Not a revolution in property investment

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Following my last post about fractionalised land title on blockchain, I’ve been thinking through a number of additional unanswered questions about the proposal. Based on responses and discussions on Twitter, it seems clear that there is no use case for blockchain in this context even though it is possible to roll it out.

Assuming it is rolled out – and it was an announcement by a South Australian government minister that kicked this off – there are myriad issues, I think, with the scheme. This post works through the nature of what is being sold. Is it land? Or something else?

Land markets

The proposal aims to ‘revolutionalise the property investment sector‘ by fractionalising land title into ‘bricklets’. Fractionalising simply means creating multiple co-owners of a lot (a piece of land, or an apartment). This will be achieved by selling a lot via blockchain which will ‘list’ the owner directly on the land register. That is, there will be two records of the transaction: one on blockchain, and the other in the land registry.

My current thinking is that this will inevitably create two separate markets: one for what I think is categorised as personal property (the blockchain interest) and the other as real property (the registered title). There are two reasons for this. One concerns the two differentiated types of rights under the proposal. The other concerns the valuation mechanism.

Real vs personal property: two interests

Presumably the blockchain interest includes some kind of mechanism for distributing rents and profits – though as I observed in my last post, it will need also to provide for distribution of liability and mechanisms for decision-making. There is inevitably some kind of property manager, likely the company launching this product.

If this is so, then the blockchain interest would afford the co-owners certain rights against each other and the manager. These rights are personal rights. They are not the same as an interest in land. There is no reason why there cannot be a market in these rights – all sorts of things can be bought and sold. Even debts can be sold. But the nature of these rights is such that you need to pursue a person to enforce your interest and recover any damages. If that person has no money or flees the jurisdiction, your interest is not worth much.

The (fractional) interest in the land though remains real property. Real property is valuable because land doesn’t move. What differentiates land (real property) from personal property is the right to recover the thing itself ie the land. Banks love security over land for this reason. Our society is enamored with the financial benefits of land because it anchors owners’ rights in something tangible.

Because each owner is also registered on the title, they have a legal interest in land that attracts all the rights of real property. But each owner also has rights under the blockchain agreement. That’s two separate types of rights and they may, I think, generate two separate markets.

What value?

The proposal is that the bricklets be valued each year. Owners can set a sell price, so that their bricklet will be traded when the value reaches that price. The question is, though, what exactly is valued?

Land valuation adopts a specific method involving comparing the sale price of similar properties sold recently in the area. The lots in the proposal can, of course, be valued in this way. A valuer would look at the sale price of similar lots in the area. But those comparison lots will be sold as a lot, not as bricklets. I am doubtful that the value of bricklets will simply be a proportion of the value of an entire freehold title.

Other aspects of property law recognise the difference between the value of an entire lot and the value of a part. For example, if two people jointly own property and one co-owner moves out, in some circumstances they may be entitled to receive a proportionate ‘rent’ from the person who remains in possession. Courts recognise that the value of this ‘rent’ is not equivalent to market rental because the nature of the interest is not the same as a full lot.

The relevant value, in my view, is the value of a bricklet based on what a person will pay for this fractional interest. Not a proportionate value of the entire lot. The entire lot is not being traded; only a bricklet is.

A revolution in property investment?

The media around this idea has suggested that this proposal creates a gateway for entry into the property market. Maybe. But in doing so, I think that it is likely to create a less valuable interest than buying regular property ie not a fractional interest. The rental return might be OK – because the rental market will pay the same regardless of the underlying title.

But I would think that investors need to be careful about assuming the same capital growth as regular property because this is a brand new market. I think it’s a risk to buy based on current market value of the entire lot – because unless there is someone to buy your fractional interest, it’s not worth it.

Is this a revolution? I don’t know. There are existing ways to make money from land through small financial investment (see, eg, this financial product BrickX) so probably not. And they don’t need blockchain.

I’ll post later on questions of using the interest as security.

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