Japanese tokenization platform Progmat is exploring the potential for tokenizing overseas real estate. It’s the most prolific tokenization platform in Japan, founded by MUFG with backing from the other big three banks, SMBC and Mizuho, alongside others. So far most of the security tokens issued have been linked to single large real estate properties in Japan, with one or two digital bonds. Now they’re considering how to expand the types of security tokens.
There’s an affiliated Digital Asset Co-creation Consortium (DCC) with 282 members. A much smaller DCC working group explored which types of tokenized assets to consider. Out of sixteen options, overseas real estate is the top of a shortlist of five. The others are real estate construction, wind power infrastructure, solar infrastructure and funds.
The decision making process was quite informative. Each token type was assessed according to four criteria. On the commercial front, does the asset serve a need or is it in demand? And how profitable would it be? Then there’s the question of feasibility. Is there an existing scheme or structure that can be used? And what are the risks? Each of the 20 working group members voted on each criterion for every asset class.
Overall the conclusion was there would be strong demand for all five of the shortlisted assets and all were considered profitable, with less confidence about real estate construction.
The real estate tokenization choices
Regarding the scheme or structure, most Japanese real estate security tokens use a trust structure and this could be used as a template for overseas real estate. Except it’s a two tier trust structure with a domestic trust and an overseas real estate trust. Alternatively, the investment could be via a limited liability company (LLC). Regarding risks, the one big caveat was exchange rate risks. Additionally, the asset managers would need to watch out for local tax laws, especially the potential for double tax.
The working group also considered different types of exposures to overseas real estate – single property versus portfolios or real estate loans. Portfolios could either be a physical portfolio, a real estate fund or a REIT.
When they compared the trust model investing in a specific property versus an LLC investing in REITs, the LLC/REIT route was the lowest cost and risk, and the easiest to implement by far. However, the working group preferred single properties held via a trust. That’s in part because it’s the same model that has worked for security tokens so far in Japan. But the final decision appeared to be about marketing. It’s easier to sell single properties to individual investors because they are more tangible compared to a faceless REIT.
Meanwhile, Progmat Coin is progressing its stablecoin initiatives. The big three banks launched Project Pax, which will use stablecoins for cross border payments. Companies will instruct their banks in the usual way, and on the backend it will still use Swift messages. However, instead of routing payments via correspondent banks they will go via blockchain.
