Real estate has always been seen as a lucrative and reasonably secure investment. People will always need someplace to live and work, no matter what the globe or the stock market does. Even though the real estate market expanded, the transactions in this industry are also complicated and costly, making real estate largely illiquid.
Since individuals still wish to engage in real estate, certain advancements have made dealing with real estate interests simpler. However, specific fresh approaches that surfaced this year go a step further in modernizing the acquisition, ownership, and sale of real estate. It’s known as tokenization. It is the process of employing digital tokens that are stored on a blockchain ledger to represent ownership of a real estate asset. Since tokenization occurs with blockchain assistance, it gives investors and owners various advantages and prospects that surpass conventional real estate trading practices. Increased security, more straightforward transactions, and greater liquidity are a few advantages.
What is the Tokenization of Real Estate?
Tokenization is, at its core, the process of digitizing a physical asset. With specialized blockchain platforms, real estate tokenization transforms the value of the real estate asset into digital tokens. Digital tokens, often called “security tokens,” can be compared to real estate shares.
- According to the analysis, the worldwide real estate tokenization industry is expected to increase at a compound annual growth rate of 21.09% from $1.92 billion in 2021 to $2.32 billion in 2022.
- Although relatively new, tokenization is already a hot topic in certain circles. The phrase refers to a bitcoin fundraising event where participants trade cash or cryptocurrency for “real estate tokens.” Simply put, tokenizing real estate is an excellent approach to securitizing actual assets. An asset is secured when it is divided into shares that may be sold to investors.
- The exact process is used to tokenize an asset: split it into shares, or “tokens,” each representing a specific portion of the real estate asset.
- They may also sometimes be referred to as “security tokens.” The immutability of the blockchain ledger enables the security process, and they may be exchanged through cryptocurrency exchanges or other trading systems (ATS).
Types of Real Estate Tokenization
The following categories can be used to categorize the market for real estate property digital asset tokenization:
- Commercial Tokenization: It involves tokenizing the ownership of commercial assets using protocols consistent with the law.
- Residential Tokenization: It is the process of tokenizing residential real estate fractional ownership for institutions, asset owners, developers, and investors.
- Trophy Tokenization: It involves tokenizing real estate assets, usually landmark structures in enviable locations with solid real estate foundations.
Problems Real Estate Tokenization can Solve
Many problems in the real estate sector might be resolved using this technology. Real estate tokenization may help with the issues listed below:
- Liquidity: Tokenization may aid in boosting the market’s liquidity. Investors will find acquiring and selling real estate assets simpler by developing digital tokens that reflect fractional ownership in these assets. This implies no need for a drawn-out and costly legal procedure when investors acquire and sell their ownership share in real estate assets.
- Fractional Ownership: By tokenization, people may be able to invest in real estate assets they otherwise wouldn’t be able to. More investors may participate in real estate investments by fractionally partitioning real estate holdings.
- Transparency: The real estate market may become more transparent due to real estate tokenization. A clear and transparent picture of ownership and investing activities is provided by using blockchain technology, which ensures that all transactions are recorded and cannot be changed.
- Lower Transaction Costs: Real estate tokenization may lower the transaction expenses related to real estate acquisition and disposition. This includes the potentially high expenses of brokerage fees, transfer taxes, and legal fees.
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Global Access: Tokenization may make real estate assets accessible to investors worldwide. Real estate tokens may be bought and sold by investors from anywhere globally, giving them access to a larger pool of cash.
How Does Real Estate Tokenization Work?
The development of real estate tokens aids in overcoming difficulties faced by conventional real estate. This is accomplished in the following five stages:
1. Deal Structure for Smart Contracts
In real estate tokenization initiatives, it is crucial to consider the shareholder type and regulatory requirements. Parties must establish and uphold ground rules for the present and potential investors before real estate tokenization can begin.
2. Digitalization of Assets
Using security tokens and smart contracts, real estate transaction data is recorded on the blockchain ledger. Parties must submit the following to benefit from the securitization of a real estate asset:
- Particular purpose vehicle structure with a single asset: Accredited investors may participate in the sale thanks to the SPV. Tokens representing the shares of the real estate property are used in this arrangement.
- Real estate fund organization: In this act, the fund’s units are represented by assets, much like a private equity fund.
- Finance Organization: This approach enables effective fundraising by tokenizing real estate. Then, in the third-party market, these assets might be sold to investors or accredited institutional purchasers.
3. Technical Selection
Real estate tokenization depends on selecting the appropriate tech stack, just like any other project. Following your selection of a real estate tokenization supplier, you must decide on three crucial issues:
- Blockchain and token preference: You and the team must choose the best blockchain. It’s essential to consider gas costs, speed, openness, reviews, and security while selecting the blockchain ledger.
- KYC/AML confirmation: Both investors and those purchasing tokens must complete KYC/AML on the platform.
- Markets, primary or secondary: You must decide on the market where you will sell your assets.
4. Distribution Of Tokens
Token generation and distribution come after your development team has developed smart contracts. Platforms for real estate tokenization provide various payment options for purchasing properties. There are two main ways to distribute tokens:
- Initially Distributed: This approach entails giving newly created tokens to investors in exchange for their original investments in real estate tokenization initiatives.
- Secondary Trading: This strategy entails listing assets on several exchanges so that all investors may trade them for other coins or users.
5. Support for Post-Tokenization
Post-support is the last but most crucial step in the tokenization process. This often requires overcoming mortgage-related obstacles, resolving legal concerns, monitoring activities, monitoring liquidity, and more.
Benefits of Real Estate Tokenization
1. Increased Transparency
Real estate tokenization is recognized for more transparency, as we previously indicated. Data encoded into a digital token is very safe since this procedure combines blockchain to store information and smart contracts to carry out transactions, but the terms of smart contracts are transparent to anybody with interest.
2. Improved Liquidity
Real estate has long been a desirable investment but has also been seen as a low-liquidity alternative. This is due to the significant capital needed, which necessitates much paperwork, frequent parties engaged, and an increase in the number of private participants. Real estate is tokenized, letting investors participate and increasing total liquidity quickly.
3. Easy Property Management
It is simpler to handle properties in contracts with conventional real estate, which is one of the clear advantages of real estate tokens. Delay in monthly rent payments is the main issue cited by landlords. The blockchain-based smart contracts or tokens that enable you to register documents into a specific database might swiftly modify this with tokenization.
4. Evidence of Ownership
Ownership rights have long been the subject of protracted court cases in the real estate sector. They not only result in legal issues but may also reduce the brand’s value, which costs a lot of money and effort.
Data is tokenized when stored on the blockchain, making it impossible for anybody to tamper with it. Owners can assess transactions from the past or present thanks to clear and acknowledged fractional ownership.
Limitations of Real Estate Tokenization
1. Securities Law Consequences
Real estate tokenization is a security, but analyzing each token is essential. If the token is a security, its issuance must comply with prospectus requirements or rely on an exemption, such as the “accredited investor” exemption. The issuer may also consider the relevant registration requirements and prospectus requirements.
2. Agreement with the Land Registries
Real estate tokenization must adhere to the existing land registration protocols. A real estate token issuer must balance the transaction following the land registration systems laws of the countries where the underlying real estate is headquartered since each country offers its land registration system.
3. Non-Fungible Tokens (NFT) vs. Security Token Offerings (STO)
The term “security token offerings,” or STOs, refers to selling digital assets like stocks, bonds, and other tokens. NFTs, also known as non-fungible tokens (NFTs), are digital assets kept on a blockchain. Since NFTs are distinct and non-fungible, they cannot be traded for one another. Security token offers (STOs), clearly securities according to the U.S. Securities and Exchange Commission, are often used for tokenization in real estate (SEC). However, security token offers (STOs) use fungible tokens, implying that one STO for a particular real estate property functions the same as any other STO for that asset.
Future Prospects for Real Estate Tokenization
Although tokenization is still in its infancy, experts believe the discipline has a bright and promising future. This is due to the procedure providing a practical and affordable means of real estate investment. Since this kind of investment vehicle is still relatively new, it will take more time for laws to be created in a unified set of guidelines.
- Asset tokenization real estate has the potential to revolutionize real estate investment in addition to being a great and safer investment choice by increasing liquidity in a largely illiquid asset class, lowering investor risks and entry barriers, and drastically reducing transaction costs.
- But for the market to expand, problems must be resolved, including transparent market regulation, market positioning, and the need for centralized transaction reporting.