Commercial Real Estate and Security Token Offerings (STOs)

Seokje Park외 1명
Xangle Partner Research
Apr 18, 2024


Table of Contents

1. Overview

2. STO, the Birth of a New Security?

3. What Changes Will STOs Bring?

4. Why Choose Real Estate Over Securities and Bonds?

5. How is Real Estate Tokenization Progressing in South Korea?

6. How Can Token Securities be Utilized in Real Estate Development Investment?

7. How Can Token Securities Be Utilized in Physical Real Estate Investment?

8. Conclusion


1. Overview

(Source: Yahoo Finance)

Larry Fink, CEO of BlackRock, the world's largest asset manager, emphasized that the future of financial markets lies in asset tokenization. This observation suggests that the trajectory Wall Street has quietly pursued in blockchain and ditigal assets revolves around asset tokenization. Likewise, JP Morgan, the largest investment bank in the United States, is actively developing a tokenization platform through its blockchain entity, Onyx. Citibank, one of the top three banks in the US, projects in its report "Money, Tokens, and Games" that the global asset token market will reach approximately $5 trillion by 2030. Just as derivatives have expanded the financial market, asset tokenization is expected to unlock new avenues in financial investments by leveraging traditional financial assets. Notably, the real estate market in South Korea exhibits promising potential in security token offerings (STOs). This article seeks to explore the opportunities and applications of STOs in the South Korean commercial real estate market.


2. STO, the Birth of a New Security

The financial landscape in Korea has evolved significantly, driven by legal and institutional advancements, with the Capital Market Act serving as the bedrock for regulating the entire capital market. Under the current Capital Market Act, financial investment products are classified into “securities” and “derivatives.” Securities are defined as financial instruments where investors provide funds and receive profits or rights in return. They are further divided into six categories based on the type of rights they represent:

  1. Debt Securities: Examples include government bonds, municipal bonds, and special bonds, representing the right of claim.
  2. Equity Securities: These encompass shares and preemptive rights, indicating ownership interests.
  3. Profit-making Securities: These signify the right to income from trusts.
  4. Investment Contract Securities: These denote rights associated with investments in joint ventures.
  5. Derivative-linked Securities: These indicate rights tied to the price of underlying assets.
  6. Depository Receipts: These reflect rights related to depositing securities and the deposited securities.

As outlined, the Capital Market Act clearly defines 'securities' within the six mentioned categories. However, what exactly constitutes an electronic security, a term often referenced but not explicitly defined above? Unlike the categories specified by the Capital Market Act, electronic security isn't a distinct type of security; rather, it signifies the format in which securities can be issued and traded. This concept parallels the historical shift from physical securities (paper certificates) to electronic form.

The management of physical securities posed numerous challenges, including storage and complexity in exercising rights. To address these issues, the Electronic Securities Act was enacted in 2019, facilitating the conversion of physical securities into electronic form. This transition resembles the evolution from paper currency to credit cards for payment transactions.

Similarly, security tokens represent an alternative format for issuing and trading securities, akin to electronic securities. They don't introduce a new category of security under the Capital Market Act's classification but rather signify a novel method of distribution, comparable to the shift from physical to electronic securities. To revisit the analogy, the progression from electronic securities to security tokens resembles the addition of mobile payment methods alongside credit cards, following the transition from physical to electronic securities. This discussion aims to explore the potential implications of STOs in the Korean real estate market.


3. What Changes Will STOs Bring?

The advent of new products or services tends to be more perceptible to consumers than to providers. This is because consumers directly experience the value of the product through their interactions. Conversely, changes within systems are more keenly felt from the provider's perspective as they strive to enhance the efficiency of internal processes. The transition from physical securities to electronic securities within the financial system wasn't strongly felt by us, the financial consumers, precisely because of this. Therefore, to anticipate the forthcoming changes introduced by STOs in the Korean real estate market, it's essential to consider what changes consumers can perceive through advancements in the system, rather than solely focusing on the token securities themselves.

With the implementation of electronic securities, numerous changes have occurred, including reduced issuance costs and improved transaction transparency. From the standpoint of financial consumers, the most significant change lies in the exercise of shareholder rights. Previously, physical securities required shareholders to retain them despite the risk of loss, enabling direct participation in shareholder meetings, capital increases, and dividends. To exercise shareholder rights, verification of shareholder status through the substantial shareholder registry system was necessary. However, with the introduction of the Electronic Securities Act, the process of exercising shareholder rights under the Commercial Act and the existing custody system has been streamlined and electronicized. Consequently, shareholders can now exercise their rights online without attending physical shareholder meetings.

From a systemic perspective, the most noteworthy development is the emergence of a format capable of accommodating investment contract securities, which were previously not covered under the existing framework of “electronic securities.” While standardized securities like equity securities and debt securities, widely used in the financial market, were suitable for distribution as “electronic securities,” limitations existed in distributing non-standard securities such as investment contract securities and (non-monetary trust) profit-making securities as 'electronic securities.' Therefore, the changes driven by security tokens are expected to primarily revolve around the utilization of non-standard securities like '(non-monetary trust) profit-making securities' and 'investment contract securities,' rather than the creation of new types of securities.


4. Why Choose Real Estate Over Securities and Bonds?

(Source: Blackstone)

Securitization involves the process of transforming assets into tradable securities within the capital market. Its primary goal is to boost liquidity by leveraging securities for fundraising and expanding investments.

The Korean financial industry places a significant emphasis on liquidity, a focus influenced by past events. During the 1997 financial crisis, companies prioritized securing liquidity through their real estate holdings. However, unlike stocks and bonds, which can be securitized and traded in the market, real estate assets faced challenges due to their lower liquidity. At that time, the legal and institutional frameworks for real estate securitization were inadequate, leaving sales as the only option to liquidate real estate holdings. Consequently, many corporate-owned real estate properties were sold off at undervalued prices to foreign investors. In response to these challenges, the Asset Liquidation Act was swiftly enacted in 1998. This led to the introduction of the Corporate Restructuring Real Estate Investment Trust (CR-REIT) as an indirect real estate investment mechanism aimed at enhancing liquidity. Subsequently, real estate funds were introduced, and the enactment of the Capital Market Act in 2009 further facilitated the securitization of real estate assets through various investment vehicles.

More specifically, the trend has been towards securitizing the assets of vehicles that primarily hold real estate portfolios, rather than focusing on the liquidity of individual real estate assets. Investing in REITs entails investing in shares of a company that invests in real estate portfolios as a whole, rather than individual properties. In other words, purchasing HYBE stock does not directly equate to investing in NewJeans. Furthermore, real estate funds have predominantly shifted towards private funds due to the limited activity in the profit-making securities trading market, resulting in a concentration on large-scale commercial real estate.

Consequently, it is anticipated that real estate, with its pronounced liquidity needs compared to stocks and bonds, where direct asset liquidity is feasible, will emerge as the most sought-after asset in the STO market.


5. How is Real Estate Tokenization Progressing in South Korea?