TOKO - Using tokenization to boost property syndicate investment in New Zealand

Overview

Property is one of New Zealand’s largest and widely debated industries. The painful and long-lasting effects of the 1987 Black Monday Crash made a generation of New Zealand retail investors wary of securities markets and cemented property as one of the most popular forms of investment for New Zealand retail investors. However, long periods of easy monetary policy, comparatively relaxed immigration and the effects of the COVID-19 pandemic have led to demand outpacing supply. This has caused an astronomical increase in prices, taking direct property investment out of reach for many Kiwis. While property syndicates offer an alternative to direct investment for participation, they still face challenges due to relatively high initial minimum investments, low liquidity, and an inefficient secondary market.

DLA Piper New Zealand – through Law& – is working with TOKO to solve this inefficiency by using the best of distributed ledger technology to assist property syndicates in their management of a secondary market that is secure, efficient, and accessible for retail investors.

The problem

New Zealand’s property syndication market is characterized by high financial barriers to entry, low liquidity, and a heavy reliance on manual processes. Property syndicates typically have a minimum investment amount of NZD25,000 to NZD50,000.

One significant challenge for investors is liquidity. Investment terms are often for long or undefined periods. In many cases, the only way an investor can withdraw their money before maturity is through a secondary market. Many unlisted property syndicates have a secondary market operated by the syndicate manager, effectively as a matchmaker between investors. However, these tend to rely on manual systems, with high transaction costs, limited trading windows and uncertain or long processing times (FMA, 2021). The combination of these features can diminish property syndicates’ accessibility and popularity, which reduces demand and increases the cost of capital.

Limited solutions

Recently, there have been some attempts at alleviating these pressure points by using technology to automate the secondary market. One such example is Jasper. Jasper is a commercial property syndicate manager that has created a digital platform for its wholesale secondary market by using a similar “[S]haresies style investment approach” (Melville, 2022) (Sharesies is a digital investment platform targeted at retail investors with relatively modest balances). However, while this digitizes the process, some traditional limitations remain. Jasper has set the minimum secondary market buy investors to NZD25,000 for new investors and NZD5,000 for existing investors (Melville, 2022). Setting a minimum investment amount limits the investor’s ability to divest at any price it is willing to sell for, and therefore the liquidity problems still stand.

The solution with TOKO

TOKO is an enterprise-grade tokenization platform that combines the best of distributed ledger technology with DLA Piper’s compliance and regulatory advice. Through tokenization, each syndicate interest can be broken down into smaller units and digitized into tokens, the ownership of which is recorded on a distributed ledger, an immutable record of transactions. Current and potential investors can then buy or sell these tokens of fractional ownership with one another directly in the secondary market, secured by blockchain technology, making the entire process cheaper, faster and safer.

For example, say an investor would like to invest NZD50,000 with a property syndicate. The property syndicate could issue the investor with the same asset but transformed digitally into 50,000 tokens (at NZD1 per unit) using tokenization. In the secondary market, the investor could sell these tokens at a price determined by the demand for the tokens in the market. These tokens could be traded electronically 24/7. All KYC/AML/CFT obligations could be met as part of the onboarding process the retail investors have to go through to sign up. Trading and settlement could be facilitated through the use of smart contracts – and without the need for intermediaries. Each investor would have a digital wallet on the platform with their tokens and transactional cash so they could deposit and withdraw their funds.

By lowering the barriers to entry and providing improved liquidity through the secondary market, the tokenization value chain could significantly improve access to (and therefore demand for) property syndicate investments —allowing property syndicate managers to tap into the retail investor revolution. Investors, for their part, would have greater access to this popular asset class, be able to diversify their investments and have better liquidity and price discovery through the secondary market.

Why New Zealand?

The New Zealand market provides the ideal environment to roll out this technology. Demand for property investment is enduring, the regulatory regime and business environment are well-regarded, and the regulator is supportive of innovation in the sector (FMA, 2021).

One key advantage of the New Zealand regulatory regime is that secondary markets operated by property syndicate managers for their own syndicates are exempt from securities exchange licensing. This allows those managers to provide secondary market liquidity without having to either go through the cost and risk of getting their market licensed or to list their syndicates on existing licensed markets such as the NZX (which also comes with cost and compliance obligations). Combining this regulatory concession with a secondary market powered by distributed ledger technology could help property syndicates fully realize the potential benefits of these secondary markets for the sector.

Another important factor is the supportive attitude of the financial sector regulator. The main objective of New Zealand’s financial regulatory body (the Financial Markets Authority (FMA)) is to create more fair, efficient and transparent markets. The FMA sees innovation as the key to achieving this and has committed to using relevant tools to promote innovation in markets where that is likely to lead to improved customer outcomes (FMA, 2021).

Closing comments

New Zealand has always had a strong demand for property investment. A successful roll-out of TOKO for property syndication could well strengthen property’s position as the country’s most popular investment asset class, by opening up the secondary market to a greater constituency of retail investors underserved by the sector.

Globally, investment markets are being democratized through technology. The power of TOKO can bring the same benefits to New Zealand’s property syndicators and their investors.