Global Research Report on Digital Development | Combination of REITS and Digital Assets

Author: Digital Governance Research

Digital Development Global Research Report Volume 2 Issue 38 (2024/9/23-2024/9/29)

This issue reviews the relevant information on the combination of REITS and digital assets for reference.

I. Combination and Significance

The successful model of REITs (Real Estate Investment Trusts) combining industry and finance lies in the synergy of assets, professional management, broadening financing channels, enhancing market liquidity and policy support, in order to achieve effective docking between the real estate market and the financial market, and create value for economic development and investors.

First, it can achieve the combination of asset quality and professional management.REITs usually choose high-quality real estate assets, such as commercial real estate, infrastructure, etc. These assets have stable cash flow and appreciation potential. Many asset digitization methods have gradually matured, but among the current exit channels, REITS may be able to combine innovation and compliance, and is a model that combines innovation of high-quality assets with compliance assurance.

Second, broaden financing channels and improve capital efficiency. For the original equity holders of real estate projects, REITs provide a new financing channel. By packaging and listing mature real estate assets, original equity holders can quickly recover funds, reduce asset-liability ratios, and optimize financial structures. On the one hand, digital assets can digitize more rights and assets through technical measures and technical devices, and on the other hand, combining with REITS may also promote the innovation and vitality of the financial system itself and improve capital efficiency.

Third, promote policy support and promote the standardized development of the industry. Many countries and regions have issued policies and regulations to support the development of REITs, creating a good policy environment for the integration of industry and finance of REITs. These policies include tax incentives, regulatory norms, and other aspects. Since the application and promotion of blockchain technology, its combination and innovation with real estate assets and rights has never stopped. With the continuous maturity of global financial system innovation and blockchain technology application in recent years, especially the deep integration of digital economy and real economy, the combination of REITS and digital assets may further promote a more effective combination of policies and industry development and the development of industry norms.

Second, exploration and methods

The combination of REITs and digital assets mainly includes new digital assets and the construction of WEB3 innovative assets.

1. Traditional digital assets such as data centers, telecommunications infrastructure and intelligent logistics and warehousing facilities are relatively common and typical types of REITS underlying assets.

Data centers. With the development of the digital age, the demand for data centers continues to grow. Data centers have the characteristics of long term, stable lease, huge migration cost and high customer quality, which can bring sustainable and stable cash flow from operating activities and meet the requirements of REITs' underlying assets. The demand for data centers is mainly concentrated in the tertiary industry, and its income mainly comes from rental income from providing server hosting, cloud computing and other services to enterprises and institutions; on the other hand, the construction and operation of data centers require a large amount of capital investment. Through REITs, assets can be securitized to attract more investors to participate and provide financial support for the development of data centers.

Telecommunication infrastructure such as communication towers. Telecommunication infrastructure such as communication towers is an important support for digital communications. These assets usually have long-term and stable lease contracts and relatively reliable cash flow. Using them as the underlying assets of REITs can integrate scattered telecommunications infrastructure resources, improve the operating efficiency of assets, and provide investors with stable returns.

Intelligent logistics and warehousing facilities. Against the background of the rapid development of e-commerce, the demand for intelligent logistics and warehousing facilities is increasing. Such assets use digital technology to achieve intelligent management and improve warehousing efficiency and service quality. Its income sources mainly include warehousing rent, logistics service fees, etc. As the underlying asset of REITs, smart logistics and warehousing facilities can leverage the power of the financial market to expand the scale of construction and enhance the competitiveness of the industry.

2. Exploring Web3 asset forms combined with real estate may require multiple approaches.

Digital property rights and tokenization. Digitize the rights and interests that are not involved in traditional powers in real estate property rights, and issue tokens representing some of the rights and interests through blockchain technology. These tokens can be traded and transferred in the Web3 ecosystem to improve the liquidity of real estate-related assets. For example, the rights and interests related to the creative value of a commercial real estate project can be divided into several tokens, and investors can purchase corresponding shares of tokens according to their financial strength to participate in real estate-related investments. At the same time, tokenization can also achieve clear definition and traceability of property rights, reducing transaction costs and risks.

Smart contracts and automated management. Use smart contract technology to formulate automated rules and processes for real estate-related rights and interests transactions and management. Smart contracts can automatically execute operations such as rent payments and contract renewals to improve transaction efficiency and transparency. In terms of property management, smart contracts can realize functions such as automatic collection of fees and automatic arrangement of facility maintenance, thereby reducing management costs. In addition, smart contracts can also trigger specific events according to preset conditions, such as automatically starting the default handling procedure when the rent is overdue.

Decentralized Finance (DeFi) and Real Estate Financing. Under legal and compliant conditions, combined with the DeFi platform, a new financing channel is provided for real estate projects. By issuing mortgage lending tokens based on real estate assets, real estate developers or investors can obtain financial support on the DeFi platform. At the same time, investors can also obtain income by participating in real estate mortgage lending. In addition, DeFi's liquidity mining and other mechanisms can be used to encourage users to participate in real estate-related financial activities and improve the liquidity and value of assets.

Virtual Reality (VR) and Real Estate Display. Using VR technology, an immersive display experience is provided for real estate projects. Potential investors can remotely visit real estate projects through VR equipment to understand their layout, facilities and surrounding environment. This can not only improve the marketing effect of real estate projects, but also provide investors with more comprehensive information and reduce the risk of investment decisions. At the same time, VR technology can also be combined with blockchain technology to realize the digital twin of real estate projects and provide a more intuitive reference for asset management and transactions.

Community governance and joint decision-making. Establish a real estate community based on Web3 to allow investors and users to jointly participate in the governance and decision-making of real estate-related projects. Through the form of a decentralized autonomous organization (DAO), investors can vote on major issues related to real estate projects, such as property management and facility upgrades. Community members can also jointly promote the development of real estate projects by contributing knowledge, resources and labor, and achieve value co-creation and sharing.

Data-driven decision-making and evaluation. Use blockchain technology to achieve secure storage and sharing of real estate data, and provide investors with more accurate and transparent market information. By analyzing real estate transaction data, rental data, user behavior data, etc., a more scientific real estate evaluation model can be established to help investors make more informed investment decisions. At the same time, data-driven decision-making can also optimize the operation and management of real estate projects and improve the value and income of assets.

III. Strategy and Practice

Strengthen asset screening and integration. Select digital assets with stable cash flow and growth potential, such as data centers, communication infrastructure, and innovative assets combined with WEB3. These assets usually have long-term lease contracts and reliable sources of income, which meet the requirements of REITs for underlying assets; integrate digital assets to form economies of scale. Multiple scattered digital assets can be combined into a large REITs asset package through acquisitions and mergers to improve asset operation efficiency and market competitiveness.

Attach importance to professional management and operation. Form a management team including professionals in technology, law, industry, finance, etc., preferably with relatively long-term professional knowledge and experience in the field of digital assets. The management team is responsible for the daily operation, maintenance and upgrading of assets to ensure the stable operation and continuous appreciation of digital assets; introduce advanced digital management technologies, such as the Internet of Things and big data analysis, to improve asset management efficiency and service quality. Reduce operating costs and increase returns by real-time monitoring of asset operation status and optimizing resource allocation.

Appropriately use financial innovation and financing channels. Expand and utilize financial innovation tools to provide more financing options for the combination of REITs and digital assets. For example, digital asset-backed securities (ABS) and blockchain bonds can be issued to attract more investors to participate; expand financing channels and cooperate with traditional financial institutions and emerging financial technology companies. Raise funds for the acquisition, construction and operation of digital assets through bank loans, bond issuance, equity financing, etc.

Attach importance to risk management and compliance operations. Establish a sound risk management system to effectively identify and manage market risks, technical risks, legal risks, etc. of digital assets. Reduce the risk level of the investment portfolio through diversified investment and risk hedging; comply with relevant laws, regulations and regulatory requirements to ensure that the combination of REITs and digital assets is carried out within a legal and compliant framework. Strengthen communication and cooperation with regulatory agencies, keep abreast of policy trends, and adjust business strategies.

Fourth, Risks and Challenges

Asset valuation logic needs to be reconstructed.The digital asset market is relatively new and changes rapidly, and its value is affected by a variety of factors such as technological development, market demand, and competitive situation. For example, the value of a data center may change significantly due to advances in cloud computing technology, new data storage needs, or the emergence of competitors. This makes it difficult to accurately assess the value of digital assets as REITs' underlying assets.

In addition, traditional real estate valuation methods may not be fully applicable when evaluating digital assets. Digital assets have unique technical characteristics and business models, and new valuation models and indicators need to be developed. For example, for data centers, in addition to considering traditional factors such as geographic location and building area, factors unique to digital assets such as server capacity, network bandwidth, and energy efficiency also need to be considered.

Technical risks and security.Digital assets such as data centers and communication networks require highly reliable technical equipment and systems to ensure their normal operation. Technical failures, hacker attacks, natural disasters, etc. may lead to the interruption or damage of digital assets, thus affecting the income of REITs. For example, a large-scale cyber attack may paralyze a data center, resulting in the loss of tenants and reduced rental income.

Digital assets usually involve a large amount of sensitive data, such as customer information, trade secrets, etc. Data leakage or security vulnerabilities may bring serious legal and reputational risks to the owners and users of digital assets. REITs investors will also express concerns about the security of digital assets, which may affect their investment decisions.

Regulation requires integration and coordination.Different countries and regions have different regulatory policies on digital assets, and the regulatory framework is still evolving. This brings uncertainty to the combination of REITs and digital assets. For example, some countries may have strict restrictions on the issuance, trading and holding of digital assets, which may affect REITs' acquisition and operation of digital assets.

Digital assets involve multiple regulatory departments, such as financial regulators, telecommunications regulators, data protection agencies, etc. There may be conflicts in regulatory objectives and policies between different departments, which require effective coordination and cooperation. This increases the regulatory complexity and cost of combining REITs with digital assets.

Market acceptance and investor education. Compared with traditional real estate, digital assets are still relatively unfamiliar to most investors. Investors may lack understanding of the characteristics, risks and returns of digital assets, and thus be cautious about investing in digital asset REITs. For example, some investors may be concerned about the technical complexity, value volatility and regulatory uncertainty of digital assets.

In order to increase the market's acceptance of digital asset REITs, it is necessary to strengthen investor education and popularize the basic knowledge, investment risks and return characteristics of digital assets to investors. Financial institutions and regulators can improve investors' cognitive level and risk awareness by holding seminars and issuing investor guides.