A few years ago, the concept of owning and trading fragments of physical real estate might seem too far-fetched to many. But with the advent of blockchain technology, real estate tokenization offers new opportunities for fractional ownership and investment.
The long-awaited debut of Blockchain technology in real estate has made the tokenization of real-world assets a much-discussed topic in the industry. After all, tokenization ticks all the boxes that are often required to ruffle many feathers in a traditional industry – it is digital, global, complex and forward-looking.
But how exactly does real estate tokenization work and how can it help turn illiquid real estate property into liquid property? We’ll take a look.
What does tokenization mean?
Tokenization is the process of taking traditional assets (like real estate) and breaking them into digital tokens that can be traded on a blockchain. This makes it easier for people to invest and trade these assets and helps create a more liquid market.
- Tangible assets like precious metals, real estate, art and more;
- Intangible assets such as intellectual property rights; and
- Regulated financial instruments like bonds and stocks.
In the context of real estate, tokenization refers to the splitting (dividing property into smaller parts) of ownership through tokens stored on a blockchain. This way, investors can directly own a portion of a token’s underlying real asset without having to purchase or manage the entire ownership.
Tokenization can help make investing in real estate more accessible and liquid. Rather than buying an entire property, investors can now purchase tokens representing a portion of the property. This makes it easier for people to invest and also helps create a more liquid market.
The benefits of tokenization
Tokenization has the potential to revolutionize the way we invest and trade assets by making it easier and more accessible to everyone. For example, tokenization can help:
The conversion of illiquid real estate assets into “tokens” implies that a direct investment in real estate is treated as an indirect investment. This allows issuers to obtain higher liquidity, as the number of buyers is not limited to those who can afford the entire asset. Additionally, tokenization also enables fractional ownership, opening up investment opportunities to a greater number of potential investors.
The use of blockchain technology brings a new level of transparency to the real estate industry. Since the data is stored on a decentralized ledger, all transactions are visible to everyone on the network. Completed transactions can no longer be modified, manipulated or rolled back, creating a safer and more reliable system. This increased transparency helps build trust in the market and reduce fraudulent activity.
The use of smart contracts can help automate several processes involved in real estate transactions, such as title transfers, document verification, dividend payments, and compliance. This can help make the process more efficient and streamlined, saving everyone involved time and money.
Tokenization removes current limitations on real-world asset splitting, allowing a broader investor base to participate. Barriers to entry are removed as assets once available only to a select few are now available to more people. This increased accessibility helps to democratize the market and level the playing field.
Reduce geographic constraints
The global nature of public blockchains facilitates the tokenization of assets, making them available to investors anywhere in the world. This breaks down geographical boundaries and connects global markets. For example, real estate in New York can now be tokenized and made available to investors in Japan, and vice versa, provided the participating blockchain complies with relevant know-your-customer and anti-money laundering laws. silver.
How to tokenize real estate assets?
There are three steps involved in tokenization of real estate assets:
Step 1: Structuring the deal
This step consists of deciding on the type of asset to be tokenized. Typically, landowners:
- Form a subsidiary created by a parent company (to isolate the financial risk) called a securitization vehicle, or;
- Be part of a real estate fund or funds that already exist and focus on investing in real estate securities
During this step, shareholders’ rights to dividends, partial governance and shares are also determined.
Step 2: Choose a platform
The next step is to choose the tokenization platform to create the tokens. Some examples of popular platforms for tokenizing real estate assets include RealT, Harbour, and Slice.
The owners’ chosen platform then uses blockchain technology to create smart contracts, which are then used to manage and automate the sale, transfer and dividend payment of the tokens. Tokens can run on different types of blockchains, such as:
- Public Blockchains: These networks are decentralized and open source, meaning anyone can join and participate. The best-known examples of public blockchains include Ethereum and Bitcoin.
- Private blockchains: These networks are centralized and authorized, which means that only those who have an invitation from the network administrator can join them. Private blockchains are often used by businesses and organizations for internal record keeping and efficient management.
- Hybrid Blockchains: These networks are a combination of public and private blockchains, giving users the benefits of both worlds.
Step 3: Issuance and distribution of tokens
Tokens are created, issued and distributed during a security token offering (STO). Just like shares issued on the stock exchange during a initial public offering (IPO), security tokens are offered to investors in exchange for funding. After the STO is completed, these security tokens are listed on a digital asset exchange, where they can be bought and sold by investors.
How can the real estate market benefit from tokenization?
Tokenization provides new liquidity to the real estate market by facilitating trade and investment in real estate. Thanks to tokenization, investors can now buy and sell a condominium in a property, which was not possible before. This has created a more liquid real estate market and is helping to transform the way people invest and own property.
The global real estate market is currently valued at $280 trillion. However, despite being one of the largest markets in the world, traditional real estate remains largely illiquid and non-transparent. Critics attribute it to many factors, including high investment costs, long investment horizons, expensive intermediaries, and inefficient settlement cycles.
Tokenization helps solve these problems by bridging the gaps between traditional real estate and blockchain technology. According to a recent study by Moore Global, if 0.5% of the total global real estate market were to be tokenized over the next five years, the real estate market could grow exponentially to $1.4 trillion. Simply put, even a small portion of traditional real estate could dramatically improve market liquidity through tokenization.
How to earn cash without selling your real estate assets?
Traditional real estate principles dictate that earning cash can only mean one thing: selling your assets. However, with tokenization, this is no longer the case. Now owners can unlock the liquidity of their property without selling it.
Blockchain technology opens up a wealth of opportunities by allowing assets to be broken down into smaller pieces, representing ownership, furthering the democratization of investing in previously illiquid assets and improving market fairness. This is true not only for real estate assets, but also for company stocks, valuable art collections and more.
For example, let’s say a landlord’s million dollar rental property currently generates $10,000 a month in rental income. If they were to tokenize the property, they could issue 10,000 tokens at $100 each. These tokens could then be sold on a digital asset exchange to investors, who could then trade the tokens and receive rental income from the property.
The owner would still retain ownership of the property and would continue to receive rental income. However, they would also have the necessary liquidity without selling their assets.
The Potential Risks Associated With Tokenization of Real Estate Investment
When it comes to real estate tokenization, there are a few key risks that investors should be aware of:
- Regulation: Real estate tokenization is still a relatively new phenomenon, currently unregulated in most jurisdictions. This means that there is a risk that laws and regulations will change, negatively affecting the tokenized real estate market.
- Volatility: Digital asset prices can be highly volatile, which means investors could lose a substantial amount of money if they invest in a property that is going down in value.
- Fraud: As with any investment, there is always a risk of fraud. When investing in tokenized real estate, thorough research and due diligence is important to ensure the legitimacy of the project.
Despite these risks, the potential benefits of investing in tokenized real estate outweigh the risks for many investors. The key is to be aware of the risks and to conduct thorough research before investing.
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