Real estate constitutes nowadays the most popular asset to tokenize. Buildings around the world are being placed on blockchain in full and partly. Digital Asset Editor-in-Chief talks to Ilia Obraztsov, Smartlands CEO, a blockchain firm that tokenized part of a student dormitory in Nottingham, UK. Smartlands is clearly the rising star in tokenized real estate, but its strategy goes well beyond that.
Q1: You have just successfully closed tokenization of a student accommodation block in Nottingham. Interestingly, you tokenized only 30% of it. How does it work, how will the token holders interact with the company that owns the rest of the building?
A1: We’ve raised enough capital from private investors to buy 30% of the equity in Winrise One Limited – the company that owns the property, with the remaining 70% being held by the original developer Windermere Capital Investments Ltd and Shojin Property Partners.
The investment period is three years, during which investors may have an opportunity to sell their investee tokens earlier when the work on the Smartlands proprietary secondary market trading platform scheduled for launch in late 2019 is finished. There may also be an option to extend the period of investment beyond three years.
Investors are expected to earn an income return of 5.74% per annum on average, paid quarterly over the three-year term (excluding the expected capital growth).
The total expected Return on invested capital (ROIC) is 47.17% over three years (15.72% annualised), which includes income and capital growth.
Both of the above-mentioned expected returns are after corporation tax and a 20% profit share paid to the originator Shojin Property Partners.
Q2: What are token holders expected to get in Nottingham?
Having paid all fees using our utility token SLT, you may redeem your investment via your crypto wallet or send your tokens for a spin on the secondary market.
A2: In the case of Nottingham property, investors are looking at cash-on-cash return, which is leveraged by an additional bank loan giving you an upside for capital growth from both rental income and property value.
Q3: What were the main issues/problems/challenges if any in this project? How did you solve them?
A3: The main challenge (I should say, the only challenge) is to get our potential investors to realise that they are investing in an actual asset – not into security tokens.
Security tokens are nothing more than digital representation of an investor’s ownership right to a share. And the option to tokenize, in our case a piece of real estate, is just another spoon of sweetener in an already well-structured real estate investment project. Meaning, you can buy conventional shares using fiat currencies or you can buy the entire building for cash for all we care.
We can talk about using virtually any vehicle available to real estate investors including tokenizing your share and using cryptocurrency for your purchase – a highly sought-after option by smaller investors or new-comers in the space.
In any case, we at Smartlands will help you make the right decision.
Q4: What other assets do you have in your plans for tokenization?
A4: Recently we have released a strategic roadmap for our upcoming activities so the next five years are pretty full. We are making a strategic move towards Smartlands becoming a Global Digital Banking Ecosystem and we have a 5-step plan for “uberisation” of securities issuance.
Over the next two years, we will strive to refine our approach to selecting investment opportunities for our customers, focusing exclusively on the most lucrative equity types and asset classes (real estate, agricultural assets, different kinds of equities).
In the nearest future, we plan to tokenize Investment Fund focusing on precious metals and the Disruptive Fund that invests in mid-stage fintech startups.
The latter project shouldn’t be a surprise because for years we’ve been in touch with serial entrepreneurs, tech investors, legal specialists, academics, management consultants and technologists who bring innovative new services to the global marketplace. So it’s only logical that we take a closer look at the fintech space from a venture investor point of view.
The creation of our own decentralised Security Token Exchange will be an integral part of the upcoming Smartlands activities. We plan on staying firmly on course to unlocking the liquidity premium, creating additional value for investors.
A switch to mobile is another step Smartlands is taking in the nearest future, turning a ponderous stationary process into a one-click operation that enables investors to track offers end manage portfolios right from their mobile devices. The R&D of Smartlands digital banking is already well underway and soon with the introduction of our banking product and contactless payment card we will enable our customers not only to invest and earn, but reliably hold, exchange, and spend their fiat and crypto.
We also plan to raise capital through the sale of an equity stake in our own Smartlands Holding company. Our intent is to use the capital to continue our global expansion and reach the target of $1 billion in tokenized real economy assets by the end of 2023.
The master plan for the future of Smartlands is designed to compartmentalise our thinking and present to the world our aspirations in the form that is most conducive to a lively discussion. After all, Smartlands’ outreach to the community for all major decisions concerning product development and the direction Smartlands is to take has always been the cornerstone of our success.
We feel that in order to become a fully automated AI-powered decentralised global investment ecosystem that can handle the needs of small retail investors as well as global institutional wealth managers we first have to:
- Create decentralised P2P secondary market for security tokens on the Stellar network
- List Smartlands-issued security tokens on centralised regulated exchanges
- Obtain our own MTF licence, licenses for money safeguarding, e-money operations
Once these steps are taken, we will overhaul the platform for featuring of seamless single accreditation/onboarding for the issuance of security tokens in any jurisdiction, which will put Smartlands in a position to globalise its reach through a single all-purpose Smartlands mobile app.
The next step is to obtain the MTF license and launch our own decentralised securities exchange becoming a fully decentralised global investment ecosystem technically proficient for complete decentralisation of token issuance, audit, underwriting and custody.
With plans so grand, attempting to appear modest may very well be considered disingenuous, so there’s no point in staring at our toes – we are indeed shooting for the stars.
As the crypto economy matures, the world is expected to come closer to a new era of real-world assets being securitised on the blockchain in a legal and compliant manner. Smartlands is poised to become one of the most active participants in the space addressing head-on the many concerns impeding mass adoption of security tokens all the while continuing to tokenize existing businesses and assets helping issuers reach a worldwide investing audience at a minimal cost.
Q5: You intend to set up a fund to tokenize these assets, or you will tokenize the fund itself?
A5: For each particular case, we’re considering a different approach. If the fund requires comprehensive management and diversification to achieve an upside (e.g. disruptive technologies, or renovation of industrial logistics), then we’re planning to invest in an existing fund with desired competencies in place. There are ongoing discussions with multiple funds right now, and they’re all at different stages.
If the fund doesn’t require a day-to-day management regiment (e.g. shares of a single pre-IPO stage company or commodities), we can establish it ourselves and tokenize it.
Q6: Your global plans break out to 50% in the US, 30% in the Asia Pacific, with only 10% in the EU, and 10% outside of the EU. Why?
A6: Obviously, for Smartlands as a technology company and a blockchain-based securities issuer, the US represents the ultimate opportunity. If you look at research, United States still holds the number one spot in terms of highest number of STOs held within its borders despite one of the strictest regulatory systems on the planet.
But, having registered with the SEC and complied with the relevant state and federal regulations, a company faces a huge array of possibilities. For starters, US investors are unable to participate in securities offerings based outside the country, which means that international issuers on Smartlands’ will benefit from the somewhat starved US investor pool. And, although the tax rate is 21 percent, an LLC can easily find ways to alleviate the tax burden for its shareholders.
Most importantly, the US has a vibrant tech community with the rest of the world looking to it to set the tone for investment, business, and R&D activities.
The sectors in which Smartlands is involved – issuance of digital securities and digital banking – are no different. The US promise is a large, highly qualified labor pool, a dedicated community, and the culture of investing in the future that goes back a century; just look at the fact that the U.S. is home to the largest hedge fund investor base in the world with the best access to institutional money.
Q7: As you are based in the UK, I cannot omit a question about Brexit. How do you see its influence (with a deal and with no deal) on your business, and on tokenization a new industry?
A7: Brexit is a political move that has very little to do with tokenization of everything, for which we are preparing the tool box. There may be some regulatory adjustments connected with Brexit but to think that UK’s secession from the EU is going to stand in the way of progress is near-sighted, to say the least. For instance, however many recessions the world has endured, we have realised long ago that healthy, mature, and decentralised capitalism (as opposed to vulture capitalism) is passing every test by society with flying colors. And asset tokenization as a means of democratising investments and facilitating financial inclusion is here to stay regardless of such transient impediments as the Brexit.