He wants to sell you a small piece of Gangnam for about 5 bucks

Finance

Published: 16 Aug. 2021, 20:26 Updated: 18 Aug. 2021, 19:36

He wants to sell you a small piece of Gangnam for about 5 bucks

Buildings cost a fortune in Seoul, especially in the Gangnam District in the southern part of the capital city, but now there is a way to own a piece of high-end Korean property for 5,000 won ($4.30).

Yea Chang-whan, CEO of three-year-old Kasa Korea, came up with an idea to make assets more accessible to everyone by using fractional ownership.

The value of a building is divided into tradeable units so it's affordable for most people. Ownership is represented with digital asset-backed securities (DABS) tradeable on Kasa's mobile platform.

As with an initial public offering, DABS of buildings are offered for public subscription, selling at 5,000 won a piece.

The building then lists on Kasa's platform, and DABS-holders can start trading their units as in the stock market or hold onto them for dividends. Dividends are paid out to investors every three months based on the rental income a building earns from tenants.

If the building is sold, the money earned from the sale would be distributed to investors prorated per share.

In Kasa's latest offering, which was for a building in Seocho District, southern Seoul, DABS sold out in two hours and 27 minutes in a 4-billion-won sale. The securities were sold to 3,025 investors.

The shares sold out much faster than Kasa's first sale, for a building in Yeoksam-dong, southern Seoul, in which about 10 billion won was raised in 8 days.

“Our expectation is that as we grow in users and as we build trust among the people that use our platform, that speed and the total amount of capital raising will increase," Yea said as he sat down for an interview with the Korea JoongAng Daily last month. "I do want to emphasize that of the 3,025 people who have invested in the second building, 63 percent had already invested in Kasa before. So there is a very high percentage of people who have invested again."

Yea was a computer science major at Stanford University, California. His expertise has been important to the start-up, which he defines as a proptech company. Proptech, is a combination of words property and tech.

"We are definitely a tech company that uses blockchain as a solution," Yea said. "So my background as a computer scientist definitely helped me out, and we have big plans actually in the future, to continue using data processing, artificial intelligence and different technologies to make the experience of using Kasa much better for our users."

He is also the co-founder of local crowdfunding platform Tumblbug. After leaving the company, he worked at social impact venture capital firm Yellowdog.

He founded Kasa Korea in 2018.

The following are edited excerpts of an interview with Yea.

Yea Chang-whan, 31-year-old founder and CEO of Kasa Korea, speaks during an interview with the Korea JoongAng Daily last month at the company's office in Gangnam District, southern Seoul. [PARK SANG-MOON]

Q. What was your motivation for founding Kasa Korea?

I used to study at Stanford University. It was actually one of the most expensive neighborhoods to live in. Real estate there was very, very expensive, and the valuation goes up very steeply every year. It was very clear that if I were to graduate and try to get a house, whether buying or renting, it was nearly impossible. So I wanted to figure out how we can alleviate that and basically make assets and properties more accessible to everyone. That's where we started the mission of Kasa.

Q. How are Kasa's DABS different from other real estate investment instruments like real estate investment trusts (REITs)?

One major thing is that REITs, by definition, you are investing into a stock or a shareholding unit of a real estate company. That company would be owning a portfolio of real estate.

Kasa is a single asset investment. So you are investing and choosing a specific building compared to a portfolio of assets. That experience is actually much more important when you are trying to buy a building. For REITs, because you are investing into a portfolio, you don't really have a say.

The second part is that it takes a really long time to list an actual REIT on the stock exchange. It also costs a lot of money because you have to go through underwriting and get approval from the Korea Exchange. It typically takes about six months to two years to list a REIT.

If you were to list or liquidate an asset on Kasa, it would take roughly about one to two months. As a property owner, you don't have to go through all the hassles of underwriting, or going through the listing approvals. You just come to us.

The first building to be listed on Kasa Korea's platform, in Yeoksam-dong, southern Seoul [KASA KOREA]

Q. With Kasa being a new investment platform, how do you persuade investors that this business is legitimate?

Even though I am the founder of Kasa and we work very diligently here to operate a safe environment and platform, we do not think that anyone would trust Kasa from day one. It's a new platform.

The main question would be if I were to deposit or withdraw money, would that be safe in the incident that Kasa might not be operating anymore.

All the capital actually goes into a trust account, which is separate from our corporate accounts, at Hana Bank. So you are essentially sending money to Hana Bank. We are leveraging the built-up trust of a licensed bank so that our users' money is actually safely warehoused.

We are similarly separating the ownership from Kasa's assets so Kasa will not own any properties that list on our platform. All of them would be entrusted to a licensed trust firm. That would mean in the case Kasa actually ceases to operate, all of the beneficiary rights would be guaranteed by a third-party trust firm.

Kasa Korea sold off part of the 15-story building in Seocho District, southern Seoul, to 3,025 investors in a form of digital asset-backed securities worth 4 billion won in July. This building is the second building listed on Kasa's platform. [KASA KOREA]

Q. How did you build a relationship with Hana Bank?

So, it really kind of changed our future when we received conditional approval for the sandbox program in May 2019 [from the Financial Services Commission (FSC)]. Before that it was just an idea.

We were very fortunate to have been the most prepared among applicants. And when the news came out, it drew a lot of attention from other financial institutions especially those in the securities and brokerage areas and banks. We were just a one-year-old company, but we were signing memorandum of understandings with Hana Bank and trust firms and Shinhan Investment before the year-end.

And of them, some actually ended up investing into our Series A round and became our shareholders.

Q. What is a sandbox program and how does it affect your business?

By definition sandbox is a temporary approval given to an innovative company that is operating a business that has not been defined in traditional laws or regulations. So we are given a maximum of four years to operate this business.

But the intention of the sandbox program is to make really good businesses permanent. So our eventual goal is to make our approval more permanent and potentially get a license that is related to that. But for now we are temporary in Korea.

Q. You said you received conditional approval.

After the conditional May approval, we spent six months working with the regulators to test our system. So they visited our office multiple times. We showed them that we could go through technical issues in terms of performance, security, all these issues that are crucial when you are operating a stock exchange.

Q. How did you prepare to obtain approval for the sandbox program?

The idea of fractional ownership or trading isn't something completely new. The hard part I think is how are you going to execute that and what are the legal grounds that might enable that.

We had answers to a lot of the detailed questions on how we will actually build a platform. We submitted a complete rulebook that dictates how we are going to operate in the market.

That's very important for the regulator, because it is important to grow a business, but at the same time make sure that investors in Kasa are protected. When I say protection, I mean investors are not losing money for reasons other than their investment decisions. That includes information security, privacy issues, disclosing of the right information at the right time.

Aside from that, Kasa was acknowledged because of our potential social impact. I presented to the FSC that the reason they should be approving us is to alleviate impact of gentrification.

If you think about partial ownership of buildings, what that can enable is to eliminate the wall between the landlord and a tenant. And this becomes a very interesting social interaction because if you as a rent payer can actually own the part of the building, then you don't essentially have to pay the rent because you are also the owner.

Screen capture of Kasa Korea's mobile app [KASA KOREA]

Q. How do you persuade landlords to liquidate assets on your platform?

We are focusing on small to middle tier assets, with valuations ranging from $5 million to $80 million. It's actually not the asset type that big institutions or asset management companies would normally look into. Professional institutions with larger capital would be looking into assets at least $100 million.

So there is a lot of demand from the building owners in this area who do want to sell their assets but because the market itself is so illiquid, they haven't been able to find the right buyers at the right time.

Kasa is a refreshing alternative for these people because we are essentially providing an IPO market for their assets. Roughly in our pipeline alone, we have received over 350 properties inbound who are interested in liquidating their assets as a listing on Kasa.

From the property owners' perspective, it's definitely a huge plus if they are able to find a buyer and Kasa is basically a kind of a system where we can always be there if the price is right and our demand from the user side is there.

Q. So are the landlords selling their assets to Kasa?

All the property owners have the intention of selling their assets when they approach Kasa. We partner with a trust firm in Korea that is licensed to be a custodian for these properties.

So property owners who wish to list their asset on Kasa would sign a trust agreement with one of our partner trust firms. Based on that agreement, we are able to issue asset-backed securities digitally.

Q. You mentioned DABS holders will receive rental income in a form of dividends. But that's when there is a tenant in the building right?

Our first building in Yeoksam-dong, its tenant is PCA Korea, which is a branch school of an American school in the United States. They are the sole tenant, master leasing the entire building for five years.

If the five years expire and they would no longer extend their contract, yes there will be a loss of a tenant and we will have to change the tenant. But meanwhile, the school is paying the rent.

The same goes for our second building. Our tenant is a law firm who has already been in the building for more than 7 years.

I think one of the main investment points that people would want to look into is obviously, is there a tenant, and we are definitely disclosing that on the offering through our securities filing. So you can see who the tenant is, how long they are going to be contracted, and how much they are paying,

Of course, the rental income that we payout as dividends are not the rent itself. It would be the rent minus whatever expense that are used to actually manage the property. So it's more the net rental income.

Q. How is blockchain technology utilized in Kasa?

The distributed ledger technology has been a core part of our system. We are not issuing cryptocurrency, but the main purpose is to go into the custodial and settlement aspect of securities after they are traded. In a traditional capital market structure, we would have a securities broker who would be putting in orders, taking orders, we would have an exchange and also a clearing house.

These three aspects are separate and they create, own, and manage their own ledgers of who owns how much. Every time a trade happens, they would have to sync these ledgers across different parties and that's why we have settlement periods. Typically, the period is T+2 in Korea and T+8 in different countries depending on how inefficient the system is and how the market participants are syncing the ledgers.

[Blockchain technology] enables near instant settlement of securities by inviting all of the market participants -- banks, trust firms, Kasa and others -- into a private blockchain. So instead of waiting for two days to draw your capital gains, if you have sold your DABS, then almost immediately you will be able to withdraw capital from the system.

Q. Does Kasa have plans to go abroad?

We are very interested in expanding outside of Korea. Currently, Kasa's exchange can only list assets located in Korea. By the way that's almost a two-or-three-trillion-dollar market, so it's not a small market.

We believe that the business model and our mission can be applied to anywhere else in the world. What we have proven so far is that we can run a full length exchange platform regulated by the jurisdictional government in Korea, and our plan is to either directly export this model into other countries or partner with really good overseas partners to build a similar platform in other countries.

Q. What is your vision for Kasa?

Our mission statement is to make the world's assets accessible to all. It's a very simple goal but also very powerful. We just happen to start with assets, specifically commercial real estate in Korea, but as we talked about earlier, it could be commercial real estate in Singapore or Thailand or Hong Kong.

We also plan to go into other asset types. So not just commercial real estate but it could be intellectual property, it could be ships, airplanes, it could be art pieces, all these different assets that traditionally have not been accessible to the general public.

But I do want to emphasize one more aspect. That's to go down the value chain in real estate. As a platform, we are currently just providing the opportunity to own or trade partial ownership of real state. But if you look at the general landscape of how real estate is developed and sold and resold, brokeraged and managed, all of these areas are ripe for innovation.

Proptech itself is a generally very young and new area around the world. If we can go into asset management as a tech company, or into real estate development from the aspect of a tech company what would that look like. So these are very interesting questions that I do want to go into.

For instance, if we can minimize property management fees or expenses by automating building management through various kinds of tech and systems then more profit goes to our investors.

At the same time if we were to increase tenant lifespan or be very good at replacing tenants when there is vacancy, then that could actually grow the overall profit of a certain building.

BY KIM JEE-HEE [kim.jeehee@joongang.co.kr],VIDEO BY JEON TAE-GYU [jeon.taegyu@joongang.co.kr]