Overview
In the ever-growing industry of real estate, there has been the latest buzz – tokenization of real estate. But what is tokenization? Is it just a passing trend or a key to revolutionizing transformation in traditional real estate investments? Let’s find out.
The real estate business is considered one of the most lucrative investments. The increasing urbanization, growing population, and the need for residential properties and commercial spaces have driven substantial expansion in the global real estate market. But these high-value properties suffer from insufficient liquidity due to lengthy settlement processes, high brokerage fees, and heavy capital investments.
Real estate tokenization is a state-of-the-art technology that transmutes the way properties are invested in the modern world. By leveraging blockchain technology, it transforms real estate assets into digital tokens that can be easily owned by multiple investors and traded. It fosters faster deals and induces liquidity in the market.
Tokenization has set the stage for an innovative and modern way to interact and invest in real estate assets. Let us dig into what real estate tokenization is all about and how it could bring benefits to asset owners, investors, and the industry at large. Let’s explore!
What does Tokenization of Real Estate Entail?
Simply put, real estate tokenization is the process of breaking down a real estate asset into multiple, smaller parts. In the digital world, the technical term used to describe this process is called the “fractionalization of real estate.” These fractions are identified as digital tokens. These multiple tokens represent a fraction or piece of the asset.
To summarize, multiple investors can invest and purchase a piece of the asset without buying the entire property.
All this is done through smart contracts that automatize the fractionalization of real-estate assets once the predetermined conditions in the agreement are met.
Let’s illustrate the real-estate tokenization process with a simple example:
Suppose, a property owner wants to sell his house of 200,000 sq. ft. worth $30 million. Now, since his asset is highly priced, he is having difficulty finding a wealthy investor who could pay him an upfront amount to purchase the entire house. Here, tokenization comes into play and can easily help the asset owner sell his house through fractionalization of ownership.
Real-world asset or RWA Tokenization with the help of blockchain technology and smart contracts fragments the building into smaller slices that can be easily purchased by multiple investors without needing an individual wealthy investor. If the asset owner divides the house into 200,000 shares and each share is valued at $100, it is reasonable for smaller and a wider range of investors to invest. Both parties – the asset owner and the investors are benefited through fractionalization. Asset owners can easily sell and liquidate their assets. Investors can participate in high-value real-estate investments with smaller investment thresholds.
What are Real Estate Tokens?
After tokenization, the real estate asset is divided into digital tokens. The token represents the value and ownership rights of an asset on the blockchain’s distributed ledger.
They are also called governance tokens as they give certain rights such as the right to vote to token holders and make important decisions.
During tokenization, a digital token is generated that replaces the confidential data associated with the transactions with a string of random numbers and letters. This unique string is called a token. Tokenization is irreversible and protects the original data from cyberattacks and data breaches.
The asset token generated, also called a security token, signifies the legal ownership rights of an asset.
How Does Blockchain Help in the Tokenization of Real Estate?
Blockchain is a growing technology that is reshaping the way how real estate is managed by introducing digital tokens. Blockchain converts the ownership shares into digital tokens, making them easily tradable and transferrable between stakeholders. The encrypted smart contracts execute the tokenization process. All transactions are immutably recorded in the blockchain ledgers. Investors can purchase these digital tokens using fiat or cryptocurrencies.
Blockchain enables fractional ownership of assets making high-valued real estate accessible to average investors. Smart contracts ensure legal compliance and regulatory oversight preventing disputes and complications.
Blockchain tokenization is the core technology that automates real-estate investments, eliminates bureaucracy, simplifies transactions, and allows investors to become part-owners of the property which was not possible before.
The 5 Steps of Real-Estate Tokenization
Step 1 – Asset valuation & deal structuring
The first step is choosing the right property. Asset owners must determine whether the property is tokenizable and profitable for stakeholders. After choosing the property, the asset owner must consider factors like the market price of the asset, application jurisdictions, and regulations, fractional shares of the asset, etc.
Step 2 – Digitization
In this stage, the tokenization of the asset takes place. All information that is stored in the paper is digitally recorded on-chain. Smart contracts are deployed to issue digital tokens and the legal structure is framed.
Step 3 – Selecting the technology
Once the legal formalities are completed, the underlying blockchain technology is selected. Smart contracts are deployed. A custody solution is chosen to secure the digital tokens. Smart contracts should ensure that all KYC/AML verifications are confirmed to safeguard the interests of the stakeholders.
Step 4 – Issuance and distribution of tokens
In this phase, digital tokens are created and issued for sale in primary and secondary marketplaces. Investors can purchase tokens using cryptocurrencies, stablecoins, or fiat currencies.
Step 5 – Post-tokenization support
After tokenization, tokens are distributed among investors based on their investment shares. Additional support is offered for tracking fair distribution and management of funds, settlement of legal disputes, and other important decisions.
Benefits of a Tokenized Real Estate
Tokenization benefits both real-estate asset owners and investors. Here are some of its benefits:
Fractional ownership
Tokenization has introduced the idea of fractional ownership. Earlier, if an average investor wanted to invest in luxury and high-valued real estate, it would have sounded impossible. The fractionalization of an asset breaks it into smaller, affordable pieces and makes investments accessible for average investors. There is no need to buy the entire property.
Global access
Real estate tokenization has created a global platform, where investors from around the globe can participate. With blockchain technology in real-world asset (RWA) tokenization and digital wallets, anyone with an internet connection can invest. Furthermore, the decentralized marketplaces are 24/7 open allowing easy access to global investors.
Enhances liquidity
Tokenization optimizes real-estate investments without intermediaries, lengthy paperwork, and bureaucracy. Automated transactions eliminate human errors and minimize online fraud and data hacks. These factors streamline transactions making them cheaper and easier for stakeholders contributing to the overall liquidity of the market. Additionally, secondary markets offer decentralized platforms to liquidate assets easily.
Increased transparency and security
Blockchain’s decentralized framework adds transparency and immutability to transactions. It eliminates third-party involvements and manual transactions. It enhances network security, and efficiency and reduces counterparty risks and fraud. Since all transactions are automated, there is no scope for human errors or latency. There is no lengthy paperwork and transactions are settled almost instantly.
Free and open market
Traditional markets are over-regulated and subject to bureaucracy and third-party interferences. The decentralized nature of tokenization facilitates a free-flowing market, independent of unnecessary bureaucratic hindrances. Stakeholders can independently make decisions, participate in tokenization, gain asset ownership, and take control of their funds. Decentralized markets remain open and operate 24/7 and are not centrally controlled by any group or authority. This increases the efficiency and transparency of the markets and provides equal opportunities for stakeholders.
Challenges of Real Estate Tokenization
Real-estate tokenization is an upcoming technology and like any other new technology, it has certain limitations.
Smart contract security loopholes
Smart contracts should be thoroughly audited to prevent security breaches. If there are security glitches, hackers can steal confidential information and funds from stakeholders. Since these transactions are irreversible, funds lost or stolen can be irrecoverable.
Complex regulatory measures
Blockchain tokenization lacks a proper regulatory framework. The regulations may differ in countries and jurisdictions leading to confusion and disputes.
Complicated license requirements
Real-estate tokenization should take place through licensed tokenization platforms. These platforms are equipped to handle regulated security token offerings or STOs. In the current scenario, getting license registrations for tokenization platforms is difficult, lengthy, and complex.
Technical difficulties
It is difficult to verify and authenticate data in real estate tokenization. Whether the data provided by the asset owner regarding valuation, property details, or infrastructure are valid or not may create uncertainty in the tokenization process.
Implementing tokenization on a large scale through blockchain may create technical hurdles. People unfamiliar with digital wallets may find it difficult to manage and secure the passwords. This can lead to data theft or loss of funds.
In Conclusion – Could Real-Estate Tokenization be the Next Big Thing in Reality?
Is real-estate tokenization the next big trend or just a fad? In a nutshell, as technology evolves and there are clearer regulatory standards, the tokenization of real estate has the potential to go mainstream with increased market adoption. Tokenization is the future of decentralized finance and together with fractional ownership can make investments more inclusive and affordable for modest investors.
While it may be too early at this point, to be certain whether real-estate tokenization may become the next big trend, it will genuinely bring new investment opportunities for smaller investors. The potential benefits of real estate tokenization are huge and with time as more people become aware and embrace the technology, it will usher in a digital transformation and be more than just a passing trend.