The global real estate market is expected to reach a value of USD 637 trillion in 2024 according to data presented by Stocklytics. By 2028, this figure will grow by a further 20% and hit almost USD 730 trillion.
Despite significant challenges due to increased financing and construction costs, we’re building more than ever in history on a global scale. According to Precendence Research, the global real estate market size (construction and finance) was USD 3.9 trillion in 2023 and will reach USD 4.12 trillion in 2024. By 2034 it is expected to reach around USD 7.03 trillion , growing at a CAGR of 5.5% from 2024 to 2034. Many regions and cities facing housing shortage and commercial, infrastructure and tourism constructions are constantly expanding and renewing.
The vast majority of real estate construction and acquisition is debt financed. Since banks are increasingly compromized by regulatory requirements, private capital, as well as securitization take a growing proportion of the financing market shares. With the current interest rates, which are expected to remain at a higher level for some time, private and real estate debt has become and will remain an attractive asset class. Banks are already very opaque and siloed with their loan data transparency, but they’ve systems in place internally to track and evaluate their outstanding loans, which private market investors mostly don’t posses. This is a major issue when such loans are structured as securities, as they have to rely on opaque and insecure data as the global financial crisis 07/08 has dramatically shown. And since the GFC, not much has changed in this aspect. Loans are still often just based on paper-based contracts, or at best, in monolithic Loan Origination Systems (LOS).
Benefits of the Blockchain for Real Estate Finance
The blockchain technology demonstrates its benefits especially for debt capital for several reasons. First of all, loans can be originated natively on-chain. In fact, the only financial asset next to funds that can be natively originated and live on-chain with all its benefits.
The blockchain technology can be seen as the perfect fit for real estate debt as it is truly revolutionizing the way how loans are originated, tracked, managed and traded seamlessly, based on 4 core pillars.
Creating entire Lifetime Transparency
By originating loans on-chain, data is stored immutable and cryptographically secured. This includes the initial loan application with all relevant documents hashed on-chain and on a specific storage system, risk analytics data, and most importantly, the lifecycle data that is tracked for future use in secondary trades. Therewith full transparency is created along the loan lifecycle. At RIVA Markets we also integrate Moody’s Analytics, which allows instant in-depth risks analytics and recording of the results and its entire history on the blockchain.
Providing utmost Efficiency
Real estate finance in particular is an extremely cumbersome and inefficient process. From initial loan structuring and the preparation of the documentation, sharing of the data, due diligence to negotiation and closing. Also further in the loan lifecycle and service management process, the opaqueness of loan data and disconnect with traditional payment systems creates high efforts to manage and track loans for non-bank lenders and private market investors. By bringing the loan on-chain, use of self-enforcing smart contracts and connect with OpenBanking API, processes can be automated and all tracked on the blockchain for utmost efficiency from issuance to lifecycle management.
Through tokenization and peer-to-peer tokenized asset trading instead of traditional securities trading and settlement, the need for costly intermediaries is eliminated as transactions on the blockchain are directly cleared, settled and even asset registrars updated. Blockchains act as all-in-one systems with complete audit trail capabilities.
Creating Market Accessibility
Another major issue private markets, and especially real estate debt is facing, is its accessibility. This starts already in the deal sourcing for investors and the funding sourcing for real estate developers and investors, and continues in secondary market trades for secondary investors and those who seek to sell a loan or whole loan books.
The evolving market of tokenization and tokenized asset trading will inevitable revolutionize private markets and make them accessible for all types of parties. For those seeking funding and for those seeking investments, exits and secondary market opportunities. But not only through a tokenized asset form. As we at RIVA Markets working on a hybrid way, which we call the transition to tokenized asset management, we create on-chain assets as bilateral loan agreements, digital securities as Single-Asset-Single-Borrower (SASB) MBS (Mortgage-Backed Securities), and fully tokenized. Digital securities can be traded through ISIN and CUSIP, and settled through depository accounts, or tokenized assets directly through stablecoin settlements, and in the future even other crypto token pairs.
Increasing Liquidity
Increasing liquidity is often the major promise for tokenized assets, but this is still an open promise for many of such tokenized assets. Especially real estate debt is a highly attractive asset class for secondary investors, as those seeking real estate debt generating secured interests from rental income. By providing the above lifetime transparency and tracking, investor can gain the certainty of secured payments and provable debt coverage ratio (DCR). Additionally to the large secondary market for real estate debt potential and the benefits for secondary market investing into on-chain and tokenized real estate debt, we’re developing additional market liquidity through multiple ways, such as a network of marketplaces and liquidity sources, cooperation with market makers, as well as building RWA yield pools with an Automated Market Maker (AMM) model, which are successfully used in Decentralized Exchanges (DEX) in the crypto market. We’ve described our approach building multiple secondary liquidity in our early article “Addressing the Liquidity Challenge in RWA Tokenization“.
Conclusion
While the real estate finance market is still dealing with the many challenges it faces and the tokenization market is seeking it’s product-market fit to benefit buy and sell side for a faster adoption, real estate finance on the blockchain clearly provides the highest benefits. At RIVA Markets we’ve built this as our first and major use case, and have developed the market infrastructure for a seamless use and transition, with interoperability as core concept to secure assets can be efficiently traded.
