Traditional real estate transactions are expensive, slow, and complicated. Real estate tokenization makes this process economical, fast, and simple.
The size of the global real estate market was valued at $3.69 trillion in 2021. Also, its growth rate is expected to grow at a Compound Annual Growth Rate (CAGR) of 5.2% between 2022 and 2030.
In the U.S. alone, real estate revenue is expected to increase by 4.6% from March 2023 to March 2024 according to Corelogic HPI Forecast.
That’s huge, right?
We are living in the most technologically advanced period ever. It used to take decades for a major tech advancement, but now every change happens in a few years.
Impactful technological progress is yet to happen in the real estate industry. That’s where real estate tokenization comes into the picture.
First, let’s understand the concept of tokenization.
What is Tokenization?
Tokenization is the process of converting real assets into digital tokens. Each token’s value depends on the asset’s value and the number of fragments.
Security tokens are digital tokens that represent an asset. In the case of real estate, a security token represents a physical property.
The physical property can be land, residential, or commercial buildings. Moreover, you can buy and sell these properties with the help of security tokens.
Digital tokens are built using blockchain technology. In addition, these tokens represent your ownership of the asset.
Now let’s get into real estate tokenization.
What is Real Estate Tokenization?
Real estate tokenization is the conversion of real estate into the form of a digital token. Blockchain technology plays a major role in representing and securing your ownership rights.
Apart from securing your ownership rights, real estate tokenization allows you to own fractional shares of a huge property. For example, you can buy a piece of land that fits your budget.
There are mainly three types of real estate tokenization. They are:
- Residential Tokenization: This tokenization process involves the ownership of residential real estate for institutions, asset owners, investors, and developers.
- Commercial Tokenization: This process involves tokenizing commercial properties with the help of legally agreeable protocols.
- Trophy Tokenization: Here, tokenization is associated with popular buildings in important locations.
Now that you have understood real estate tokenization, it’s time to know how blockchain transforms the real estate industry.
How Does Blockchain Transform the Real Estate Industry?
As mentioned earlier, blockchain plays a crucial role here. Smart contracts and Distributed Ledger Technology(DLT) act together to revolutionize the real estate industry.
Blockchain technology helps you record and execute your digital property’s ownership. Also, you can enjoy cheaper, more efficient, and faster ownership transactions.
As you know the role of blockchain in real estate tokenization, let’s understand how it works.
How does Real Estate Tokenization Work?
The major processes associated with real estate tokenization are:
#1. Deal Structuring
In this phase, property owners choose the asset type to digitalize. Also, applicable regulations, shareholder type, and jurisdiction are considered in this phase.
Here, the shareholder’s right to their asset is made clear. These rights consist of equity shares, dividends, and partial governance, depending on the project.
In addition, regulatory frameworks and tax structures are also taken into consideration.
#2. Digitization and Selection
This second phase involves the storage of asset-based information on the blockchain. In this phase, smart contracts store the information.
The required blockchain is selected at this phase. Therefore, the selection criteria for blockchain depend on the investor’s interest.
#3. Issuance, Distribution, and Marketing
During this phase, the token is issued using a Security Token Offering (STO). STO is the process that involves the security token’s initial sale.
To get a clear idea, STO is similar to the stock market IPO (Initial Public Offering). Unlike stocks, STO allows investors to buy security tokens for real estate assets.
Another method is registering the asset with an entity such as Real Estate Investment Trust (REIT). In this process, the token is created after the registration process.
St. Regis Aspen Resort Tokenization is a notable example. Here, St. Regis Aspen Resort’s owner created a REIT asset, Aspen Digital. Aspen Digital was then converted to Aspen Coins.
Aspen Coins were built using the ERC-20 token standard. A total of 18 million tokens were sold at $1 per token, raising a total of $18 million.
Before the token issuance and distribution, it is mandatory to qualify for regulatory standards. The regulatory framework plays a crucial role in the determination of taxes.
Once the real estate tokens are for sale, you can buy them using stablecoins, cryptocurrencies, or fiat currencies. In addition, the purchased tokens will be available in your crypto wallet.
Finally, the marketplaces conduct promotional activities on various online platforms. The marketing process helps to reach investors across the world.
Who is Involved in Real Estate Tokenization?
As you know about real estate tokenization, let’s also learn about the ones involved in this process:
Real estate operators are in charge of managing the assets. They also play a crucial role in raising capital for real estate investments.
Most of the token buyers exist in different parts of the world. As a result, operators also function as caretakers of the physical assets.
Tokenization allows global investors to buy security tokens. In addition, they also enjoy ownership benefits.
Investors are the backbone of the whole real estate tokenization process. The real estate projects with more interested investors help increase the tokens’ demand and price.
Tokenization platforms act as a bridge between real estate operators and investors. The increasing number of such platforms helps widen security token adoption.
In addition, you can use a tokenization platform to find real estate that matches your requirements. The requirements can be the price range, location of an asset, future potential, taxation, and more.
Suppose you want to purchase a security token that costs around $100. In this case, the platform helps you filter the tokens that fall under your preferred budget.
Benefits of Real Estate Tokenization
#1. Transparency and Efficiency
The tokenization process conducted using the blockchain provides a transparent system. As a result, you can check and verify the transactions in real time.
The public ledger records every piece of information related to a deal. Future investors can also utilize this recorded information.
Apart from transparency, real estate tokenization also benefits from efficient smart contracts. Here, your buy order gets executed automatically.
Selling a piece of real estate is hectic and time-consuming. I hope you’ll also agree with me on this. Real estate tokenization solves this illiquidity issue.
You don’t need to worry about finding a buyer. Here, you can buy and sell security tokens at any time.
#3. Fractional Ownership
Another great advantage is the possibility of owning a fraction of an asset. Fractional ownership helps to invest even a small amount of money.
Fractional ownership also provides an opportunity to diversify your assets. You can buy assets from different locations with limited capital.
Suppose you have $500 to invest in real estate tokens. In this case, you can put $100 into five different assets worldwide to reap diversification benefits.
#4. No Middlemen
Whenever we think about real estate, agents and brokers come to mind. But with real estate tokenization, you don’t need to worry about them anymore.
The traditional method of paying huge brokerage fees and commissions is now out of the question. In fact, you can buy more security tokens with that saved amount.
#5. Faster Settlement
Traditional real estate takes days or even weeks to complete the transaction. In contrast, you can buy and sell security tokens quickly.
Time is very valuable, and real estate tokenization helps you save time. Based on the speed of the blockchain, the transaction speed also improves.
Limitations of Real Estate Tokenization
Let’s also have a look at a few drawbacks of real estate tokenization:
#1. Regulations and Tax Issues
Uncertainty related to regulations is one of the most important concerns with real estate tokenization. A well-established regulatory framework is necessary for wider adoption.
A healthy regulatory environment is essential to gain investors’ trust. Also, clear and structured rules will enhance the rapid growth of the real estate sector.
Along with regulatory concerns, lack of tax clarity is another issue real estate tokenization faces. Here, there are no defined tax regimes.
The liquid nature of tokenization can also result in high price fluctuations. The price variation varies based on the change in demand for the underlying asset.
Security tokens with short-term investors can cause frequent buying and selling. So, it’s better to consider the past performance of the token to avoid highly volatile ones.
#3. Lack of Awareness
Most people aren’t aware of real estate tokenization. As a result, there is a delay in wider adoption.
Encouraging small investors to participate can change the current situation. Likewise, more investors provide more liquidity.
Future of Real Estate Tokenization
A bright future lies ahead for tokenization. The future potential consists of the following:
- Once people are familiar with real estate tokenization, security tokens will be a major part of one’s portfolio.
- With the increase in participation, more marketplaces to trade security tokens arise. Also, security tokens become liquid assets.
- Investors worldwide can use security tokens to diversify their portfolios by buying assets across different continents.
- The implementation of Metaverse can enhance the value of the asset. Moreover, virtual tours help investors to understand the underlying asset.
- There is also a potential to build a strong digital community. For example, the owners of a large plot of land can build a community of hundreds of members.
Real estate tokenization has a huge potential to revolutionize the entire real estate industry. Thanks to blockchain technology!
As retail investors, we can buy tokens that represent a property. Also, we can sell it whenever needed.
With the introduction of a more regulated framework, tokenization can be the next big thing in the real estate industry.
Real estate tokenization undoubtedly provides an economical and convenient process to invest in real estate. With more people entering the space, the growth potential is limitless.
In the coming years, we’ll be able to trade security tokens similar to trading stocks.
Next, you can check out crypto index funds and ETFs.