Introduction

The Future of Real Estate Assets and Wealth Management with Tokenization

NFRE x METANEUR CORP.

presented by Cole T. Fortune

Tokenization has great potential for assets that are illiquid and have high barriers to entry

Tokenization offers the potential to increase liquidity via fractional ownership; promote transparent and secure data; and enable 24/7 trading. It would thus lower barriers of entry, providing greater operational efficiency and liquidity. The greatest gains may be those that could be achieved through broader access to previously illiquid assets or asset classes with high barriers of entry, such as real estate, luxury collectibles, sports teams and even funds such as private equity, private debt, venture capital or infrastructure vehicles.

Wealth and asset management industry: Opportunity to innovate and thrive

As an innovative new technology, tokenization would bring changes to wealth and asset management, allowing a broader pool of investors to access new products and services better suited to meeting their financial needs. Tokenization could contribute to a reshaping of the structure of the asset and wealth management industry through the digitization of real assets. This will put clients back at the center of the relationship, not only benefitting from products that are cheaper, but also through access to a diverse range of asset and services that are adaptable and customizable to individual needs. For the alternative investment industry, tokenization could allow for product innovation in a very competitive environment over the coming years. Whether fund management companies choose to play the game offensively or defensively in this environment remains to be seen. However, institutions that engage solidly with technology, focus on future opportunities, innovate and adapt quickly to new market realities, while keenly listening to investors’ needs and requests, are sure to thrive.

Investors: Equitable access to investment options

For the investors, tokenization will provide wider investment options and access to types of investment and value creation that are currently beyond the reach of many. These will be more cost effective products permitting better control, transparency, portfolio optimization and risk management tools to govern how assets are allocated.

About Our Business

Improving Liquidity
- The tokens can be traded on secondary markets
Enabling Faster, Cheaper Transactions
- Less complexity and better operational efficiency reduces transaction and lifetime costs
Offering Greater Transparency
- The token holder’s rights, legal responsibilities and record of ownership can be embedded into tokens
Broadening Access
- Tokens provide access for more investors to a previously unaffordable, or insufficiently divisible asset class

All About NFRE Tokenization

Tokenization

Tokenization can be defined as the process of creating a digital representation of a nondigital asset; the digitization of an asset. The underlying asset could be anything from financial products like shares and bonds, or real tangible assets such as real estate, art, collectibles or sports teams. Tokenization enables the digital transfer and management of these real ‘of chain’ assets in the digital world. Tokenization is not a new idea, but its execution using blockchain, a distributed ledger technology, opens a new realm of possibilities to create, record and transfer the tokens.

Security tokens are made available as a security token offering (‘STO’). Unlike an initial coin offering (‘ICO’), the value of the tokens issued are backed by the real ‘of chain’ asset.

Crucially, a tokenized security is a ‘real world’ security that exists independently of-chain, with the added feature that it is represented by tokens that are embedded on chain.

There are several types of tokens that can be used for a tokenized security, including:

Security tokens which represent ownership or interests associated with the underlying asset (e.g. ownership, right to dividends)
Utility tokens which give holders access to specific rights and privilege's such as use or access rights to a building or a service
Exchange tokens which are used as a form of payment; one example is Bitcoin.

Benefits of Tokenization

Beyond the typical advantages associated with digitization such as speed, convenience and accessibility, the use of blockchain technology results in the operational efficiencies that come with smart contracts, as these are programmable actions that can automate processes and save time. Using blockchain to tokenize an asset allows the tokens representing the asset to be recorded, stored and managed digitally in an immutable, distributed way. There are six core benefits to this approach:

1. Fractionalization

The asset can be split into far greater amounts than using traditional methods. This lowers the entry barriers to investments that have high minimum investments and lower ticket numbers.

2. Data Transparency

Data can be stored and accessed securely on the blockchain due to the immutable and distributed nature of blockchain technology

3. Shorter Settlement Time

Tokens can be traded 24/7 with a record that can be updated within minutes or hours (depending on the underlying blockchain), compared to traditional T+3/ T+2 settlement times.

4. Operational Efficiency

Processes such as compliance, whitelisting, escrow account management, dividend distribution, corporate action management and drag-along actions can be automated with smart contracts.

5. Flexibility

Tokens can be customized with unlimited share classes and flexible fee structures at low operational cost. Funds can be fractionalized, enabling greater flexibility in portfolio construction and exposure diversification.

6. Liquidity

Tokens can easily and securely be exchanged on a secondary OTC market securely using blockchain. The valuation of the core underlying asset may increase due to the possibility of secondary market trading and greater liquidity, thereby reducing the ‘liquidity premium’ of an asset.

About NFRE

Real estate can be classified as commercial real estate or residential real estate. In addition, real estate investment can be categorized into different investment styles, namely: core, added-value and opportunistic. Core real estate tends to have a lower risk profile and most of the return on it comes from income rather than value appreciation.

Opportunistic real estate is at the opposite end of the risk-return spectrum as it tends to be higher risk but offers potentially higher returns from value appreciation. Real estate has accounted for a significant proportion of wealth for thousands of years. It is generally seen as a good inflation hedge. In addition, real estate can benefit from long-term trends such as urbanization and urban renewal. Real estate also has the potential to be a diversifier in a portfolio of traditional assets such as stocks and bonds. In general, major real estate indices have a low correlation to stock indices.

Challenges of NFRE

Illiquidity and lumpiness
- Real estate remains one of the most illiquid asset classes due to significant capital commitments, long, expensive transaction processes and limited public markets. Consequently, there is a high liquidity premium.
Lack of customization and low flexibility in rebalancing
- While there are funds listed on exchanges that allow steady income and portfolio exposure to real estate (real estate investments trusts, ‘REITs’), they are arguably an imperfect solution for several reasons:
1. Lack of customization and low flexibility in rebalancing Challenges of the Asset Class Lack of customization (limited to shares)
2. Low operational efficiency (repetitive processes and siloed data)
3. Long settlement times (T+2/3)
4. Low data transparency (especially for non-listed REITs)
5. Low flexibility in rebalancing exposures within the portfolio (REITs typically cannot be customized)

How Tokenization Addresses the Challenges

Cost Savings from operation efficiency
- Tokenization of real estate unlocks advantages for investors and asset owners in the valuation and liquidity of the asset. Fundamentally, the core cash-generating ability of the property does not change, but tokenization can unlock value via savings in transaction time and administration fees. Digitization results in reduced settlement times, near instantaneous updates on a digital register of members, seamless execution of token issuance and post-token management processes via smart contracts, and automated compliance protocols. Information becomes more traceable, transparent and less siloed with blockchain technology. Furthermore, with tokenization, the possibility of a secondary market means that tokens can be sold securely, 24/7 around-the-clock. The liquidity premium of real estate can be reduced due to operational efficiencies gained from digitization.