Exclusive: Former MD At Morgan Stanley On REITs vs. Asset Tokenization

Of late, the Real Estate Investment Trusts (REITS) are facing a major challenge from asset tokenization, which eats into their investor market.

Tokenized Real Estate could really open the narrow pool up for far more investors. But would that necessarily be a good thing? What are the pros and cons of either?

Here’s what Patrick Springer, former MD at Morgan Stanley, who recently completed more than twenty years at the company, had to say. Mr. Springer was the managing director in their institutional securities business. Read his comments below:

“In general, REITs year-to-date are up about 3% in the US, now outperforming the S&P 500, which is the market proxy. In 2017, the REITs were also up 3%, but they underperformed the S&P 500 dramatically because the stock market went up so much last year.

When the interest rates are rising, real estate is less attractive because the cost of financing is higher. Speculative real estate development will be more at risk than REITs which tend to be a tenant and income-producing stable.

So some strategists currently recommend REITs as defensive investments because of that and because the Fed tightening cycle is already mostly complete.

The opportunity for tokenization of real estate will be in equity ownership as well as debt-backed securities.

Tokenized real estate will look a lot like publicly traded REITs if a) the token is composed of hundreds of properties, typically across a large geographic region or in a specific sub-sector (single family, multi-family, or retail, for example).

Also, it will be similar if all of the properties are developed, have tenants, and are generating income. The purpose of REITs is to provide lower risk and dividend yielding investments.

But Tokenized real estate will not have to look like REITs for many reasons. A token of real estate can be a specific investment in a building or small set of buildings, so an investor can invest specifically in a location they want – such as a new building in Dumbo, Brooklyn.

And while REITs are “post-development” and are income producing properties, Tokens can be of new projects that can generate a lot more return (although with higher risk) because the investor can buy it an earlier stage.

The average real estate investor is not able to get into the funds that are building landmark buildings or areas such as the Hudson Yards – these are exclusive investments only elite real estate companies can participate in. Tokenization will fractionalize large projects and allow more investors to participate.

On the flip side, smaller investors who want to buy single units or a small building will find a tokenized version of that asset easier to buy than a similar property in the traditional way.

Accountants, lawyers, title insurance & other issues will all be detailed within the token and so the friction and costs of purchasing real estate are reduced. Tokenizing real estate will reduce all the toll costs that people are charged when they buy and sell real estate.

Finally, tokenization of real estate can be about bank loans or bonds. A real estate company can bypass expensive banks and raise money via a loan or bond offering on blockchain to fund its development.”

Tokenization of real estate seems like the new and more profitable way to ensure that common people have access to real estate as well.

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