Baker McKenzie, working in collaboration with Colliers, HKbitEX and Deloitte, jointly published the second edition of the Real Estate Security Token Offerings (STO) Whitepaper. The paper takes a deep dive into the end-to-end process of an STO and provides examples of how real estate developers can approach STO product structuring as well as key considerations for market participants.
Security tokens are generally regulated as securities in key leading international centers including the US, the UK, Japan, Singapore and Hong Kong. STOs, as an additional capital markets fundraising channel, enable owners of illiquid assets to tap a broad spectrum of investors through compliant secondary market infrastructure.
Traditionally, property developers have been tapping bank loans to support development projects. However, with policy-driven credit tightening such as PBoC's cap on real estate-related lending and the "3 Red Lines" that impose limits on developers' allowable annual growth in debt, a portion of this capital supply from banks may be at risk going forward. With mega projects such as Lantau Tomorrow Vision, Northern Metropolis in Hong Kong SAR and Julongwan in the PRC expecting to start in the next few years, coupled with increasing demand for grade A offices as the region sees rapid recovery from COVID-19, developers are likely to actively explore STOs as alternative fundraising channels for their projects across Hong Kong SAR and the Greater Bay Area.
In addition to traditional equity, debt and hybrid structures, which typically leverage only the economic rights of the property, the paper offers ideas for issuers to incorporate additional features such as utility benefits and property ownership rights to further differentiate their product offerings. One idea includes a staggered transfer of property ownership rights throughout the term of the STO. This is particularly relevant for residential properties where an investor can eventually become a homeowner at the end of the real estate development project cycle, with a meaningfully lower expected home acquisition price.
Joy Lam, who specializes in virtual assets and is one of the co-authors, said, "We see tremendous flexibility for STOs to be utilized in connection with a vast array of different types of assets and to carry a broad range of different rights for token holders, offering a revolutionary financial product that can be tailored to serve the commercial needs of each asset owner or property developer."
Joy continued, "For instance, top-tier developers and mid-market players working on single-asset projects may have divergent needs and dynamics, yet they can all utilize STOs as a means of financing. The potential for STOs to transform how asset owners and property developers meet their financing needs is only going to grow going forward, as increasing regulatory clarity and maturation of the key infrastructure and services required to execute STOs consolidates."
Joy has been on the forefront of advising clients within the virtual assets ecosystem in relation to virtual asset funds, tokenized funds, and non-fund tokenized offerings, among other matters. She has acted on many ground-breaking transactions, including advising Knight Dragon on the first tokenization of economic interests in prime London real estate, which marks the first property tokenization project in Central London.
A copy of the Real Estate STO Whitepaper is available here.