Structural review and performance evaluation of real estate tokens

Abstract

Today, while the digital world is developing rapidly, it is also transforming. Revolutionary technologies are at the center of this transformation. One of these is blockchain technology, which forms the main theme of this thesis. Blockchain technology, which we were introduced to in 2008 with the Bitcoin whitepaper published by a person or group who still maintains their anonymity, has given rise to a new monetary system debate. Monetary systems have been intertwined with social events throughout history. Developing social needs have changed monetary systems and enabled them to adapt and respond to needs. A person or group behind Bitcoin named Satoshi Nakamoto also described the global economic crisis of the period when they published this study as a global disaster and proposed Bitcoin as a new monetary system. Blockchain technology, which came to the fore with Bitcoin, introduced us to the concept of decentralization and the new internet while creating a new monetary system. The concept of decentralization is considered to have ushered in a new era of the internet. In the first period of the Internet, which we call WEB1, it was possible just to access data digitally. In this period, called the primitive period of the Internet, users only had the ability to view, it was not possible to create content by users. This period, which contained only fixed content, was defined as the read-only web and the internet was used only as a library. The WEB2 era started in the early 2000s, offered a user-centered, collaborative and participatory environment. In this period, users have become stakeholders who shape the internet environment with all the data, text or images they add to the internet environment. Therefore, a two-way interaction came to light. In this period when all popular social media platforms such as Facebook and YouTube were created, data shared on the internet began to be kept in the database of these private organizations. In this period, when all digital investment platforms, digital wallets and digital payment solutions started to be used in addition to social media, the ability to store data was available only in the relevant centers. Blockchain technology formed the basis of the WEB3 era, which is called the new era of the internet, where the storage, verification and control of all these data are managed without being tied to a single center. With the transition to the new age of the Internet, the concept of digital ownership has become a subject of debate again. Thanks to blockchain technology, users have gained the ability to control the data on the assets they own, by providing ownership without the need for any central institution. This situation has laid the groundwork for tokenization technology, which can be defined as the creation of digital representations of assets. There is an opportunity for users to store and exchange a digital representation of their deposits, real estate or works of art in their decentralized wallets. These digital representations are developed by various companies as investment products as well as a storage tool. Real estate assets are also one of the financial assets evaluated in terms of creating a digital representation. Projects are currently being developed in this direction and offered to both corporate and individual investors. Within the scope of this thesis study, both the process development phase and financial performance of the tokenization of real estate assets are examined. Reasons such as the fact that real estate assets have been considered a non-liquid asset class throughout history, lack of transparency in the market, high investment costs, high-cost brokers, investment being tied to real estate for a long time, high market entry costs and existing bureaucracy obstacles in international investments have made it necessary for the tokenization of real estate assets. creates motivation. The tokens to be created can provide partial ownership of real estate and enable direct transfers without brokers. At the same time, all these transactions made on open blockchains can be viewed transparently by everyone. In this way, real estate investments can be made with small budgets, buyers and sellers can come together without the need for brokers, and international direct investments are possible. This thesis study includes quantitative and qualitative research on real estate tokens, one of the leading security tokens. While security tokens based on blockchain technology are rapidly becoming widespread as new-age investment products, real estate tokens have long stood out as one of the most popular of these tokens. The underlying reason for this is that the real estate sector is associated with low liquidity and long and expensive transaction processes. Studies in the literature have analyzed the structural structure of real estate tokens and concluded that they will lead to a significant increase in liquidity for the real estate market. Tokenization platforms and real estate market experts believe that tokenization will solve many problems in the traditional market, as the products that will emerge with the tokenization of real estate assets will increase liquidity by removing high entry barriers to the market and create a secondary market where intermediaries are minimized. This technology, which can provide safe access to a wide market in a short time, theoretically means a new platform for both debt and capital increase. The aim of this study is to analyze the performance of these tokens as investment instruments by examining the financial data of real estate assets tokenized by RealT, one of the leading asset tokenization platforms. In addition, within the scope of the study, the structure of real estate tokens as financial products was examined and their similarities and differences with traditional products were discussed. In this thesis study, a historical data set covering a 1-year period of 151 real estate tokens tokenized by RealT and traded in the secondary market was used. 139 of these tokenized properties are in Detroit and 12 in Chicago. Four different indices were created based on the data set of tokenized real estate. The first of these indexes is the equal-weighted price index, the second is the market value-weighted price index, the third is the equal-weighted return index, and the fourth is the market value-weighted return index. For performance measurement of the created tokenized real estate indices; A financial asset pricing model was used together with Sharpe and Sortino ratios, which provide the opportunity to perform risk-based return analysis. The created indices were compared with reference indices and the results were shared. For comparison, house price indices for Chicago and Detroit, where tokenized real estate is located (Chicago HI, Detroit HI), indices of real estate investment trusts in the USA (S&P 500 REIT), which is a similar investment product, and non-asset-based real estate traded in the decentralized finance market. DeFi Pulse Index (DPI), which is about tokens, was used. According to preliminary analysis, the index with the highest return relative to risk was the equal weight total return index (EWTTR) for tokenized real estate. The index with the lowest return according to risk was the DeFi Pulse Index (DPI), which focuses on decentralized finance products that are not asset-based. According to the result analysis, all reference indices had negative beta values against the created tokenized real estate indices. In summary, within the scope of this study, an empirical analysis was made by comparing the financial performance of real estate tokens actively traded in the market with certain reference indices. The empirical result finds that token indices perform positively relative to the crypto market and traditional market indices in the context of risk-adjusted returns. This positive performance can be explained by investors' interest in real estate tokens, a new investment product, and a success of the RealT company, which selected the real estate to be tokenized. However, in order to make a more accurate comparison, it should be underlined that the increase in the number of real estate tokens and the liquidity in the secondary market is important.