Paul Hülsmann certainly doesn’t lack confidence. “Blockchain technology is the future of the financial sector,” states the CEO of Finexity, a Hamburg-based company established in 2018. “And it will be the engine of radical long-term change in the investment industry.” Finexity launched a blockchain-based digital security in 2019 which enables private and institutional investors to use tokens to invest in selected properties.
Finexity is one of many recently founded companies that claim to be reinventing the world of real estate investment and transactions through blockchain technology. In the German-speaking countries alone, it’s almost impossible to keep track of the number of such start-ups. BrickMark and Crowdlitoken, Aargos and KlickOwn, RAAY Real Estate and iFunded, Black Manta and Fundament Securities: all of these and many more believe in the potential of blockchain technology.
“Turbo-boosting the entire real estate sector”
“Blockchain is essentially a type of database with the advantage that it’s inalterable, doesn’t require intermediaries and offers a high level of security due to its decentralised storage system,” says Susanne Hügel, Head of Digital Innovation & Business Acceleration at international real estate consultancy CBRE. Experts have long been aware that this technology has enormous potential. Theoretical discussions have now been followed by the first practical applications. In this context, the German government adopted a blockchain strategy in 2019 aimed at identifying the technology’s potential across a range of industries.
One focus is on real estate transactions and investment. A deal in Switzerland highlights the possibilities: BrickMark bought an office and commercial building on Zurich’s Bahnhofstrasse from RFR Holding and paid a large part of the purchase price in tokens. The announcement by international investment manager Peakside that it intended to launch a real estate fund for institutional investors on a blockchain platform likewise attracted widespread interest.
The example of RAAY Real Estate demonstrates just how seriously established property companies are engaging with blockchain. RAAY is a three-way joint venture between Wertgrund Immobilien (an investment manager specialising in residential real estate), developer Hammer and technology start-up Datarella. In March 2020, RAAY issued a security token that allows investors to acquire a claim to a commercial property in Munich. As a digital security, the security token is regulated and tradable.
Datarella CEO Michael Reuter sums up the advantages: “Blockchain enables illiquid assets to be rendered liquid and tradable worldwide, at very low cost and with maximum transparency. Blockchain technology is thus capable of turbo-boosting the entire real estate sector.”
How the fund industry can benefit
But why is such an established fund company as Wertgrund championing blockchain? “We need to rethink funds,” replies Wertgrund board member Thomas Meyer. He sees blockchain as a way of doing that: “It enables faster tradability, appeals to younger target groups and is very cost-effective because there’s no need for a depositary or investment management company, for example”.
This is where the blockchain principle comes into play. With all information stored in the data blocks such that it cannot be altered or manipulated, no intermediaries are required, meaning in turn that advisors who sell fund units to private investors are also superfluous. “Investors will be able to put together their own portfolio without being tied to a fund manager or a minimum holding period,” points out Finexity CEO Paul Hülsmann. The fact that blockchain technology is very cost-effective is an added bonus. It means that investors can invest in real estate even if they only have very modest amounts available (starting from EUR 10 in the case of RAAY, and EUR 500 for Finexity).
Susanne Hügel from CBRE believes that providers of open-ended real estate funds should also keep an eye on asset tokenisation. This is partly because Hügel’s analysis suggests there is a “customer need to invest in tangible assets without involving intermediaries”. Also, the fund industry can benefit from engaging with blockchain “because transaction efficiency increases and costs decrease”.
There are still two obstacles preventing the widespread use of blockchain technology in the investment sector, though. Firstly, the regulatory situation in Germany in particular is extremely opaque. “The German Federal Financial Supervisory Authority (BaFin) already permits token-based debt securities, even though there is no civil law basis,” says Martina Hertwig, a partner at international audit firm Baker Tilly. A wide range of investment vehicles are marketed in the form of tokens with BaFin’s permission – they include bonds, subordinated loans and profit-participation rights.
Secondly, as yet there is no generally accessible trading marketplace for security tokens. Although the Stuttgart Stock Exchange announced the establishment of a trading venue for digital assets in 2019, access to this marketplace is still limited.
Blockchain provides an opportunity to streamline existing processes
Opportunities in building management
While blockchain start-ups in the real estate investment sector are busy beating the advertising drum, another area of application for this innovative technology is at risk of being overlooked. Yet here the potential may be even greater. “Blockchain technology can also boost efficiency in property management by recording rental payments, maintenance logs and a host of other information in the blockchain – meaning that the information can’t be manipulated,” says Thomas Meyer of Wertgrund Immobilien.
Union Investment tested one possible application last year at the Emporio building in Hamburg. The aim was to document mandatory testing of the 6,000+ fire alarms on a blockchain. The contracted service providers used a blockchain to record the functional status of the alarms by scanning a QR code on each alarm. This has the advantage that going forward data from the blockchain can be used as proof of proper maintenance for official bodies or insurance companies.
This project is only the beginning, though. Additional scope is offered by smart contracts, i.e. electronic contracts that automatically perform certain actions. “Blockchain provides an opportunity to streamline existing processes,” says Jens Wilhelm, a management board member at Union Asset Management Holding. “The fact that data cannot be manipulated and that errors in data transmission are reduced means that blockchain is destined to play an important role in digital transformation of the real estate industry.”
Highly complex technology
Wilhelm points out the need to remember that blockchain is a highly complex technology. CBRE expert Susanne Hügel also believes that although this technology is extremely important for the real estate industry, it won’t turn everything upside down. “The reason being that qualitative aspects also play a role in real estate, which are difficult or impossible to document using blockchain.”
Even Alessandro Dell’Orto, secretary of the Foundation for International Blockchain and Real Estate Expertise (Fibree), warns against euphoria. “Application of blockchain in the real estate industry will certainly bring major benefits,” he notes. “But it also poses challenges that require new expertise in order to better understand and control this process of evolution and revolution.”
By Christian Hunziker