Hi! I'm Amy Wan, with Security Token Academy from the Security Token Meetup Kickoff event in Santa Monica. We've got a special members only interview today with founder of Aperture Real Estate and Property Coin, Andrew Jewett, Paul Monsen, co-founder of Digital Asset Advisors, and Lauren Biedenharn, founder of Team Glasses. Welcome guys.
We are here to discuss real estate and tokenization. Let's talk about that for a second. Tokenization as applied to the real estate investing industry, how does it achieve more liquidity?
I think that the easiest part is just putting things on the blockchain and making them purely tradable. If you think about what real estate is as an asset class, it's inherently illiquid. It's a house, there's lots of paperwork that's involved with transferring that property. It's a large-scale commercial building that needs a lot of money invested in it.
If you can put that on the blockchain and make it tokenizable and fractionable, I guess, is that a word? And tradable across the globe 24/7, I think the liquidity premiums that you'll see and the value of those assets will be greatly enhanced as a result of tokenization.
Fantastic. Anything else to add?
I think in residential world, if we have tokenization of residential real estate, it'll open up a new opportunity of liquidity for a first time buyer, millennial, who might not be able to have an entry point today in a tough market like Los Angeles.
Having that ability to dive into real estate investing early on, or before you might have that saved up down payment really helps. Being able to liquidate out when you need to makes a whole new opportunity for a millennial, and anybody in the price ranges that they're available to have, can then have a new open market for them to be available to get into that business.
Fantastic, awesome. Paul, can you explain to us very quickly, what is liquidity premium and why is it beneficial?
A liquidity premium is an esoteric concept of finance, that is becoming more and more necessary with the millennial generation, our generation. What is does is through technology, through the digital transformation that we're seeing, is liquidity is provided in a number of different ways. Specifically within blockchain, now it opens the market up to an entirely new type of investor. As new investors come in, it makes the market more liquid.
As things become more liquid, they become more sought after, As people demand something, because liquidity exists, or because the digitization process provides the opportunity for liquidity, things trade at a higher value. If something used to trade at a million dollars, now because there's liquidity, that's going up to a million and a hundred thousand dollars. That's the basic concept of liquidity premium.
Interesting. Anything else to add?
I would say I think there's also the concept of similar assets, so if you've got one asset that's on the blockchain and tokenized, and one asset that's not, there inherently should be a premium, a price increase for the asset that has more buyers. Basically the same thing Paul said but I think you can also look at it versus assets that are and are not on the blockchain. A commercial building is a great example of that.
If you've got 100 million dollar commercial building that's on the blockchain and you can break that up into 100 one million dollars investments, that's much more liquid than trying to sell them off in 25 or 50 million dollar chunks when they're not on the block chain.
Let's talk about the converse, illiquidity right? Illiquidity features such as lock-up periods, for example. How is that gonna go ahead and affect pricing?
I think, unfortunately, in the regulatory environment we're in right now, Reg D is such that you have your one year lock-up on all investments and I don't think anyone's really properly priced that into the market just yet. I still think people are paying whatever the token sale price is.
Once that lock-up comes I think you'll start to see a boost in illiquidity, but I just don't think the market's quite there yet for people to really get a grasp on the concept of, "Hey, I'm holding this for a year's time. During that year's time, am I making any money in the underlying investment?" I don't think people have really contemplated that just yet because I think the market's so new that this whole concept of a lock-up period doesn't really exist to investors just yet. I don't know, do you have any other thoughts on that?
I can give a reverse answer to that. Sometimes liquidity is not always beneficial, right? Specifically for investors, investors often like illiquidity. They do not want the liquidness of an asset. The reason for that is because they can find an underpriced asset; they can turn that asset, improve it, and then they can provide it to a greater audience once it's a more beneficial property for everybody.
There's two sides of liquidity. Lock-up periods I think is a short-term thing that's impacting cryptocurrency right now. Ultimately, that will go away, as there's enough assets coming available. There's an alternative side to liquidity.
That's really interesting. Who, then, is liquidity good for, and who is illiquidity good for? Are there different audiences for all of this?
In my perspective, I'm kinda like Paul. Illiquidity is good for me in my business. My whole business is built around buying properties that are distressed and don't have a liquid marketplace. Then I enhance the value of those assets and the liquidity of those assets by doing value-added rehab.
And yet you're pro-tokenization?
Absolutely, because on the back end I can fund my business via tokenizing and make the process of investing in those houses available to a much broader audience.
From a liquidity perspective, I think it benefits everybody in the process of I have more liquidity in terms of investors. The investors have more liquidity in people who can sell my token to everybody, and they can get access to underlying, illiquid assets. It's kind of like we're benefiting from both sides of the equation, in my specific example. For others, I don't know, you know what I mean?
In the simple sense, liquidity is great right now if you're selling a home. It's really, really good if you're selling a home. If you're buying a home, you're fighting with, Lauren knows this better than I do, but you're fighting with a lot of people and the prices are extremely high right now, especially in LA.
I think, of course, if you said great if you're a seller, right now in LA it's a sellers' market, great potential there, but for a buyer maybe if you're looking down the line to be a seller maybe you can see that opportunity, but you have to play the game. You have to buy in to be able to be a seller, so you've got to get in somewhere. If you're a seller, right now, it would be great if it was available to you right now.
Let's assume for a second that the tokenized real estate industry exists. I've got a bit of brain teaser for you which is, how are people going to know what to buy, what to sell, how to trade, if say two pieces of residential real estate are both tokenized but one has a slightly larger lot and the other one maybe is close to a fire hydrant? Those tiny details do affect real estate pricing, but how are investors going to be able to know that on such a level?
I can say that the tools that I see coming up is... Some people speculate a real estate agent is a middle man and will be cut out of the tokenization process completely. But what you do need in a real estate agent is somebody who is educated in that market, to be able to translate or bring this information to the investors.
I see the agent in a neighborhood, their role changing, instead of just being someone who buys and sells property in that market, is more of an expert and a consultant to those investors. They would do their due diligence, bring that to their community or their investors, and what they get rewarded for would be tokens or some sort of rating process where they get the tokens. They'd be incentivized to be a good consultant for their investors and of course if you are very good at it, you would keep getting more and more of these transactions and these deals to be able to consult, therefore more rewards.
I think Lauren had the key two words, due diligence. It's all about diligence even if you're buying an ICO or an STO or a house or anything. It doesn't matter what it is or what form it comes in; you still have to do your diligence on that. I think the beauty of what the blockchain's going to do, and tokenizing things is going to do, is going to bring all that information to the forefront so people can do that diligence and it's much easier to do that diligence.
In my mind, as you asked that question, raced all the way down to what is different about the value of a house today versus the value of a house when it's tokenized? In my mind, it just makes an estimate, or an automated value of a property, that much more accurate. I think it's beneficial in terms of the valuation of an asset, but ultimately comes down to who's the buyer, what diligence have they done, and what do they want? If somebody has three kids versus no kids, a bigger lot's going to be much more appealing to them than a smaller lot.
It's all about doing the diligence as with any type of investment. You just have to make sure you know what you're getting.
Are there certain types of real estate that are going to be better when it comes to tokenizing and other ones where we don't want to consider tokenzing? For example, luxury houses versus residential versus commercial, or should everything be tokenized?
I think this almost goes back to your last question as well. One of the things you said is once a market exists, so for me what I'm trying to solve is how to get that market to exist. I specifically focus on commercial real estate and it goes back to what Andrew and Lauren were saying was the due diligence part of that.
In commercial real estate in particular, the investors are super in tune with doing their due diligence. I think that that is the best way to go forward personally, but eventually I think giving more liquidity to the entire real estate market will only be good for the world. I think the best way to start those, go commercial first, even though it's not as popular, as sexy, and then you can get into the residential. One thing I don't want to see tokenized is I don't want to see nonprofits tokenized. I think whenever you bring tokenization into that and especially buildings it allows for a lot of speculation to happen and I think that's a very risky path to go down right now.
One of the things that I get concerned with about tokenizing all real estate is the volatility that's implied with that, because now you're subject to somebody who's buying in India for a speculative purpose. What ripple effect does that have on if you're buying a house, say you're buying a house in Indiana and somebody in Dubai buys it because they think it's a speculative investment, what does that do to the value of the mortgage on that house? What does that do to the securitization market? It just has this huge ripple effect, so I think we need to be cautious about how we provide liquidity and what does that mean for volatility.
Liquidity is not a bad thing; liquidity is a good thing. There's side effects that come with it and unintended consequences so I think we need to be, as market participants, cognizant of that and make sure that we don't create a Frankenstein out of this, too.
If 2008 happened all over again but we lived in a country where a lot or all real estate were tokenized, you're basically saying it would hit harder and faster.
Potentially. In my opinion, you'd have to look at what happened prior to that cause you might've seen an even bigger increase, or you might've seen the market cause itself to modify the price of itself. The open market might've said, "Whoa, whoa, whoa, the price of this is way too high. I'm goning to slowly back it off" versus in 2006, 7, 8, we saw this huge ramp up and then huge crash. I don't know, it'd probably take an economist much smarter than me to really think about the answers to that but I don't know.
So you're in the lending industry. If that is the effect for lenders, then how are lenders supposed to prepare for this?
I don't know. It's a great question. It's one that I don't think anybody's really thought of in terms of how do you maintain a proper asset value if that asset is openly trading in the market? I don't know.
Coming from a mortgage background myself in commercial real estate, I think the one thing that people need to understand is the repricing of risk. With blockchain in particular, right now it's relatively easy to get a three-and-a-half, well not three-and-a-half anymore, but four to five percent interest rate loan. If you're a lender that wants to take on this extra risk, you're not going to be willing to accept a four or five percent return. On the reverse side, we also need buy in from the people that are obtaining those loans to be willing to accept a six, seven, eight percent return right now. There's a weird dichotomy that we need to somehow bridge and there's a lot of work to do to bridge that gap right now.
Final question and we're just going to go down the row, starting with Lauren.
Let's talk about predictions. Where is the tokenized real estate industry going to be in 12 months?
I think tokenization is a little far off, just because of all the technical difficulties in working with the counties, but I definitely can see purchases made with crypto and a lot of tools being upgraded that we use today in the real estate industry that are going to use blockchain technology. Whether that be security or documentation, there's countless tools that I see already on their way to establishing new protocols. I think that tools for sure, in 12 months, we'll be using them and maybe not even knowing that it's blockchain.
It's a good question whenever you talk about predictions. In a completely new asset class that has not actually gone through an economic cycle yet, when we talk about making that prediction, I'll go out and answer it anyways, I think we're going to be in a slightly better position than we are today because tools will exist.
I don't think there's going to be many companies around that are providing tokenized assets. It's a very difficult, time-consuming process. I think, though, we're going to start to see the emergence of, like Lauren said, some tools that are really going to make the process more efficient and faster.
I think Paul's right. I think until we get some clarity on institutional investors, on regulatory regime... The SEC's been pretty clear on what's going on in the market but I think there's still a lot of uncertainty from investors about what they're going to do with what happened in 2017. There was craziness in 2017 and there's a lot of dust that's got to settle on that front.
I think in 12 months time, we're going to start to see, hopefully, Property Coin and hopefully Spice will be successful or really starting to get some traction. I think you'll start to see some other, probably more focused on commercial real estate, coming to market, but until such time as we get the institutional investors involved, I think we're on a slow roll towards really sparking this thing off in 12-18 months. I think this is really the timeline when we'll start to see some real traction.
Fantastic. Lauren, Paul, Andrew, thank you so much for joining us, and thanks to our Security Token Academy members for watching. For Security Token Academy, I'm Amy Wan.
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