Hong Kong could see more instances of “tokenisation” in real estate transactions as the market embraces financial technology to make illiquid and expensive assets more accessible to a wider pool of investors.
Clients in the property development sector are looking at tokenising illiquid assets such as real estate as a form of fundraising, according to Susheela Rivers, head of Asia-Pacific real estate at global law firm DLA Piper. The efforts should materialise within the year, she added.
“Hong Kong is a city that understands real estate. It has a high point of entry,” Rivers said. Digital tokens can “create a marketplace that makes this a little bit more tradeable, an exciting new way of holding real estate”.
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Hong Kong, the world’s third-largest capital market, has been a hotbed for fintech innovation, including the issuance of eight virtual banking licences since 2019 to compete with traditional lenders. Closely held Stan Group, the family office of Hong Kong “shop king” Tan Shing-bor, unveiled its “buy-a-brick” tokenisation plan in an employee incentive scheme in 2019.
For example, the ownership of a HK$100 million (US$12.9 million) commercial building can be fractionalised at 100,000 tokens worth HK$1,000 each, thus lowering the barrier to entry for small investors in the industry.
Investors, whose individual claim to the asset is represented in digital form through so-called distributed ledger technology or blockchain, may trade the tokens on an exchange or a secondary marketplace. This increases liquidity associated with the underlying asset.
Depending on the issuer, some tokens could also issue dividends to investors, Rivers added.
The market capitalisation of tokenised real estate in the US stood at US$27.2 million at the end of December, according to Security Token Market, an industry news provider on tokenisation.
Hong Kong’s shop king Tang Shing-bor (left) unveiled a “buy-a-brick plan” in 2019. alt=Hong Kong’s shop king Tang Shing-bor (left) unveiled a “buy-a-brick plan” in 2019.
The Asian financial hub is likely to be receptive to the financial innovation, Rivers said, citing the city’s property savvy residents and its proximity to mainland China, where technological advances have come fast and furious.
Challenges abound, however, as real estate is regarded as an institutional asset and movement within the industry is regulated. These include the limitation on the number of owners that can lodge their rights with the Land Registry at a time, Rivers said.
Besides, security tokens come under the purview of the market watchdog, the Securities and Futures Commission, and are subject to additional investor protection measures if they are classified as complex financial products.
There are exemptions, depending on the nature of the tokens, as well as when they are used in private transactions instead of in public markets, said Rivers. DLA Piper is working within the regulatory regime with its clients on the tokenisation plan.
Tokenisation can also be a new source of financing for property developers, who face tough borrowing caps such as a 40 per cent limit on bank loans for buying land.
The Stan Group also sought approval from the SFC in 2019 to tokenise its real estate holdings, although the outcome is not known. It declined to comment for this story.
“Maybe the developer wants to convert a hotel asset for another use. Or its value is not so great and it is hard to get financing,” Rivers said. “That could be a reason to start tokenising, with the rights sitting in a smart contract, providing efficiency.”
The market needs some key reputable developers and investors to pave the way, who will have to navigate through the regulations, she added.
“There is a learning curve. Blockchain and smart contracts – these are new concepts and real estate investors are more traditional guys who prefer tried and tested ways,” added Rivers.
This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP’s Facebook and Twitter pages. Copyright © 2021 South China Morning Post Publishers Ltd. All rights reserved.
Copyright (c) 2021. South China Morning Post Publishers Ltd. All rights reserved.