June 2019 may well come to be seen as a milestone in the evolution of real estate financing. Peakside Capital, in partnership with Brickblock Ltd., officially launched this month what it claims is the first-ever real estate fund using blockchain technology.
Peakside Income Fund 1 aims to raise €200 million to invest in core and core-plus office properties in first- and second-tier German cities, with a focus on assets ranging from €15 million to €75 million. The fund employs Brickblock's Scaling Funds platform to allow investors to make their investments online on a self-checkout basis, permitting trading of fund shares nearly instantly, according to Brickblock.
The fund's launch follows two years of hard, complicated work by Brickblock and a yearlong partnership with Peakside Capital. During that time, attitudes to the promise of blockchain technology in real estate have begun to shift, suggesting Peakside's fund may be blazing a trail that many more will follow, Brickblock CEO Jakob Drzazga said in an interview.
Jakob Drzazga, co-founder and
CEO at Brickblock
"As recently as 2017, there was a lot of skepticism about blockchain technology, and people didn't really understand it," Drzazga said. "Now they realize that this is actually something that will have a deep impact on our industry, maybe not immediately, but in the mid-to-long run. This is such a great leap in technology, especially when it comes to security and the possibilities that make processes much more efficient, much quicker."
Some uncertainty still attends blockchain technology and its potential uses in the real estate sector. At its core, blockchain technology offers a decentralized, distributed and public digital ledger that is used to record transactions across many computers so that the record cannot be altered retroactively without the alteration of all subsequent blocks and the consensus of the network. Advocates of the technology claim that it could bring cost savings, greater efficiency and transparency to the real estate industry.
Drzazga identified the potential of the blockchain for real estate financing in 2017 after conversations with his friend and co-founder Martin Mischke, who had experience with the technology through his involvement in cryptocurrency payment service Bitwala GmbH. Drzazga, a former property developer, had always found the process of raising funds for real estate projects protracted and laborious. Mischke's explanation of what blockchain technology entailed gave Drzazga an idea.
Q&A: Blockchain startup sees potential for growth beyond property fund market
"I realized that blockchain technology can really facilitate the transfer of a share from one person to another, without the middleman, in a trusted way," said Drzazga. "I suggested we use it for fund shares because this is what's really missing in real estate. I thought the technology was perfect for making an illiquid asset liquid."
Making their idea a reality came at a much slower pace. The two years since Drzazga and Mischke founded the company has involved long, hard hours to get both the technology and legal framework in place for their product to work.
Colin Nimsz, chief strategy officer, general counsel and business affairs at Brickblock, said that the new ground the company is breaking has meant tackling thorny legal issues, such as know-your-customer and anti-money laundering regulations. "Theoretically, if there were no legal complications and this was a well-established industry, meaning that the banks didn't ask a lot of questions and were all willing to do business, we probably could have launched this much earlier," he said.
Still, the lengthy process has given Brickblock and Peakside Capital room to get to know each other and ensure a seamless launch for the fund. The partnership between Peakside and Brickblock was the result of a search by Peakside for a blockchain platform provider that could facilitate its adoption of the technology to raise funds, Stefan Aumann, managing partner at Peakside Capital, said. Brickblock beat about seven competitors due to the specific real estate focus of its blockchain platform, he added.
The blockchain platform will open up access to many more investors for Peakside Capital, said Aumann. "It will hopefully enable us to approach a whole different set of investors. We can go down now to as low as €125,000 per ticket, which isn't technically retail-investor level, but it is broadening our investor base significantly using a web-based sign-on process for a group that we otherwise couldn't cater for," he said.
"Perhaps most importantly is the transferability of shares, which closed-end funds can't offer. But using blockchain technology, we can offer our investors availability of these shares to a much larger extent than we would have traditionally," he added.
Peakside has received a lot of interest in the fund from clients and investors, said Aumann, which has made him confident that it will reach its €200 million target. Still, there remains some uncertainty as to how the sector will react to this new way of working. "The one big unknown here, not only to us but to everybody who is working in the space, is how investors will react to the technology part of this. We will have to see," said Aumann.
If all goes well with the fund, Aumann expects Peakside to launch similar blockchain-based funds in the future.
Brickblock has already begun working to bring in more clients like Peakside. The last two years have involved building the company's foundation, with the next two years focused on spreading the word about blockchain and Brickblock, said Drzazga. "We are now ready," he said. "We have the first use case and we want to scale our operation."