One key advantage of tokenization is the opportunity to sell or trade real estate asset-backed security tokens on secondary markets. The greater liquidity of security tokens as compared to traditional real estate investments is probably the core of their appeal. Yet ensuring that tokens will have a stable value during secondary market trading is highly dependent on correct valuation.
When valuating a security token backed on a real estate asset to ensure maximum stability in secondary trading, there are three important factors about the asset itself that must be considered:
- Valuation of the asset
This is the most clear and obvious factor: what is the asset underlying the token actually worth? This may seem like the simplest data to obtain, but in fact, we have to beware of pitfalls. There’s a lot of hidden information that isn’t readily apparent and that asset owners may in fact be attempting to hide, such as plans for future developments in the immediate vicinity which may affect demand or desirability of the property.
- Dividends paid to investors
This factor relates to the ability of the asset to generate cash, such as through real estate leases. Here, the relationship is actually fairly straightforward. Tokens offering a higher dividend can generally be priced higher than tokens paying a lower dividend.
- Risk in the property/project
With any type of investment, there is always the risk of unforeseen circumstances. STOs are a very new type of security and to some extent their performance on secondary markets is largely untested. In addition, developers may be interested in an STO in part because they are unable or ineligible for traditional funding sources. This creates a higher degree of risk in the property or project, and for this reason, a factor which valuation will need to take into consideration – offering greater incentives to entice investors to accept a certain degree of risk in the project.
While ensuring proper valuation of the underlying asset is an important factor, it is not all-important as in traditional real estate investment. The value of real-estate backed security tokens depends not only on the asset’s value and on factors explored here to do with the asset and the project, but also on “crypto-based” factors, such as the quantity of tokens issued, the volume of trading, and liquidity, as determined by token reserves or excess cash flows.
Models for valuating the token itself are still emerging and will not be well understood until platforms are in place that allow secondary token trading in the very near future. This is the final piece of the puzzle that will finally make STOs a fully viable model for raising funds and creating wealth for token holders.
But even at this early stage, what is clear is that without a solid valuation of the property itself, the token’s value will fail to stabilize at an acceptable level in secondary trading—disappointing investors and in some cases permanently damaging the token and/or the asset owner’s reputation, seriously harming the chances for any further funding endeavors. As explored here, comprehensive valuation of the underlying property, its dividends, and the degree of risk are crucial first steps to ensure solid return on investment.
What it ultimately comes down to is the need for wisdom and experience in ensuring realistic and effective security token valuation. There are more factors involved than meet the eye and any developer or asset owner contemplating an STO must have expert advice and guidance through the crucial early valuation stages of the project in order to ensure success later on in secondary trading.
