REIT's on the blockchain
What is a Real Estate Investment Trust, and what opportunities do they offer when put on the blockchain.
In Brief
REIT's are a 3.5 trillion USD asset class that stands a lot to gain from moving onto the blockchain. The advantages include:
Increased liquidity
Reduced operating costs
Reduced transactions times (down from weeks to minutes)
Reducing friction and administrative costs
Voting
What is a REIT
A real estate investment trust (REIT) is a company that owns, operates, or finances income-generating real estate.
Modelled after mutual funds, REITs pool the capital of numerous investors. This makes it possible for individual investors to earn dividends from real estate investments—without having to buy, manage, or finance any properties themselves.
What Qualifies as a REIT in the US?
To qualify as a REIT, a company must comply with certain provisions in the Internal Revenue Code (IRC). These requirements include to primarily own income-generating real estate for the long term and distribute income to shareholders. Specifically, a company must meet the following requirements to qualify as a REIT:
Invest at least 75% of total assets in real estate, cash, or U.S. Treasuries
Derive at least 75% of gross income from rents, interest on mortgages that finance real property, or real estate sales
Pay a minimum of 90% of taxable income in the form of shareholder dividends each year
Be an entity that's taxable as a corporation
Be managed by a board of directors or trustees
Have at least 100 shareholders after its first year of existence
Have no more than 50% of its shares held by five or fewer individuals
Today, it's estimated that REITs collectively hold about $3.5 trillion in gross assets; publicly traded equity REITs account for $2.5 trillion
Types of REIT
Equity REITs
Equity real estate investment trusts are the most common type of REIT. They acquire, manage, build, renovate, and sell income-producing real estate. Their revenues are mainly generated through rental incomes on their real estate holdings.
An equity REIT may invest broadly, or it may focus on a particular segment. Here's a rundown of how each segment performed in 2019, according to the National Association of Real Estate Investment Trusts
In general, equity REITs provide stable income. And because these REITs generate revenue by collecting rents, their income is relatively easy to forecast and tends to increase over time.

Pro's and Con's for investors
REIT vs. Real Estate Fund: What's the Difference?
REITS pay out dividends; real estate funds can appreciate in value
A real estate investment trust (REIT) is a corporation that invests in income-producing real estate and is bought and sold like a stock.
A real estate fund is a type of mutual fund that invests in securities offered by public real estate companies, including REITs.
REITs pay out regular dividends, while real estate funds provide value through appreciation.
Regular Dividends could be achieved through tokenisation
Leading REITs trading on London Stock Exchange (UK)
as of 31 October 2021, by market capitalization
The smallest market-cap REIT in the UK is £7 million followed by £51 million
How are profits distributed to investors
REIT's are tradable on UK stock exchanges, and so investors are rewarded with the capital gains on their investments as well as a dividend payout. LAND currently has a dividend of 3.92%.
SL - REIT in Sri Lanka (introduced in 2020)
Prior to the global disruptions and market uncertainty due to COVID-19, the real estate market in Sri Lanka had shown steady year on year growth over the past several years. The general rate of increase in property values though had diminished in the past two years in comparison to the 2017/18 period.
SL-REITs are an alternative investment scheme, which offers investors an opportunity to invest in the real estate asset class in Sri Lanka without having to make direct investments in property. A SL-REIT is a portfolio of investments in property created by investing funds subscribed by investors through the purchase of units of a SL-REIT.
A SL-REIT Managing Company is licensed to operate a SL-REIT under the Securities and Exchange Commission of Sri Lanka Act No. 36 of 1987 as amended by Act No. 26 of 1991, No. 18 of 2003 and No. 47 of 2009 (SEC Act). Such managing company is required to comply with the terms and conditions applicable to a Managing Company of a Unit Trust as stipulated in terms of Part IV of the Schedule to the SEC Act to obtain such licence and will be governed and regulated by the following;
The SEC Act and the Directives issued thereunder
Unit Trust Code for Sri Lanka Real Estate Investment Trusts, No. 01 of 2020
SL-REIT Trust Deed
The Explanatory Memorandum
Applicable Laws relating to Tax
All applicable Laws relating to property in Sri Lanka
Interesting Read on introduction of REITS in Sri Lanka - FT Article
It looks like the main documentation needed is the Explanatory Memorandum and the SL-REIT Trust Deed
Tokenisation of REITs
Now to the interesting part, how can companies adapt the REIT model to launch on the blockchain.
Voting: It's possible to create a DAO - fund raise and raise capital and make investment decisions as a whole, then use regulated entities to structure a REIT and distribute dividends through tokens.
If you offer a token that had a fixed supply, backed by shares in a UK REIT - you could provide investors with yield on their current tokens generated through the steady rental income provided by the rental properties. It would be pinned to property and would be stable so could lend itself to becoming a counter-cyclical hedging tool within the cryptocurrency space.
What Problems does tokenisation of Real Estate solve?
One of the most significant issues with investing and selling real estate is the liquidity of the asset. In the normal course of a transaction, there are many different parties involved, especially with the legal transfer of the asset. Tokenization could potentially mitigate this issue in specific situations. As easy as it is to buy and sell various cryptocurrencies in the marketplace, tokenization could simplify transactions in the real estate space. Rather than the normal transfer of the ownership process that takes place when selling a share of ownership in a real estate investment, tokenization could cut out the middleman and allow ownership to be transferred directly from investor to investor.
Real estate tokens can represent a portion of the deed, an equity interest in a legal entity, ownership of the collateralized debt, or any other form of asset related to that real estate. The nature of the interest being tokenized may impact which regulations apply to the token.
The future of Real estate tokenisation
Although the development of real asset tokenization is still hindered by a lack of financial markets, a weak legislative framework around digital assets and a low level of awareness among investors, the tokenization of real estate assets is becoming an increasingly popular sector of investment activity. Real estate tokenization is a promising application of blockchain technology that will increase the investor base by increasing liquidity in the market, because it allows for more small-scale investor participation. This value proposition is particularly needed in real estate as the market for real estate is more valuable than any other asset class in the world, yet it remains highly illiquid. Tokens are the next phase in the development of blockchain technologies, allowing investors to move from highly speculative cryptocurrencies without collateral to asset-backed tokens. As the amount of functioning secondary markets for real estate tokens grows, the adoption of this investment platform will continue to grow as well, which will help the real estate market continue to thrive.
Automation of REIT management
For a REIT to be integrated on the scallop blockchain, there would need to be automation of the following services:
Exercising due diligence to ensure the property is valued correctly.
Collecting and investing lease rentals appropriately.
Ensure income is distributed in a timely manner.
Perform KYC and Customer Due Diligence.
Appoint a property manager to manage and maintain the real estate properties of the SL-REIT including ensuring validity of all material contracts.
Ensure adequate insurance coverage is obtained for all properties.
Appoint investment committee and ensure compliance of the REIT’s investments (as per SEC regulations).
Eliminating these tasks would allow Scallop to take a fee from investors, as well as the capital gains from token ownership from the initial fund raise.
Key Stakeholders of a REIT
An Individual or a Company who owns the property which is to be transferred into the REIT through the Managing Company
Trustee - A bank licensed by the Central Bank of Sri Lanka and appointed with the prior approval of the SEC, with a Fiduciary duty to hold the assets.
Managing Company - Perform duties in accordance with applicable Rules and Trust Deed and will oversee the Property Manager, Compliance Officer, Construction Contractor and any other Designated Persons.
Property Manager - The property manager would be required to Maintain the asset in a marketable condition.
What makes REITs a superior investment model
Simple business model any investor could understand.
Better earnings visibility reduces the possibility of over/under valuation.
Since most of the surplus cash is paid out, there is better transparency. New investments require debt or equity, which means additional scrutiny of commercial viability.
Limitation on share ownership reduces conflict of interest.
Higher efficiency; companies can expand rapidly due to easy access to capital. This brings in economies of scale.
How can blockchain add to this - we can see rapid expansion due to capital raise bringing a better economy of scale.
BlockChain and Real Estate
Real Estate Tokenisation - The process of real estate tokenization involves converting a real estate asset into a token on the blockchain and putting it for sale. You can also create tokens for properties under construction. These tokens represent an interest in real estate or can work to raise capital for investment development.
In Summary
REIT's are a 3.5 trillion USD asset class that stands a lot to gain from moving onto the blockchain. The advantages include:
Increased liquidity
Reduced operating costs
Reduced transactions times (down from weeks to minutes)
Reducing friction and administrative costs
Voting
REIT's are an exciting example of how blockchain technology can create real world utility, and we at Scallop see a bright future for the technology.
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