnB, they might be open to fractional ownership, he says.
“We turn that equity into tokens, and that cryptocurrency is backed by your asset, which is your home,” explains Sullivan, whose company is based in Newport Beach, California. “In the same way that AirBnB enables you to generate cash flow, through Quantum you gain liquidity instead of just benefiting from your home as you pay down the mortgage and gain equity.”
Although sales of existing homes in the U.S. have been falling for four months, according to the National Association of Realtors, cashing out a home investment is not an arduous task at the moment. But homeowners still have lots of untapped equity. Not counting the 20 percent in equity that most lenders require remain untouched, American homeowners have $5.8 trillion in home equity that could serve as collateral for second mortgages, home equity lines of credit or new forms of fractional ownership and investment.
Real estate has proven to be a plump target for efficiency-seeking blockchain startups. Propy, for example, is showing how the entire transaction process can be streamlined via blockchain. Blockchain technology has the potential to uproot deeply entrenched players in the mortgage process, whose services are supplanted by smart contracts.
Precisely because real estate investments are by definition illiquid, nontraded real estate investment trusts (REITs) and privately managed funds and pools are considered alternative investments that only sophisticated individual investors should pursue. Although it’s easy for any individual to buy shares of publicly traded REITs, the new blockchain projects could open another investment channel that could make it easy for investors to build diversified portfolios.
Brooklyn Proving Ground
Meridio, a project of New York blockchain incubator ConsenSys has already converted a Brooklyn building to fractional ownership, working with Cushman & Wakefield, the international commercial real estate brokerage, on the deal. The company is now opening conversations with Cushman about other properties and with other brokerages about how tokens could offer a parallel mode of investment.
Meridio’s tokens are formulated with smart contracts embedded in them with relevant compliance reporting and documentation. As the concept is more widely adopted, Shaikh would like to create an open market for the tokens.
The industry may be intrigued, but it hardly lacks for ways to attract and manage investors’ money. The National Association of Real Estate Investment Trusts (NAREIT) offers numerous indices that track a cornucopia of real estate investment vehicles. NAREIT tallies the market cap (as of July) of all New York Stock Exchange-traded REITS at $1.038 trillion, including the holdings of the 67 REITS that are rated investment grade. And that doesn’t include other real estate investment vehicles.
That formidable infrastructure is powerful and proven. Meridio, says Shaikh, will look for ways to complement, not replace, the current investment channels. One option is to persuade existing REITs to include tokens in their portfolios.
Making a Market
Job one is figuring out how to make a market. Peer-to-peer trading with smart contracts is functionally efficient but lacks scale, to say the least. Meridio is working on that with a pipeline of 65 commercial assets, says Shaikh, that includes retail, mixed-use, retail and industrial buildings.
“We’re starting to see a diverse pipeline,” he says. “Retail investors want to be able to invest in real estate without going through multiple parties and five-year funds. They want a liquid real estate market.”
Meanwhile, QuantmRE’s Sullivan says homeowners will have new ways to build equity, potentially by buying slices of other houses they believe will appreciate, instead of putting all their equity into their own homes, adds Sullivan, whose company plans to launch its public token sale on Nov. 1.
Fractional ownership on the block might change the meaning of the ‘real’ in real estate, he adds. “Real estate has been physical, not conceptual,” Sullivan says. “If real estate could change hands as rapidly as stocks and bonds, what does that do to the ownership?”
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