Real Estate In The Digital Age

By Caroline Giroux

The Rise of Proptech

Real estate is one of the largest asset classes in the world, comprising over $225 trillion; ~$50 trillion in the United States alone. Historically, the industry has been a slow adopter of technology due to its capital intensity and illiquidity, the longevity of assets, many different stakeholders, and disjointed workflows. However, over the last 10 years we have seen that begin to change with the emergence of ‘PropTech’, or property technology. PropTech can be thought of as any technology that impacts the built world.

A wave of venture-backed companies has emerged to help solve pain points across the real estate lifecycle and to bring traditional real estate processes and offerings into the 21st century. Some major trends and themes that have become popular for investors include fintech and insure-tech solutions, workflow management software, data and analytics software (often utilizing AI and machine learning), “smart buildings” via IoT devices, co-working and flexible space offerings, residential real estate platforms, use of robotics in construction, and modular or prefabricated homes.

Over the last 5 years, over $95B in funding has been invested into PropTech startups and PropTech-specific venture capital firms such as Nine Four Ventures, Fifth Wall, MetaProp and Zigg Capital. New players continue to emerge in the space as technology evolves, so it’s no surprise that with the recent rise of NFTs the real estate industry has reacted in unprecedented ways.

Over the last 5 years, over $95B in funding has been invested into PropTech startups and PropTech-specific venture capital firms.

Let’s back up. What’s an NFT?

An NFT, or non-fungible token, is a digital asset that represents a verifiable object or piece of content. They’ve been around since 2014 but we’re hearing more about them now in relation to art, digital images, and other collectibles. $16 billion has been spent on NFTs since June 2017. Buyers purchase NFTs using cryptocurrency and can then trade them via blockchain technology. Because tokens are non-fungible, they are one-of-a-kind and cannot be replaced. NFTs have gained a lot of attention in pop culture due to the outsized profits some transactions have yielded. For example, Jack Dorsey’s first tweet selling for $2.9M. Blockchain technology simplifies these transactions by making them transparent and fast, a huge part of the appeal (especially for retail investors).

What if we could take an industry notoriously lacking in transparency and made up of highly illiquid assets and transform it through tokenization and blockchain technology?

Entrepreneurs and venture investors around the world believe that we can.

What if we could take an industry notoriously lacking in transparency and made up of highly illiquid assets and transform it with blockchain technology?

Tokenizing Real Estate

The process is relatively simple. A real estate asset, for example an office building, is divided up into shares, each represented by a token, which can be purchased by anyone. Token owners then own a piece of that office building, the underlying asset. You can think about this like a modern-day REIT in the age of web3. Investors can buy and sell these tokens through various marketplaces using blockchain technology. Although the process is simple, it is revolutionizing the space by reducing barriers to entry when it comes to owning and investing in real estate. You could buy one of these tokens for less than $100. Additionally, tokenization allows for increased portfolio diversification and liquidity as well as increased efficiency in transactions.

Tokenization platforms such as Harbor—which raised $40M in venture capital from Andreessen Horowitz and Valor Equity Partners before being acquired by BitGo in 2020—Omniex and Prime Trust have attracted significant attention from real estate investors in recent years.

We are also seeing tokenization offerings begin to emerge in the residential space, like Fabrica, which just raised a seed round backed by Anthemis Group and Urban Innovation Fund. Each property added to Fabrica is put into an individual trust which is then minted and tokenized (NFT). The title of the property is granted to the trust and purchasing the NFT establishes ownership of the property. The owner can then transfer that NFT, and underlying ownership of the property, quickly and easily with full transparency through the blockchain.

From a monetization perspective for venture funds considering an investment in a real estate tokenization platform or marketplace, there are listing fees, trading fees, asset management fees, and a range of strategies revolving around data analytics and collection. There is a lot of white space, and so far, no clear winner. However, if a platform could attract enough users, then this fee-based structure could prove to be highly lucrative.

Investors can buy and sell these tokens through various marketplaces using blockchain technology. Although the process is simple, it is revolutionizing the space by reducing barriers to entry when it comes to owning and investing in real estate.

That all sounds great, so what are the cons?

It’s still very early days for real estate tokenization, and it is yet to be seen what the lasting impact of this technology will be on the industry. NFTs may democratize real estate but who is responsible for making major decisions about the underlying asset if there isn’t necessarily a lead investor? Increased liquidity could be a major positive but how do we ensure that we are accurately valuing NFTs and regulating trades? Tokenizing real estate assets means solving many major pain points in the transaction process, but can it be efficient if the rest of the real estate lifecycle is untokenized (tenant leasing, real-time accounting, etc.)?

Clearly there are still a lot of questions to be answered but we are excited to see how the space evolves and where the winners will emerge!

Caroline Giroux (’22) is a second-year MBA student at Columbia Business School where she is focusing her studies on real estate and technology. Prior to business school she worked in consulting and then at Orchard, an NYC-based PropTech startup, where her interest in tech-solutions for the built world began. While at CBS she spent 6 months at Nine Four, a PropTech focused venture capital firm.