The difficulty of valuing cryptoassets
REAL (Real Estate Asset Ledger) launched in 2017 aspiring to put real estate assets on blockchain. The project would enable property owners and developers to tokenise their assets, list them on the REAL platform and sell shares to investors. The idea is a continuation of a trend in the real estate industry (and the wider investment community) to make assets more accessible to smaller investors. In return for a share of the property, investors will be rewarded with rental income and any value increase at time of sale. The platform also takes a rather hefty 10% commission fee (so much for cutting out the middleman).
REAL are not the only platform aiming to do this. However, they are interesting from a perspective of trying to evaluate the current value of a cryptoasset.
REAL raised 37,049 ETH, worth back in September c. $11m. This was below the hard cap of $30m/200,000 ETH. As such, the team revised their budget on the 31st October. Rather than using $8m of funds on the ‘core operations’ (i.e. salary and other associated operational costs) the team elected to cut that budget to $3m. All ETH above this amount (e.g. c. $8m at this point) would be used for initial investments.
However, ETH’s subsequent explosion in value meant that the team were able to eventually sell their ETH for a total of $21m. Presumably this was in addition to the $3m already sold (as otherwise the sums don’t add up). Regardless, it is safe to assume that the team has c. $20m of firepower to purchase real estate assets.
So how do we value the REAL token at this point?
The REAL token only affords you the option to buy assets. It does not give you a claim on the company or the current dry capital. Therefore it makes no difference – if you are solely using it for the intended purpose of being used to buy an asset – if REAL is valued at $0.5 or $500. You will just have to buy more REAL if it is valued lower to invest.
If you expect the value of the REAL to appreciate then obviously now would be a good time to buy, as it currently sits nearly 90% off its ETH ICO price (0.0045 at ICO vs 0.00035 as of today). It has also fallen against the $, sitting at c. $3m today – less than 7x the capital the project possesses. But this is speculation – not utility. If the token afforded you a right to the firm's capital then it would be a no brainer; you would be buying at around an 85% discount. This certainty would however of course likely mean that the token value was more stable, as otherwise the opportunity for arbitrage would be so great.
REAL also carries with it a whole host of other issues that makes it hard to be too enthusiastic about its long term prospects.
For one, it is a clear security and therefore will struggle with exchange listings. This will impact on liquidity and awareness, meaning the project is at a risk of not being able to finance new investments once existing capital is deployed.
Real estate investing is also a risky proposition at the best of times. This is especially so when we are close to the top of the cycle in many regions and coming off the back of a decade long asset boom that has led to grossly inflated real estate prices. There is a reason why real estate investment management firms have significant resources and extensive office networks. It is worrying that a project which relies on investing in real estate (and these assets are decided upon by the team) that there was not a single real estate focused team member listed in the whitepaper – merely a few advisors. This is especially concerning when the geographic range of investment ideas is drawn up:
- Spain/Balaeric islands: “We are particularly focused on supply constrained markets with good airport infrastructure such as Ibiza, Mallorca, Menorca and Canary Islands.”
- North America “We want to be opportunistic if we get the chance of buying properties in unique markets such as NY [which I would note is one of the most competitive markets in the world]”
- Latin America
- Caribbean: “Consumer strength in the US is creating high growth prospects in several mature Caribbean hotel markets such as Riviera Maya in Mexico and Punta Cana in Dominican Republic. We are also identifying opportunities in niche luxury markets in smaller Caribbean islands.”
In an update on the 12th Feb, the team stated that “We have selected our first investment opportunity in Thailand.”
One of the few real estate advisors listed is Arnau Porto, Co-Founder of Blueport Capital. Blueport Capital are (I believe – it is hard to find information) the owners of Portblue Hotels. The REAL whitepaper states that: “We will partner with Portblue Hotels, an experienced hotel operator managed by one of our Advisors to be offered opportunities from their proprietary deal flow and have a management contract with them in the properties we purchase.” Deal flow is important, and partnerships with hotel providers are commonplace in real estate, but it does open up some conflict of interest issues that are not explored.
This article is not intended as a hit piece on REAL (there are hundreds of other projects in the same predicament), but more to explore simply the issues in valuing a project. I love finding projects close to launching a product that are 80-90% off their previous highs, but it is hard to put any real value on REAL at present. The co-founders both have strong records of launching online startups, particularly Bernardo Hernandez who sold Idealista (a Spanish real estate site) for €273m, is a board member at Desigual and an investor in many other firms.
The real estate industry is ripe for change. Fees are high, processes are slow and transparency is low. Blockchain can help fix these. However, REAL sums up many of the issues cryptoasset projects face. It is hard to see why a normal investor would use REAL over a normal investment site, where you don’t have to bother buying proprietary tokens. There isn’t the adoption of these niche tokens to provide the liquidity needed to buy REAL. Today’s volume is c. $2k – institutional investment opportunities are in the millions. Even if this liquidity comes, investors are then reliant on the team actually selecting, properly managing and successfully exiting asset opportunities. This is not a given, especially with the current state of the real estate market.
With that said, there are a lot of projects with less credentials and worse prospects than REAL trading at higher prices. A $3m valuation is very low relative to other projects in the space - one half decent exchange listing or a little bit of PR/hype around it and it will go much higher. Long term, REAL could end up being simply a novel way of raising funds for a real estate firm – rather than bother trying to get a $20m ticket from an institutional firm (which will take a lot of time, hassle and a much more extensive track record in real estate investing), why not just do an ICO?