Retail investors can invest in multi-million-dollar — and sometimes even billion-dollar — buildings because of REITs. When placed in a portfolio and structured as a listed property trust or REIT, these buildings become “unitised” or divided into units. Before the inception of REITs on the Singapore Exchange (SGX), buildings were held by companies, tycoons and subsequently private funds. In a way, REITs democratised property investment. Now anybody, including retail investors, can invest in properties such as Raffles City or VivoCity through a REIT.
Eng-Kwok Seat Moey, managing director and head of equity capital markets at DBS Group Holdings, is often seen as the mother of S-REITs. Late last year, she embarked on a new journey to fractionalise assets, which includes investment property, on a distributed ledger such as blockchain.
The DBS Digital Exchange (DDEX), which was implemented at the start of this year, provides the platform for a fully integrated digital ecosystem. DDEX — which already has 400 members — lies somewhere between private equity and a public exchange such as SGX or Hong Kong Exchange.
Distributed ledgers, like traditional ledgers, record transactions. But because they are digital and immutable, data that is in these ledgers cannot be altered, hence providing data security. Combined with KYC (know your customer) and anti-money laundering (AML) checks, DBS’s risk management expertise and the bank’s security, DDEX is safer than ordinary crypto exchanges.
Tokenising property
All in, DDEX is totally different from other exchanges because DBS’s equity capital market and debt capital market teams can originate a deal such as tokenising a bond or property trust or building or an SME or a painting. These assets can be digitally fractionalised or tokenised by the blockchain and distributed to DBS’s private banking customers, accredited investors or institutional customers. The blockchain or distributed ledger can create a smart contract so that terms of investment, custody and other material are all in the contract.
Investors’ bank accounts can be debited to pay for the token and custody accounts created on the blockchain such as a CDP account, can be credited with the token. The tokenised security is listed on the blockchain. Should investors of the tokenised security — priced in fiat currency — wish to sell, they can do it on DDEX and their accounts will be credited with the sales proceeds.
“The digitalisation of assets, such as real estate, with blockchain technology allows us to digitise the whole process end-to-end, from origination to settlement, clearing, trading and custody,” Eng-Kwok describes.
Just like a REIT
Tokenising a property portfolio is similar to unitising it in a REIT or trust. “For REITs, we take a portfolio of real estate, gear it and list it on an exchange. Similarly, when we tokenise real estate, these tokens represent ownership of the real estate. The ownership of these tokens is registered on a blockchain which provides several advantages such as liquidity, transparency and the digital management of corporate events via smart contracts,” Eng-Kwok explains. These tokens are in the form of a digital trust with custody accounts and these are locked into the blockchain.
Hence, the security tokens that trade on DDEX are backed by assets. These can be real estate, bonds or paintings. They can include SMEs whose owners want some liquidity but where the companies are not ready for the public markets.
“An STO (security token offering) of real estate is no different from a REIT IPO except for the form of ownership. An STO is listed and traded on a private digital exchange while a REIT IPO is listed and traded on a public exchange like the SGX,” Eng-Kwok says.
For instance, if a building such as South Beach or Guoco Tower is not ready for a REIT, the owners can issue an STO on DDEX, where the building can be fractionalised into more digestible sizes, should they wish to partially monetise the assets. Similarly, IOI Properties which acquired a site in Central Boulevard and Marina View can issue security tokens backed by the yet-to-be-completed Central Boulevard Towers on DDEX should it need funds to develop its Marina View site.
Indeed, a locally-listed company with a property portfolio is keen to tokenise one or more of its properties, Eng-Kwok reveals.
A DBS private bank customer or accredited investor can have his or her bank account linked to the DDEX. To buy the security token of a building on the DDEX, the customer’s bank account is debited, a smart contract is set up, and when it comes time to sell, the customer’s bank account is credited with cash which is in the form of fiat money or digital Singapore dollar as and when that is in circulation. The transactions are immediate.
It works like a closed-end fund, Eng-Kwok says by way of analogy, except that units in the fund are digitised and unitised, and only DBS’s accredited investors can buy these units and trade them on the DDEX or they can hold the units to maturity and sell them on the DDEX when the building is sold.
The tokens are backed by the building and if the valuation increases, the customer gets the upside. The debt is fixed. If the building is valued at $100 million, and it is an STO, $60 million is debt, $40 million is equity. You can own part of the building, Eng-Kowk cites as an example. Every year, the token holder receives the rental after paying up expenses. The end-to-end settlement and clearing will be digitised. The information will be in the system, on the blockchain which will send out an alert when it is time for distributions to be credited into the customer’s account.
Digitising a building or a portfolio in this manner is probably a lot more efficient than setting up a private fund. Private funds have a limited group of investors, usually institutional investors. These private funds need a manager, probably a trustee, Eng-Kwok suggests.
Changing the capital markets
DDEX can fractionalise or unitise assets into security tokens in an STO. By doing this, DDEX can democratise investments that would ordinarily be the territory of only the very rich or big corporates; it can create liquidity for SMEs or unicorns who are in early stages and are unable to list on a public exchange; and as a digital exchange, DDEX’s digitisation of these assets can create smart contracts with no intermediary and these tokenised assets can be traded on DDEX.
“A digital exchange fills the gap between private and public markets, namely the lack of liquidity in the private markets, and for the public markets, the lack of access to growth companies which are not ready for a public listing,” Eng-Kwok says.
How do the developers and real estate managers view tokenisation?
“Tokenisation is an innovative way of securitising real estate through blockchain technology. It is an emerging trend that has started in recent years and is currently still not mainstream. Investing in real estate securities such as REITs allow individuals to invest in real estate without having to buy or manage properties themselves. Similarly, real estate tokenisation fractionalises real estate into many small pieces, called tokens, allowing individuals who own a token to own a piece of the underlying asset,” notes Jonathan Yap, CEO, fund management, CapitaLand Investment.
“Tokenisation could potentially offer a wider range of investors to access the real estate market, increasing liquidity. However, there is also a need for considerations such as security and having structured regulations as real estate tokenisation is still developing,” Yap observes.
REITs will still be in demand
Tokenising investment property will not affect the listed REIT market. “We believe the growth of tokenisation will not lead to a declining interest in REITs because REITs and real estate tokens serve different markets and investment appetites,” Eng-Kwok says.
A tokenised building can still be sold or listed in an IPO when the portfolio is big enough, as an exit strategy. The other exit is trading the security tokens on the digital exchange. You are investing directly into an underlying asset and you can participate in its upside. But you have secondary liquidity, Eng-Kwok says, differentiating a tokenised property from a publicly-traded REIT or company.
“REITs or tokenisation are different means of accessing capital. If the underlying considerations are appropriately addressed, it may gain acceptance and complement REITs in expanding the capital pool for real estate,” Yap says.
Whatever the case, Yap points out that the competency of sponsors and/or managers in sourcing good investments and managing them well remains critical. Asset and property management and leasing will remain crucial skillsets, he adds.
“We have been actively engaging various industry players to understand and explore tokenisation along with all options and will consider launching such an offering if and when appropriate,” Yap reveals.
