Whereas the Real World Asset niche has begun to attract more and more investors with solutions such as RealT, the full potential of tokenization technics has not been unleashed yet.
Below is one example of how real estate professionals can reach an extreme profitability thanks to the use of tokenization technics.
The below example just describes one of the multiple possible use of tokenization technics in the context of a real-estate business. One can adapt the below example to its requirements.
The tokenized perpetual bond structure consists in the set-up of a SPV which will finance underlying real estate acquisitions by means of perpetual bonds issuance.
A perpetual bond is a specific financing instrument born in the 80’ which has no maturity. This means that, opposite to a bank loan that needs to be reimbursed, the investors have no right to obtain the reimbursement of a perpetual bond. Asa compensation, the investor receives a highlife-time yield.
The perpetual bond technic can, to that extent, be considered as a Swap between a life-time yield against a one-shot deposit.
To illustrate with actual figures, let’s take an example with an 5% interest bearing perpetual bond.
One might think that a 5% redistributing yield would be perceived a not attractive for investors.
It worth mentioning that, just in France, theSCPI (French type funds specialized in real estate management) had distributed in2022 an average yield of just 4% before tax. Most of the time, the distribution ranges between 3 to 5% per annum. In the meantime, this single kind of fund has reached an overall capitalization of 78 billion euro in 2022.
Those figures are just for the SCPI type of fund and for the French market alone.
Hence, this is an evidence that a huge demand exists for low but secure real-estate backed yield.
Many investors have not amazing expectation when it comes to passive but steady income.
This class of “reasonable investor” can however offer deep liquidity while their needs can be entirely fulfilled with tokenization strategies.
Let’s take an example of a 10 million perpetual bond bearing a 5% yield per annum issued to finance an underlying real estate portfolio with a 10% yield.
- The issuer can raise significant amount of financing fractioned among many investors who share collectively the risks.
- The issuer can circumvent the need to obtain a bank-loan and is not subject to prudential indebtedness ratio and credit-rating.
- Opposite to a bank-loan, as the bond is perpetual, the issuer has the right but not the obligation to reimburse the lenders.
- Where the real estate professional manages to invest in high yields properties (10%),he can reach & keep for him a significant margin as remuneration (=5%margin in this example, since 5% out of the 10% yield would be redistributed to the investors).
- As the issuer does not depend on banking limitations, he can raise technically an unlimited amount of financing. The only actual limit is its ability to continue to raise funds.
- From a wealth point of view, the issuer’s net asset had instantly increased of 5million. Indeed, the perpetual bond doesn’t have be reimbursed. Hence, it is not qualifying as a liability from an accounting standpoint, but as a quasi-equity. The only actual liability is the perpetual yield that has to be served. However, the future value of such a yield can be capped at 5 million in the current example, since 50% of the real estate are actually sufficient to payout the expected yields top the investors. Hence, the actual wealth of the issuer has instantly increased of 5 million.
- The issuer is the actual owner of the real estate portfolio. While the yield is shared between him and the investors, he can benefit of 100% of the underlying asset appreciation and thus can take 100% of the future capital gain at the time of the real-estate liquidation.
- From a tax standpoint, most jurisdictions recognize a perpetual bond as a financing instrument for which the interest can be deducted as a charge.
- For the investors, it is the insurance of a life-time steady real-estate backed yield.
- If properly collateralized, the investor can obtain direct or indirect rights over the real estate and end-up in a situation more comfortable and secure that what would have been his position in an investment fund (such as an SCPI).
- tis not because the bond is perpetual that the investors can’t exit their investment and obtain its reimbursement. Indeed, tokenization solves the problem of perpetual instruments by creating the opportunity of a secondary market and an easy transferability mechanism. With this secondary market opportunity, the investor can sell its participation to any other investor. The perpetual bond tokenization places the investor in a very similar situation than an equity owner.
- Same than for a stock owner, the perpetual bond investor can exit its investment by selling its instrument to anyone else. Same than for a stock investor, he is entitled to receive a yield generated by underlying asset (dividend in one case, real-estate backed interest in the other case).
- The investor can diversify quickly and efficiently. Thanks to tokenization, he can have access to real estate markets that would otherwise remain inaccessible to him.
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Fincapital Partners is a private investment club which provides private investment opportunities and financial services to its members.
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