This will then give absolute legal certainty as to the status of Smart Contracts and Digital Assets. It is very significant as, until the Chancellor’s guidance, Digital Assets were not recognised. It could have been argued that, as one was unable to take physical possession of a Digital Asset e.g. a Cryptocurrency, thieves could not be prosecuted as they had potentially stolen something that was not legally recognised - similarly banks could not lend against such assets. However, now that we have greater legal certainty, it is likely to lead to greater institutional interest creating digital assets, in turn offering exposure to a wide range of assets including property funds, real estate portfolios, or even exposure to individual buildings.

This interest has already begun since the first property in the UK to be tokenised was a student accommodation block in Nottingham University this summer, using the Stella Blockchain. The company behind this deal is called Smartlands, and it raised £12+million by selling 30% of the building to investors by offering exposure to the property for as little as £5,000. It was estimated that the yield will be 5.74%, with a target return of 15.74% p.a. on the student accommodation property. Smartlands is looking at similar digital offerings for up to £500million of residential accommodation in the UK, vineyards in the USA and a smart city in Brazil. There are a variety of companies such as Smartlands offering tokenisation services including:

Securitize: a registered transfer agent, based in the USA and with offices in Europe

Token market: the FCA-regulated firm which has raised over £230 million of Initial Coin Offerings (ICO) and currently promoting three offers

Digi shares: a Nordic-based firm looking raise capital to build a platform

Leaseum services: a team with institutional experience offering a range of services to digitise real estate, PE, Infrastructure and VC funds, as well as specific assets such as equities, bonds, property etc

Tokeny: a Luxemburg-based firm looking to issue, transfer and manage tokenized securities.

Archax: an exchange for trading asset-backed tokens (digital securities, security tokens, etc), based in London

TPX Exchange: a regulated platform that will allow one to sell as little as £250 of one’s property and which are looking to potentially digitise the $20 trillion global residential property market.

However, offering digital ownership of the property has not been plain sailing recently. In a joint venture between Fluidity (backed by Consensys and Galaxy Digital) and digital asset-focused broker-dealer Propeller, it was decided to not proceed with the $20 million tokenised Real Estate deal. This was despite getting a ‘green light’ from the Security Exchange Commission (SEC) in the USA, as Fluidity found there was simply not the institutional support to invest. Also, Blockchain ‘start-up’ Harbor and the real estate arm of Chicago-based trading firm, DRW Holdings, did not proceed with their proposed $20 million of student Real Estate project.

Interestingly Emaar, the owner of the Burj Kalifa (which at 2.722 feet is the tallest building in the world,) has issued a press release as it is looking to launch the EMR token which will act as a loyalty programme for its customers. However, given Emaar is one of the most dynamic, largest and most successful property companies in the world, how long will it be before it issues some form of property-backed Digital Asset? After all its chairman, Mohamed Alabbar, recently said, “We didn’t become Emaar by standing still, or by thinking small. By launching the EMR utility token ecosystem, Emaar is expanding the concept of connection. We aren’t just looking into the future – we are building it”.

Nevertheless, look out for more equity or debt tokenised Real Estate-backed offers in 2020, as we are getting greater regulatory and legal clarification in many different jurisdictions. We are to see major custody providers such as Fidelity, BNY Mellon, State Street and Northern Trust all going to offer increased custody services in 2020. This removes another barrier for institutions which have been justifiably cautious, as they need any Digital Asset they own to be to held securely and independently.  Interestingly, HSBC has recently announced that, by March 2020, it will be transferring up to $20 billion of assets into its ‘Digital Vault’, of the $50 billion of private assets it holds for clients, on to a new Blockchain-based custody platform. This will be one of the largest examples of a global custody-provider championing custody of Digital Assets and it will make it easier and faster for investors to make enquire and check up on their holdings.

Once we see a correction in equity and/or bond markets, then private investors may also start showing greater interest in tokenised property offerings, so stimulating other asset managers and property developers to enter the market and slate the demand.

At the event, a leading barrister Jeremy Barnett spoke about how he believed Blockchain technology can add tremendous value for the owners of Real Estate.” Take as an example a new shopping centre. If all the critical information about the project was held on a Blockchain, the landlord would know at every stage during the construction of the building who had done what and why. This would create a time-stamped and immutable record which could be used for a variety of requirements -insurance, bank financing, paying contractors and even potential litigation if this were to occur at a future date. This data could even be used to help in the fractionalization/tokenization of outlets within the shopping centre, to identify who is to receive an ongoing rental income. Therefore, having “Structured data”, one can add value to an asset such as a property”.

The suitability and safety of a building is an important issue, especially in the UK, where there are potentially corporate manslaughter charges that could be bought against company directors. Company directors are potentially personally liable in the event of an accident and are at even greater risk if an employee’s life is lost while at work e.g. shop or office workers, or potentially tenants (in the case of a property company).

If data on a building is held in a structured and digitised manner, it would be possible for Smart Contracts to be used to identify when maintenance checks need to be carried out -automatically notifying when health and safety checks are required i.e. inspections on lifts, fire extinguishers, etc.

On a more sober note, the barrister Barnett said that “If such a system had been used in Grenfell Tower, we would not only know who had made critical decisions about design and materials but also it would be possible to automate many of the processes that take place, such as monitoring of fire alarms and sprinklers, to make the buildings safer. Using such a system, all those who design, build, operate and own new buildings will be able to comply with the onerous rules that will be introduced by the new Fire Safety Regulator.”

In a recent report from Harvard Business Review, which looked at How Blockchain Will Change Construction, it cited several examples of how the technology is being applied in the property sector. According to Propulsion Consulting founder Marc Minnee, who is advising on a large project in Amsterdam, “Blockchain provides a platform for clearly cascading work products down the chain and holding everyone accountable for completing key tasks,”. Meanwhile, the risk consultants at Aon, believe that 95% of building construction data currently gets lost on handover to the first owner.

Briq, a California-based Blockchain firm, is using a Blockchain-powered platform to create a “living ledger” of everything about a building - from the initial sod of earth being dug to the latest safety inspections and those potentially minimising risks for those who own and insure the property.

It is possible, in conjunction with Artificial Intelligence (AI) and Internet of Things (IoT), that  Blockchain technology can store data in a very collaborative manner by sharing relevant data with those entities which need access to it. A combination of Blockchain, AI and IoT would be able to identify potential risks and alert relevant parties when maintenance and inspection specialists are required. This would greatly minimise potential liabilities and so reduce the costs of owning and managing Real Estate.