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Real Estate Tokenization in Germany: Market
Analysis and Concept of a Regulatory and Technical
Solution
Robert Henker1, Daniel Atzberger2, Willy Scheibel2, J¨
urgen D¨
ollner2
1XU Exponential University, Potsdam, Germany
2Hasso Plattner Institute, Digital Engineering Faculty, University of Potsdam, Germany
mail@roberthenker.com
{daniel.atzberger, willy.scheibel, juergen.doellner}@hpi.uni-potsdam.de
Abstract—Real estate is the largest asset class and is equally
popular with professional and retail investors. However, this
asset class has the disadvantage that it is very illiquid, and
investments have a high entry barrier in terms of equity. The
adoption of the Electronic Securities Act in 2021 by the German
Bundestag has created the legal framework for tokenizing real
estate assets and their management using digital ledger technology
in Germany. In this paper we describe a business concept for
managing ownership and business transactions for real estate in
Germany using blockchain technology. Besides its possibilities,
we present a market analysis that comprises existing approaches
and discusses legal limitations specific to the country.
Index Terms—Blockchain Technology, Distributed Ledger
Technology, Tokenization, Smart Contracts, Real Estate Assets
I. INTRODUCTION
The market for managing, financing, and trading property
and asset rights in real estate has enormous global impact,
as real estate accounts for 60% of global assets [1]. From
2016 to 2019, global real estate market turnover increased
from $7.6 trillion to $9.6 trillion, and global commercial real
estate investments reached a new high of $830 billion in 2019.
Furthermore, the importance of real estate is not limited to its
high market value but also to its critical role in every person’s
live as a foundation for living and working. Because of their
fundamental importance, property and asset transactions have
been formalized and regulated for centuries. For example, real
estate and all related rights are fully recorded in land registers
kept by land registries and any change to the land register
requires a not inconsiderable bureaucratic act.
Due to legal requirements, processes, such as purchasing,
financing, and marketing of real estate have been strongly
characterized by manual and paper-based handling, which
reduces the efficiency for involved companies, e.g., notaries,
lawyers, and banks [2]. On the other hand, real estate has
traditionally been one of the most illiquid asset classes,
requiring a high level of capital commitment and entailing
long, expensive transaction processes. The pressure on the real
estate industry to change is increasing from the demand of new
market participants and existing investors. Furthermore, there
is a desire for more access to this market, such as the growing
interest in real estate ownership. In Germany, real estate is the
most sought-after asset class among private persons.
Since the adoption of the Electronic Securities Act in 2021
by the German Bundestag, the use of blockchain technology
for managing ownership rights on real estate in Germany is
possible in a legally secure framework [3], which has been
a major limitation before [4]–[6]. Regarding real estate and
property rights, the blockchain technology offers enormous
potential for digitizing legal aspects and practical processing [7],
e.g.,
•
Capitalization of hidden reserves: The refinancing of
illiquid assets, such as real estate, via banks is limited
to lending limits to a portion of the lending value set
by the bank. By issuing tokenized shares in the form of
Mezzanine capital, additional liquidity can be obtained
beyond the lending limit [8].
•
Higher liquidity: Illiquid assets are challenging to sell,
and the time and costs incurred in doing so are priced into
the valuation of the same in the form of a discount by
market participants on the fair value. With tokenization,
shares theoretically become sellable at any time and thus
achieve a higher trading value [9].
•
Fractalization: Splitting into small units lowers the
minimum cost of entry to a reasonable level and also offers
small investors the opportunity to have direct ownership
and control, which is one step towards the Democratization
of the Financial Market [10], [11].
In this paper, we present a business concept, that relies
on a software system in which tokenizations of property
and asset rights to real estate are created and managed in
the form of security tokens in Germany. For this purpose,
regulated securities are mapped in digital twins that combine
the advantages of regulated classical securities with those of
digital currencies. With the cryptographic tokens, contractual
services are regulated by smart contracts that enable legally
secure and fully electronic and automated processing of the
resulting business transactions. The basic idea of this approach
979-8-3503-1019-1/23/$31.00 ©2023 IEEE
Fig. 1. Idea of tokenizing real estate assets. Digital twins of physical real estate assets are modelled as security tokens and the information on the ownership
are stored in a blockchain. Using smart contracts, basic transactions, e.g., rents, are managed in an automatic way. The technology allows investors to buy and
sell tokens and obtain ownership rights.
is shown in Figure 1, which has also been discussed in earlier
works [2], [9], [12].
II. CO NC EP T
Our concept describes a white-label SaaS solution for
managing ownership rights of real esate using blockchain
technology. In order to demonstrate the functions and potential
of such a software system practically, we start with a description
of an use case which is shown in Figure 2. We then detail the
technical architecture of the system.
A. Business Case
Real estate companies and project developers often need
more equity as collateral to borrow from banks for new
construction projects, renovations, and conversions. Since the
financial crisis and the subsequent regulation, the requirements
for equity ratios and liquidity reserves have risen sharply, and,
at the same time, lending limits on existing properties have
fallen; these conditions will become even more stringent in the
wake of additional regulations such as Basel 3 from 2023 [13].
For banks, this means fewer loans granted and, thus, lower
sales and profits.
Banks and other intermediaries can integrate the planned
solution as white-label software into their inventory systems and
Internet portals, thus setting up their own refinancing platform.
If insufficient equity is available for a loan request from a
property developer or project developer, the bank can refer
him to the portal. The real estate company can then present its
project to the bank’s customers and raise the missing equity
capital from customers as participation. Subject to compliance
with certain conditions, the capital raised counts as Mezzanine
capital and increases the balance sheet equity. This allows the
real estate company to take out a loan, and the bank gains
additional lending business and can monetize the use of the
platform to customers and real estate companies with a fee.
Currently, no integrated SaaS solution for tokenization with
individual parameterization and integration into existing sys-
tems and portals is available in Germany. While the individual
technical components are available in various expansion stages
for use by technically experienced personnel, there needs to be
an integrated and user-friendly solution that can be operated
and hosted in Germany in a legally secure manner.
B. Architecture
Our system architecture consists of several components cor-
responding to the processing pipeline’s individual stages. The
central system components are presented below as examples
of essential functionalities.
The token issuer system represents the backend in the
planned solution. The core component is the tokenization
engine, which is used to tokenize real estate investments
or securities backed by real estate. Electronic securities or
security tokens are created, mapped, and managed in this
process on the underlying distributed ledger and blockchain
technology. In addition to the requirements of the underlying
“real” securities, a number of other technical functionalities are
taken into account in the development of the underlying back-
end infrastructure, examples of which are explained below:
•
Freedom of choice of on/off-chain functionalities: Both
the issuer (in the case of using the token holder portal) and
the platform operator (in the case of white-label SaaS use)
should have the freedom in customizing to have as many
Fig. 2. White-label platform use case. The platform provider receives license fees for operation and hosting the platform. The operator receives transaction and
emmision fees by allowing investors and issuers to interact.
functionalities as desired and permitted in the security by
contract or regulatory law, initially also executed off-chain,
i.e., outside the blockchain or smart contracts.
•
Upgradeability: Within the smart contract engine, smart
contracts should be individually upgraded for each token
by the platform operator to correct critical errors or
security problems.
The Token Holder Portal enables stakeholders to participate
in token-based issuances via a fully digitized and paperless
subscription route. As a frontend, it provides interactive user
interfaces.
III. MARKET ANALYSIS
Two main aspects must be considered before making a
market entry decision: the current competitive situation, i.e.,
existing providers, and legal restrictions. Both aspects are
considered below for Germany.
A. Existing Providers in Germany
The use of blockchain technologies in the real estate industry
is still at a very early stage of development, not only in Germany
but also worldwide [9]. The few existing providers of productive
solutions are initially concentrating on selected, specific use
cases. In addition, there are still significant geographical
differences, and Germany needs to catch up to the USA,
for example. A survey of existing approaches is presented
in [14]. Existing work focuses on geographical regions, e.g.
Europe [11], APAC [15], or on individual countries, e.g.
Japan [12]. In our considerations, we close the gap by looking
separately at the German market and presenting a concept
similar to Kasprzak’s Oracle Bank [16]. We further present
our software architecture, similar to the considerations in [17].
Bitbond Finance GmbH conducted the first security token
offering in Germany with the permission of the German Federal
Financial Supervisory Authority (BaFin). The fundraising target
of C3.5 million was not reached, with C2.1 million. However,
this was not a real estate Security Token Offering (STO) but a
corporate bond [18]. Bitbond has since changed its business
model and is looking to move away from lending and borrowing
(peer-2-peer lending) to become a technology service provider
for tokenization. The company provides the technology for
startup Klickown, which began offering real estate investments
via STOs in 2020 [19]. All other projects supported by Bitbond,
such as the placement of a token-based bond for real estate
company Vonovia, are traditional financings for the companies
themselves [20].While the clear technological standard for
tokenizations worldwide is based on an Ethereum protocol,
Bitbond uses the Stellar protocol. This has the advantage of
supporting investments and transactions in micro amounts.
However, Stellar for STOs has hardly established itself globally
so far and tends to be more vulnerable to disruptions and attacks
due to the smaller developer base and activity compared to
Ethereum.
Another German company that appears on the German
market as a provider of STO and “tokenization-as-a-service” is
Black Manta Capital Partners GmbH (BMCP). BMCP claims
to have tokenized a property with a total volume of almost 12
million euros in 2020, together with the real estate developer
Tigris Immobilien GmbH [21]. Upon closer examination, it
becomes apparent from the securities prospectus that BMCP
does not own the technology but advised Tigris by using the
technology provider Tokeny s
`
arl, based in Luxembourg, for
the tokenization.
One of the few German STO providers with its own
technology is Upvest. Upvest originally started as a crypto
custody provider and offers software or hardware for securing
the private keys of security and other tokens. However, the
responsibility for custody does not lie with Upvest, but with
the company that integrates the service. The company makes
its technology available to various companies that provide
consulting and project services in the STO area. These include,
for example, Cashlink GmbH and Micobo GmbH, but also so-
called crowd-investing platforms for real estate such as Exporo
and Klickown. However, Upvest changed its business model
and no longer supports tokenization directly. Instead, it intends
to develop a B2B solution as a securities trading bank, which in
the future should enable banks and financial service providers
to integrate their products with themselves [22].
B. Legal Requirements
The issue of regulation represents a significant market
entry barrier for the proposed white-label solution. Despite
initial regulatory frameworks, a comprehensive legislative
classification of blockchain technology in the context of
electronic securities and tokens has yet to take place in
Germany.
First, the relevant laws and regulations for traditional
financial service providers or financial instruments in Germany
must be considered, e.g., Kreditwesengesetz,Investmentgesetz,
and the Zahlungsdiensteaufsichtsgesetz. In particular, general
licensing regulations, supervisory law, and administrative
implementation regulations, e.g., accounting/tax regulations on
the auditability of the journal or immutability of transactions
on the blockchain, are relevant here. On the European level,
Directive 2004/39/EC on Markets in Financial Instruments [23],
as implemented in the Zweites Gesetz zur Novellierung von Fi-
nanzmarktvorschriften in Germany [24], should be highlighted
as an example.
Regulation varies greatly globally and within Europe for
security tokens as a digital or electronic representation of
securities. In Germany, the financial supervisory authority
BaFin initially published circulars on the subject, which
generally define cryptocurrencies as virtual currencies and place
them in the context of existing regulation. The regulation of the
crypto custody business is relevant to the project, which came
into force in 2020 [25]. In this respect, the custody solution
incorporated externally into the solution must have this approval
for an offer in Germany permissible under supervisory law.
Adopting the law on introducing electronic securities, which
took place in 2021, is also relevant [26]. This law stipulates, for
example, that electronic securities, like traditional securities,
are required to publish a securities information sheet or a
securities prospectus.
IV. DISCUSSION
The complexity of implementing the individual processes
is high, resulting in a considerable realization risk for the
intended overall system. One risk is the selection of a specific
blockchain. No long-established blockchain manufacturers are
comparable to the market-shaping database manufacturers. In
this respect, selecting a blockchain technology that is still young
represents a risky decision since it is still being determined
whether and how the respective blockchain technology will
be further developed and how any vulnerabilities that arise or
are discovered will be dealt with. In addition, it is still being
determined whether sufficiently low transaction costs can be
guaranteed. Theoretically, tokenization allows for an arbitrarily
high number of tokens for a specific real estate object’s specific
value and, thus, an arbitrarily small division into economic
units. The actual transaction costs in a network regularly make
these transaction volumes uneconomical. In extreme cases, the
transaction costs can exceed the transaction value and thus
make, e.g., the pro rata rent payment impossible.
Personal data, e.g., wallet addresses, is already protected
by reference keys, e.g., hash keys that can only be interpreted
backward when the data is imported. Even if a public
blockchain is used as the underlying infrastructure, the solution
is still not a generally accessible information system in the
sense of data protection.
V. CONCLUSIONS
Although tokenization is still a young topic, regulators and
regulatory frameworks are adapting quickly. Most countries,
including Germany, treat tokenized securities defacto analogous
to traditional securities in terms of regulatory and tax law [27].
Germany has also taken a pioneering role in this field by being
one of the first countries to include cryptocurrencies in the
German Banking Act and regulate the custody of tokens as
early as the beginning of 2020. Increasing regulation increases
costs but also leads to the professionalization of the entire
market. One can expect that the resulting greater security for
investors and planning certainty for providers will mean that,
for the first time, even long-standing, experienced, medium-
sized market participants can be convinced of the technology
as customers. This will result in clearly defined target markets,
which will continue to develop initiatives over the next few
years due to the legal situation that has now come into effect.
The planned software technology aims at various real estate
stakeholders who create, market and manage the tokenizations.
The leading target group for marketing the platform are issuing
companies, such as real estate developers, housing cooperatives,
and real estate funds. Banks that want to include real estate
in their portfolios as part of asset management represent a
particular target group. The platform is marketed at the same
time for the notaries involved in the processes.
ACK NOW LE DG EM EN TS
This work is part of the ZIM project “ImmoToken”, which is
funded by the German Federal Ministry for Economic Affairs
and Climate Action (BMWK).
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