MAS’ Project Guardian will focus on pilot use cases in four main areas: open and interoperable networks, building a trusted network, asset tokenisation and institutional-grade DeFi protocols. (Picture: Samuel Isaac Chua/The Edge Singapore)
SINGAPORE (EDGEPROP) - The emergence and gradual adoption of fractional ownership of real estate and digital tokenisation of assets looks set to transform the landscape of capital markets in the long term. It will lead to more retail investors entering this sphere, previously limited only to institutional investors and the ultra-high-net-worth individuals.
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These new financial products and technologies aim to level the playing field and make real estate investing more accessible. It is made possible by advances in blockchain technology, with regulators keeping in step with this digital ecosystem.
According to Desmond Sim, CEO of Edmund Tie, tokenisation of real estate cannot be categorised as either a disruptor or an enabler. “I think it provides a good alternative to investing in capital-intensive assets like real estate,” he says. “For sellers, it represents a new approach to fundraising through fractional ownership and widens the demand pool.”
The regulatory landscape is keeping pace with the digital business environment. Last month, the Monetary Authority of Singapore (MAS) introduced a pilot programme, Project Guardian, to explore what a future regulatory framework might look like, and set the foundation for an open, interoperable network.
Singapore is home to a few fractional investing companies. One of the more established in the market so far is homegrown fintech company Fraxtor.
Fraxtor is an MAS-regulated, real estate investment platform that offers investment opportunities in bite-sized amounts for as little as $20,000.
Traditionally, investing in real estate assets is a capital-intensive venture limited to private equity firms, property developers and institutional investors, says Oliver Siah, co-founder and group managing director of Fraxtor. In a market like Singapore, where asset values are high and stamp duties one of the highest in the world for international property buyers, it’s even more challenging for the ordinary investor.
In Singapore, local home buyers have to pay 25% upfront — 5% downpayment in cash and another 20% in cash or Central Provident Fund savings — when buying their first home. If it is their second residential property, the cash upfront would be 55%, and the additional buyer’s stamp duty would be 17%, instead of 12% previously.
“This is daunting for small-time investors, and they are not able to fully diversify their portfolio if their entire investment is locked in on one investment property,” says Siah.
Siah: “Serious real estate investors” want to reap the capital upside when an asset is sold, something they may not receive when investing in a REIT. (Picture: Samuel Isaac Chua/The Edge Singapore)
Developers buying a site en bloc, on the other hand, would have to pay 5% of the purchase price upon signing the contract to purchase, followed by another 5% upon obtaining strata title board approval, and the balance 90% upon completion of the purchase. (See potential condos with en bloc calculator)
For the developer, apportioning the investment into smaller, palatable amounts opens it up to more participants, says Siah. Meanwhile, investors have an opportunity to diversify their investment portfolio and reduce their risk, he adds.
At the start of the year, Fraxtor and a group of investors, led by the family offices of Daniel Teo and his brother Teo Teck Weng of Hong How Group (related to the Teo family of Tong Eng Group), acquired Gloria Mansion in Pasir Panjang en bloc for $70.3 million.
To co-invest in the en bloc acquisition of Gloria Mansion, Fraxtor formed a special purpose vehicle where investors can participate for as little as $20,000, by subscribing to units in a collective investment scheme. In return for their purchase of a unit, they will receive a digital token. “What Fraxtor is offering is the chance to take part alongside the developer,” says Siah. “At the end of the day, the developer’s profit upside is definitely a lot higher compared to investing in a unit.”
“Such investment opportunities at the developer stage are rarely available to individual investors,” says Siah. “Most of the time, investors in Singapore will only get to purchase the units in the final project — the new development that will be built on the site.”
Fractional real estate investing is not a new concept and the lifecycle is similar to the established REIT market. In both cases, assets need to be scrutinised and the investment deal structured under prevailing regulations.
But Siah points out that there are differences between REITs and fractional ownership. “Most investors enjoy raking in the capital gain when an asset is divested, but this is something REITs do not provide investors,” he says. “In most cases, a REIT manager will reinvest the profits or divert them to pay off their loans. It rarely translates to investor returns.”
Siah adds that REITs are a good investment instrument for retail investors as it generates steady dividends from the rental income of the properties in the portfolio. However, he says: “Most serious real estate investors would like to see the capital upside when the property is eventually sold.”
As for public-listed property developers in Singapore, most are trading at 60% of their net asset value, Siah points out. “In most cases, when they conclude a successful development project, the investors don’t see the big upside as well,” he says. “The dividends they receive are still in the low single-digit range.”
Regulated blockchain technology, the acceptance of these real-estate backed tokens, as well as an exchange for the transaction of such tokens form the bedrock of fractional real estate investing.
In Asia, South Korea was one of the first to roll out a regulatory sandbox structure to test-bed such fintech-based products. This is officially called the Financial Regulatory Sandbox by the South Korean government.
Among the first to tap into this was Kasa, a real estate securities platform that uses blockchain and aims to make investing in real estate capital markets accessible to more people. Founded in 2018, Kasa kicked off its initial investment offerings in South Korea. “Around 2019, the South Korean government initiated a sandbox programme, and it was a great time for new and innovative fintech start-ups, such as us, to participate,” says Yea Chang-Whan, CEO of Kasa.
Yea: There is strong, untapped demand among Singapore-based retail investors to participate in fractional investing. (Picture: Samuel Isaac Chua/The Edge Singapore)
So far, the company has focused on investing in prime Gangnam commercial developments in Seoul, South Korea. “Kasa focuses on solving two issues in the traditional real estate market,” adds Yea. “First is liquidity, and next is accessibility.” The platform aims to lower the entry level to about $10,000 or $20,000, to make it more affordable.
To date, Kasa has invested in six prime commercial assets in Gangnam, buoyed by a keen interest among South Korean investors to get involved in real estate investing. “Initially, we focused on providing people with investment opportunities in lucrative office buildings, but we have recently ventured into hotel developments and warehouses to increase the number and types of asset classes we provide,” says Yea.
Among the six assets Kasa has opened to its investors, two have since been divested and have generated profits of about 20%–26% across an investment period ranging from five to 17 months.
Kasa’s real estate securities platform has a channel, Kasa Exchange, that allows South Korean-based investors to sell their fractional shares in the secondary market, instead of having to buy and hold their investments for several years. “The secondary market is active and very liquid,” says Yea.
Kasa obtained a capital markets services licence and a recognised market operator licence from MAS at the end of last year.
The firm has not rolled out any investments in Singapore yet, but Yea believes there is strong pent-up demand among local investors here to participate in the real estate market. “This is especially among Singaporean investors who prefer higher-yield-generating assets,” he says.
Kasa hopes to eventually introduce its Singapore-based investors to Kasa Exchange, which is integrated with its overall ecosystem. It allows investors to unlock liquidity, as well as enables asset owners and other stakeholders to increase their investments, or the number of market participants.
“Kasa investors who subscribe during the IPO will receive some of the fractional shares in that asset, and they can choose to sell that on our market platform at any time,” says Yea. For the asset owners, it’s an attractive proposition, because some may not want to sell their entire stake in the asset. Kasa Exchange allows them to buy back the portion of their assets at a later time, he adds.
The secondary market Kasa Exchange allows for the participation of third-party securities houses and private banks as underwriters, market-makers and sales channels, notes Yea.
Under prevailing financial regulations, only accredited investors recognised by MAS can take part in real estate fractional investment schemes offered by platforms such as Fraxtor and even Kasa. An accredited investor is someone with a gross income of at least $200,000 annually over the last few years, or a joint income of at least $300,000 with a spouse or partner.
There is currently no established regulatory framework that covers the trading of digital assets like asset-backed security tokens such as Kasa Exchange in Singapore. However, this may change in the next few years. On May 31, MAS announced a collaborative initiative called Project Guardian to “explore the economic potential and value-adding use cases of asset tokenisation”.
According to MAS, tokenisation allows high-value financial and real economy assets to be fractionalised and exchanged over the Internet on a peer-to-peer basis. When applied in the context of financial services, this kind of smart contracts opens the door to decentralised finance (DeFi), where financial transactions like borrowing, lending, and trading activities can occur on the blockchain. This would also cut down on the number of intermediaries throughout the process.
At the moment, Project Guardian does not cover real estate assets, instead focuses on decentralised finance and building a framework for trusted networks. (Picture: The Edge Singapore)
MAS’ Project Guardian will focus on pilot use cases in four main areas: open and interoperable networks, building a trusted network, asset tokenisation and institutional-grade DeFi protocols. At the moment, it does not cover real estate.
“I was very excited to hear the news [about Project Guardian] and I think the Singapore government has been very progressive in going in this direction,” says Yea. He adds that a successful test of the interoperability between platforms and networks will translate into increased liquidity for the market, as well as encourage more participants to enter the market.
Edmund Tie’s Sim is also looking forward to the results of this pilot initiative. “DeFi for the purposes of fundraising is beneficial, but this fundraising also needs to be put into something that is regulated,” he says. “And real estate is one of the best asset-backed securities available.”
He anticipates that it would only be a matter of time before Project Guardian expands to cover certain real estate investment products.
If tokenisation is more widely embraced and a robust and open network is established in Singapore, it would transform the growth of capital-intensive assets, including real estate transactions, in the future.
The traditional role of intermediaries will have to evolve to keep abreast of the next technological transformation wave. This includes real estate brokers. “Edmund Tie is still a real estate broker, but as we are nimble, we have signed an MOU [memorandum of understanding] with SDAX,” says Sim. SDAX is a Singapore-based digital assets exchange that serves as a platform for the listing and trading of security tokens and other asset-backed digital securities. It holds a Recognised Market Operator licence from MAS.
Sim: There are many opportunities to apply tokenisations deals, including in real estate assets and even cruise ships. (Picture: Samuel Isaac Chua/The Edge Singapore)
“The MOU allows us to understand their investor criteria and perhaps find a tangible asset for them to tokenise,” he adds.
Tokenisation can extend beyond real estate. “You can even tokenise a cruise ship, as long as it is a real asset that can generate income and offers a divestment opportunity,” adds Sim. “There are many deals that can be crafted based on tokenisation.”
But tokenisation within established capital markets is still nascent. According to Daniel Ding, head of capital markets (land, building, international real estate & industrial) at Knight Frank Singapore, most major institutional investors are familiar with the concept of fractional ownership of real estate, having participated in private equity real estate funds and REITs.
“However, I think at this point in time, it seems to have more success among retail investors who are keen to diversify their portfolio,” says Ding. “Opportunities which were previously only available to institutional investors are now made accessible to them.”
Ding: Tokenisation deals have so far largely benefitted retail investors, opening up institutional-grade investment opportunities to them. (Picture: The Edge Singapore)
Looking ahead, Sim of Edmund Tie believes that real estate-backed tokenisation will have to overcome some hurdles that may cause inertia in the pace of adoption. “While being the first mover presents some advantages, it comes with some risks as well,” he says.
Sim says that supporting the adoption of tokenisation needs to be backed with education and awareness. “There is a lot of misconception about cryptocurrency and tokenisation,” he adds. “Unlike cryptocurrency, these tokens are securitised offerings backed by real estate. You can call these tokens electronic REITs. The difference between tokens and REITs is that the tokens are issued by a digital exchange or platform, while shares of
REITs are issued to unitholders who subscribe at IPO, and these units can be traded on the Singapore Exchange.”
The danger of real estate tokenisation is minimised as it’s not open to everyone, but only to accredited investors, according to Sim. “The risk of mom-and-pop investors going in and losing their savings is mitigated,” he adds.
You can watch the full interviews in our latest Real As Estate video which will be available on our Youtube channel and Facebook page from June 24