The Case For Tokenising Real Illiquid Assets

Yukitaka Nezu

18 October 2019

Today, many people talk about the tokenization of different kinds of assets – real estate, companies, and believe me or not even people. Tokenaire Ltd, a small tech and blockchain startup located in the heart of London, announced last year that it will be the world’s first company to tokenize real people on a large scale. Since then, it became very quiet about Tokenaire. As I am writing this blogpost, their website is even down without giving any reasons. But that’s not what I want to cover today. With RAAY Real Estate, we will tokenise a very traditional asset class – real estate. Here’s the case for tokenising real illiquid assets.

The real estate market is really huge and complex at the same time. Huge because every single person needs space to live and sleep and requires more and more of it over time. Complex because in every real estate industry many different stakeholders are involved, a lot of capital is in circulation, local and constantly changing regulations that are dependant on jurisdiction are in place. All these factors contribute to the complexity of the real estate industry.

Another attribute to the real estate industry is illiquidity of its assets. What is illiquidity? Illiquidity is often used in the context of risk. When looking up at, it is defined as “… the state of a stock, bond, or other assets that cannot easily be sold or exchanged for cash without a substantial loss in value. Illiquid assets may also be hard to sell quickly because of a lack of ready and willing investors or speculators to purchase the asset.”. But why are real estate assets illiquid given its significant size? Well, there are different reasons for this:

  • Complex transaction process: Still as of today, buying a house or an apartment is still a very tedious process with a lot of paperwork involved. It takes weeks if not months until a real estate transaction is closed. Just think of the never-ending loops you need to run with your banks in order to get the financing done for your purchase.
  • High transaction costs: Transferring a real estate asset from a seller to a purchaser is very expensive. This is due to the notary, financing, brokerage and registration fees. And don’t forget the land transfer tax. These costs can make up to 10% of the transaction volume.
  • Lack of transparent market: Contrary to securities like stocks and tradeable bonds, real estate assets are traded privately. There are no daily prices set like for tradable securities. Private markets are difficult to access and they have a significant lack of trust.

How are these negative attributes to real estate compensated? The general demand for investing in land and properties is continuing high. There is a premium that is embedded and that is called illiquidity premium. This premium is a compensation for the risk that is attached to the fact that the underlying asset cannot be switched into cash immediately as you want. Also, real estate assets are regarded as a useful diversification to a liquid portfolio consisting of stocks and bonds.

The Case For Tokenising Real (Estate) Assets

To sum up, not only the complexity of the real estate industry but also the dysfunctions that are involved in the transactions motivate individuals, startups, companies and even governments to turning to new solutions with one of them being tokenization. Tokenization allows to create a layer between the underlying illiquid asset and the investor. This layer helps to divide up the total amount into smaller fractional ownerships. This means that the entry barrier to invest is much lower. At the same time, if the regulations allows, these fractional ownerships – let’s call them tokens –  can be freely traded on an exchange. So here we go, these are the benefits of tokenzing:

  • Improved liquidity: Of course depending on the local regulations, tokens can be freely traded amongst investors.
  • Lower transactions costs: With the help of smart contracts, automated processes can be introduced. As a result, transactions costs are significantly lowered.
  • Higher transparency and security: We know that blockchain transactions are immutable and visibly to every participant in the system. This transfers very well to tokenization. The digital history of all transactions recorded immutably on the blockchain increases transparency and security and reduced the chance of fraud.