Passive income on the blockchain

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One of the main avenues for passive income in the investment world is real estate. Whether it is cash-flow producing residential properties, commercial buildings, offices or hotels, real estate has created endless opportunities for buyers to receive regular payments on top of long-term capital appreciation.

Real estate, however, is traditionally reserved for the wealthy. Especially in the North American post-pandemic market, where buyers are competing with multiple offers — some up to 10% above asking price. Canadian real estate has climbed substantially over the past few months, as you can see in the chart below from TD Economics:

As more retail investors get priced out of the asset class, real estate marketplaces are emerging to appease this demand. Those interested in gaining exposure to real estate can now buy fractions of properties or REITs, at a much more accessible price tag and without bidding wars.

Some of the top US real estate marketplaces have raised more than $1 billion and have distributed sizeable cash returns to investors (more detail in our previous article on real estate marketplaces):

However, there are key operational challenges to these venues. In a world where technology is enabling instant access across asset classes, the need for secure cap-table management, seamless distributions and streamlined KYC/AML procedures is higher than ever. On top of this, liquidity, transferability and transparency are important to investors.

In this report, we explore how blockchain technology is disrupting real estate marketplaces and creating a new investment ecosystem around the world’s oldest asset class.

Issuer-side

Issuers value simplicity and low transaction costs. After all, the lower the costs of issuing securities, the higher their profit margins and the more returns they can offer to their investors, increasing demand.

Real estate issuers compete against each other on two main fronts:

• Higher returns and lower transaction costs: typical yearly returns for residential real estate range from 7–20%, depending on the amount of liquidity, the risk incurred by investors and type of property purchased. By tokenizing real estate securities, issuers incur much lower transaction costs, which can be appealing to investors seeking to get a higher percentage of the cash-flow. We explore this in more detail in our Real Estate Digital Securities Cost-Benefit Analysis (research.atlasone.ca/reports). In the report we examine how digital securities can save issuers 30–50% in transaction costs.
• Security and Transparency: blockchain technology allows issuers to track their cap-table in real time, without the need to constantly update it manually (whitelisted tokenholders are registered and visible on the token contract’s page). It also provides investors with transparency around dividends and ownership structure. In the case where the security is issued on a public blockchain, the distribution of ownership is visible to anyone on the internet. This can be an appealing feature to investors, as their ownership is securely stored.

Investor-side

Investors also benefit from blockchain adoption on many fronts. From an asset allocation standpoint, diversification is an important factor — both geographically and in terms of property type. Furthermore, the ability to trade their securities without incurring liquidity premiums is also appealing, and many secondary venues are emerging around the world. As long as the digital securities are homogenous (issued on the same protocol), exchanges can list any asset independent of the marketplace it comes from.

Real estate investors can benefit from digital securities in two areas:

• Lower single-asset risk: by only purchasing fractions of properties or oftentimes smaller stakes in real estate funds, investors further diversify their portfolios across regions and types of properties. They can build their own real estate portfolios without relying on middlemen entities and fund managers. Their overall risk profile can be diminished if they choose to allocate capital more sparsely.
• Transferability and liquidity: secondary venues for digital securities are emerging worldwide, from tZERO’s ATS where assets such as Aspencoin trade to decentralized exchanges such as Uniswap where investors can sell RealT’s property tokens. Tokenization has allowed exchanges to create infrastructure whereby only whitelisted wallets can trade with each other, thus still operating within the frameworks imposed by regulatory bodies. This allows investors to liquidate their holdings without paying hefty premiums, and they can also acquire real estate securities even after the offerings have been sold out.

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