The Impact of Blockchain on the Functioning of Real Estate Funds
We often hear about the tokenisation of real estate funds by the amount tokenised (theoretically enabling investors to buy for £1 of fund unit), or through a number of myths circulating about blockchain which would allow the sale of fund shares over-the-counter and globally. Without going so far as to exchange shares from one end of the world to the other, blockchain technology is already bringing real improvements to the traditional operation of real estate funds. Blockchain not only allows better distribution of fund shares when it is created but also facilitates trading over-the-counter in a secondary market. In this article, David Poupardin discusses the impact of blockchain on the back and middle offices of real estate funds.
Better distribution of fund shares
Currently, the distribution of shares in a real estate fund when it is created is fairly complex. Infrastructures exist, but do not allow real estate fund management companies to distribute their shares abroad easily. There are several distribution channels that make international distribution difficult. Blockchain – by virtue of its construction and its method of record-keeping – enables asset managers to get around these market infrastructure issues and distribute internationally more easily. By using such solutions, a real estate fund management company will be able to better manage the relationship with investors or distributors and reduce costs linked to the management of liabilities through automation.
While blockchain platforms could improve the management of the relationship between the real estate fund management company and its investors, it also guarantees more reliable access to the characteristics of the fund, as well as to the data which serves as the basis for the valuation of the assets. For example, cash flows from a building can be entered on the blockchain, which then becomes a reliable and dynamic source enabling the performance of an asset to be measured more regularly.
Creation of an over-the-counter secondary market on the blockchain
Blockchain as a solution to lower product prices and facilitate trade by providing liquidity is often put forward. However, this seems unrealistic in a short/medium horizon. Blockchain technology will allow institutional investors to exit a real estate fund more easily once their strategy on a property has come to an end without destroying its structure. Where currently – once the strategy is finalised – the property is sold and the fund loses management, with blockchain, investors will be able to exit more easily and other actors with different investment strategies will be able to replace them. In this scenario, the real estate fund retains the management of the property and the commissions associated with it by changing the range and type of investors.
While blockchain platforms could improve the management of the relationship between the real estate fund management company and its investors, it also guarantees more reliable access to the characteristics of the fund, as well as to the data which serves as the basis for the valuation of the assets.
In addition, the operation of a real estate fund is still very manual. An investor who wishes to manage or resell his or her shares will have to send transfer orders, on paper, to their real estate fund management company. Some of these orders are still being sent by fax! None of these processes is automated, and they are fairly expensive. With the blockchain, two investors can connect on a platform, finalise their exchange then notify the real estate fund management company. Once the transaction has been validated by the latter, the property register is automatically updated.
Fluid and more liquid redemption request
Real estate funds are often open funds with subscription and redemption processes. However, certain settlement-delivery schedules for these shares can be long: a redemption process can take several weeks. In the event of a massive sale of units, the funds could face a liquidity problem. The blockchain streamlines this process: in addition to facilitating the primary buyout mechanism, in the event of a market reversal, the secondary market would make it possible to exchange larger numbers of shares over-the-counter regardless of the buyout capacities of the funds. This is an attractive feature for insurance companies for example, whose portfolios often contain real estate funds, blockchain can be a real asset. In the event of significant market tension, the blockchain could facilitate the implementation of gates or “buyout capping” processes in order to spread them over time and avoid a liquidity crisis for the fund.
From the paper world to the digital world
By facilitating back and middle office management and by creating an efficient secondary market that does not yet exist, the blockchain can facilitate the creation of new business models for real estate funds. The very functioning of those funds will be transformed. In the world of real estate funds, we expect to see more transparency and fluidity with technology adoption that should result in real growth in 2020.