Insides carry out study on the role that blockchain could play in the financing of property developments.
What is property development?
Property development is a business process that adds value to
land or real estate by the reform or adaptation of existing structures, or the
construction of new buildings on previously undeveloped land.
The property developer is the person or the organisation that
identifies an opportunity and initiates and oversees the process, usually
taking the greater part of the risk in exchange for large rewards.
property development funded?
At a simple level property development funding can usually be
categorised by three distinct stages:
- Initial purchase
- Development finance
- Refinancing or sale
Property development opportunities come in two distinct forms:
- Sites with approved plans
- Sites without approved plans
A site with approved plans comes with less risk but will have a
premium price that may affect the overall profit and financial viability of a
A site without plans has a higher risk of not being able to
achieve planning approval from the relevant authorities, but possible returns
will be far higher.
Because of the greater risk traditional lenders are not willing
to fund speculative purchases without planning, and developers must usually
purchase using their own money and pay for the design and planning process
Once a development has been thoroughly planned and achieved all
the necessary approvals there are numerous avenues available to the developer
to raise the necessary funds for the construction works, whether this be a
traditional bank, private investors, an equity offering, a partnership, or
Once a development is complete the developer must pay off any
existing loans, as typically these were made only to cover the process of
construction. The developer has the option of selling part of or all of the
development, or refinancing based upon the uplifted final value of the
with the existing process:
Developers must have access to substantial cash reserves to
Large sums of money are required for relatively high-risk
projects, which require lenders to create onerous conditions, demand the use of
overpriced lawyers and consultants, and impose high fees and interest rates.
Traditional lenders are often reluctant to lend on high risk
projects or projects located in jurisdictions deemed to be higher risk.
Different stages of financing and refinancing create additional
fees which impact heavily upon project profits.
Other than crowdfunding, that are significant barriers to entry
for smaller investors.
What is a blockchain
Crypto tokens represent an asset, a utility, or a unit of value,
and are easily exchanged without the intervention of a third party, held on a
blockchain to provide an immutable record of ownership and chain of custody.
The integration of smart contracts allows a variety of external events or
actions to be triggered.
blockchain tokens be useful to the business of property development financing?
Tokens could be used as representations of debt, shares in an
SPV, or share in the title of land or property, turning those items into
secure, transferable, tradable assets. Subdivision of debt or equity allows
access to a wider pool of small investors, and in the case of crypto tokens, to
a highly liquid market of crypto traders and investors.
As the value of the token would be pegged to a fixed debt asset
or share of equity in a project, the value of the token ought to remain
relatively stable, with an anticipated return paid as a dividend upon project
completion, or a fixed rate of interest issued automatically by the smart
contract. This may be attractive to crypto traders and investors as a form of
secure stable coin, with the benefit of some return on investment.
SPICE Venture Capital founder Carlos Domingo summarised his
thoughts of the potential size of the security token market:
“It’s inevitable that security tokens will
transform equity just as bitcoin has transformed currency, because they afford
the owner a direct, liquid economic interest and the expedited delivery of
proceeds. Every type of ownership can be tokenized, which is a massive
multi-trillion dollar addressable market.”
The link below is an interesting guide to security /asset token
As an asset backed token is considered to be an equity according
to the Howey test *1 the majority of jurisdictions will have
regulations concerning the public sale of equities, and most major
cryptocurrency exchanges are not willing to list equities, although there are
exemptions from regulation for offerings below a certain threshold.
Giving away a share of equity at either of the two
pre-completion stages would entitle the token holder to a share of profit
proportional to their holding. This would diminish the developers profit and
diminish their role to an administrator of their own project.
Alternatively, a developer could operate an equity fund, with
the developer taking decisions on individual projects.
Whatever the setup, regular reporting with keystage reports and
feedback on project performance would be essential to maintain investor
confidence and engagement. Project valuations would in turn affect the price of
token in same manner as financial reports affect share prices.
existing property related platforms and tokens
Most existing platforms seem to be geared toward equity release
for built projects. There are no examples of token offerings for speculative
development of property funds.
Brickex appears to be a dead project, presumably after realising
the complexities of what they want to achieve.
Brickblock seems to be gearing itself to institutional
investment in property funds
Templum is a platform for token sales with a good guarantee of
access to an investor pool in conjunction with Indiegogo. However, they seem to
be more concerned with equity release for completed projects.
From a technical perspective the creation of a token is
relatively easy, using any one of a number of existing platforms, such as
Raven, Waves, Polymath, Ethereum, LaToken, Bitcoin, etc.
Some platforms such as Raven and Polymath offer features that
are better suited to the issuance of asset tokens.
A website is required for the initial token sale, with a method
of receiving payments and automatic issue of tokens. Tokens could be stored
online by the developer, hosting their own platform for token trading and
transfer, or have the option for buyers to transfer tokens to third party
For a debt asset that is for a fixed term until project
completion the smart contract could be used to redeem the token upon project
completion for the initial stake plus any dividends or interest due, paid to a
nominated bank account. Presumably this would act as an incentive for investors
to retain tokens.
Any equity token sale would need to comply with the public
equity sale regulations of whatever jurisdiction the SPV is located in. Smaller
projects may have exemption from these regulations.
Investors would need to be confident in the legal connection
between the token itself and the underlying asset, be that a debt asset, an
equity share, or a share of title.
There may be additional financial compliances for the crowd
funding style model using a token as a debt asset.
The best examples of alternative financing are crowdfunding
platforms, of which there are many examples. None of these (yet) have made use
of equity tokens though. It is not necessary to list these as a google search
for ‘property development crowdfunding’ comes up with a large number of related
Using a crypto token doesn’t mean that there is instant access
to a pool of willing crypto currency investors. Marketing remains as crucial to
the success of the offering as any other means of raising capital from the
Using a dedicated platform offers certain advantages in terms of
marketing. For instance, Indiegogo is a popular crowdfunding platform that now
offers token launches in conjunction with a third party which undertakes to
ensure compliance with US regulations. The fee for such a service is likely
much higher than a developer overseeing their own token offering.
Overseeing a token offering would entail setting a substantial
budget for marketing. There are a number of firms now specialising in ICO
marketing, such as:
Palm Beach Marketing
It may be preferable to offer tokens as a debt asset, with the
possibility of converting these to equity asset tokens upon completion if the
development is to be retained by the SPV as a managed letting business.
The legal and technical aspects are probably relatively
straightforward in comparison to the marketing required to make a success of a
There may be advantages to working with an established platform
to ensure the necessary exposure, although it seems unlikely that any of them
will deal with raising development finance.
Care should be taken in gaining compliance, the SEC has taken
action against two unregulated property related ICOs in the US, and other
jurisdictions are bound to follow:
Furthermore the public are now wary of ‘scam’ ICOs and will be
reluctant to invest in anything that appears to be a risk.
Although the property asset token may simply be a novelty value
at the moment, the ability to interact with crypto currency may open it up to a
much wider market, and certainly there is an advantage to being ahead of the
game with exploring the technology.