"At a standstill" is now the phrase best suited to describing the state of real estate tokenisation in France and Europe. This is for both regulatory reasons and relevance to existing models.
"Many players launched in the first half of 2022, but none have yet managed to scale up, while most have simply stopped," concedes Florian Freyssenet, founder of TokenLand, which advises traditional players on the subject.
However, the promise of real estate tokenisation is attractive:
👉 Lower the entry ticket to a few euros (compared with around a hundred for the most accessible SCPIs and €1,000 in most cases) to invest in real estate and thus earn a return (via rents). The blockchain makes it easy to split a property into thousands or millions of tokens.
👉 The emergence of a more liquid secondary market with tokens that are easier to exchange thanks to the blockchain, as well as the possibility of depositing them as collateral in decentralised finance protocols (DeFi) to borrow new funds.
"Blockchain makes it possible to automate operations or reduce the number of intermediaries that can be found in the processes of selling or financing a property project," stresses Florian Freyssenet.
But there is one "snag" and it is a big one: regulations prevent a property from being tokenised directly. This is the case in France and in the majority of European countries.
The real estate registration register cannot be directly transposed onto a public blockchain "because notaries have a monopoly on it", points out Stéphane Daniel, a lawyer at d&a Partners. Legally, therefore, it is not possible to transfer ownership directly via this technology.
This observation has led to a degraded solution that involves tokenising shares in companies that hold real estate. By holding the tokens, investors receive proportionally the income generated by the company.
This sounds simple in theory, but the system still had to be inserted within a known regulatory framework.
The royalties model rejected by the AMF
Many projects intended to rely on the royalties model, i.e. based on a royalty contract on future revenues.
Investors advance funds in the form of crowdfunding to a property company to acquire a property. In return, the latter transfers a proportion of the income generated (most often rental income) in proportion to the investment. The advantage of this model was that it was simple and did not - at first sight - require licences to be obtained through a very cumbersome regulatory process. But that was without counting on the intervention of
the Autorité des marchés financiers (AMF).
The regulator blew the whistle on the game in December 2022, considering that this legal arrangement fell into the category of "debt securities".
"While marketing communications often emphasise an investment in property, investors in no way become owners of the property but are simply creditors of a company", it explained.
"You have to understand the regulator, confides an entrepreneur in the sector, here the investor is at the mercy of any hidden charges or poor management by the platform". In his view, the platform can easily lower its return without necessarily having to justify itself. But for project promoters who were planning to opt for the royalties model, it's a cold shower.
"The regulations relating to debt securities are much more restrictive than those for royalties crowdfunding, particularly in terms of equity capital and the prospectus to be sent to the regulator, especially if you are targeting non-professional investors," explains Gauthier Alexandrian, CEO of Pecule.co, which provides technological solutions for companies wishing to tokenise assets.
"Operating a true secondary market with a centralised order book and public prices is also complicated because you need to be licensed to operate a trading platform, like a traditional stock exchange like Euronext," says lawyer Stéphane Daniel.
According to our information, there are no legislative or regulatory texts being prepared to change the law to enable real estate tokenisation to take off in France, which is therefore "at a standstill", several players whisper to The Big Whale. However, a new experimental European regulatory framework could change things.
Pilot regime to experiment outside the traditional framework
Entrying into force in March 2023, the pilot regime plans to lift certain barriers to allow innovative players to test blockchain-based secondary markets for financial securities. This experimental framework is to last for a minimum of three years and lead, if necessary, to the drafting of new regulations if the experiment is deemed conclusive.
Several crypto players have already expressed their willingness to get involved, including RealT , an entity of North American origin that has many French customers and plans to expand in Europe.
In the model proposed by the company founded in 2018 by Canadians Jean-Marc and Rémy Jacobson, investors become shareholders in a company by purchasing (via their token) shares in real estate, mostly located in the American cities of Detroit, Chicago and Cleveland. The only downside, and not the least, is that the company in question is registered in Delaware (USA).
"The model we are proposing is not viable in France because of the tax system, in particular because of registration fees, which are too high," explains Jean-Marc Jacobson, CEO of RealT.
The project, which is actively communicating with French investors via the specialist crypto press as part of sponsored content, is currently only tolerated by the AMF and is not regulated in Europe.
The Jacobson brothers therefore hope that the pilot scheme will enable them to develop their RealT Market Maker (RMM), a protocol for depositing real estate tokens as collateral in order to borrow other digital assets (most often stablecoins), in a regulated manner. "Technologically, RealT has a head start but could find itself up against an insurmountable regulatory wall if the rules don't change", points out an industry observer.
Kriptown , which ultimately aims to be an exchange offering the listing of shares in companies that are currently unlisted, is also counting on the pilot scheme to develop its business. "Thanks to this experimental European regime, the idea is to be able to tokenise shares in companies representing real estate assets," explains its CEO, Mark Kepeneghian.
On the side of the historic players in real estate investment, the subject is being looked at closely, but we are still a long way from seeing experiments in real conditions. "Certain arrangements are being looked at closely, in particular the possibility of depositing real estate as collateral to borrow stablecoins," explains an investor working with a major French real estate group.
"Traditional players will first start to integrate blockchain into their internal processes to make certain transactions more fluid, it will only be at a second stage that tokenisation can be fully integrated," anticipates Gauthier Alexandrian of Pecule.co.
