Real estate tokenization is an innovative technology that could radically change the real estate investment market in the future. Using blockchain, tokenization allows real estate to be digitalized and divided into “tokens” – digital shares that can be bought and sold like stocks or shares in a company. This innovation opens up access to real estate to a wider range of investors and theoretically make the real estate market more flexible and investor-friendly. Let’s try to understand today how this technique works and what nuances you need to consider before choosing this way of investing for yourself.
Tokenization is the creation of a digital assets that are connected to a real property, such as an residential building. Each token represents a small (or large) share in that real estate. Thanks to the blockchain on which the tokens are created, token holders can prove their ownership of the asset, and the history of transactions and their data are stored in a specific registry that ensures transparency and reliability.
Many cities are already testing real estate tokenization technologies on practice, and the first ones who started to do it were hotels and accommodation facilities, which have attracted investors to buy shares in their business before (equity investments, which we wrote about in our Instagram). For example, in 2018, the famous St. Regis Aspen hotel in the United States, Colorado, tokenized a large part of its property, which allowed the owners of the hotel to attract several tens of investors who under other conditions would not have been able to invest in such a large and expensive project. Also tokenization of real objects helps to build affordable housing, improve urban infrastructure and build other objects, as it attracts investments of many private investors.
Overall, the tokenization of real estate is a logical development of digital technologies and, in particular, blockchain; it is enough to remember the trends of recent years to understand better how we came to it. When bitcoin appeared and the cryptocurrency aroused just a huge interest worldwide among investors, IT developers closely observed the blockchain technology and realized that it has a lot of other applications, that it can be used not only in the financial market, but for example, to create tokens in a single copy that cannot be replaced or “ crashed ”. This is how a new trend emerged and new blockchain derivatives – NFTs, unique digital assets – appeared on the market. Each NFT is essentially a certificate of ownership of some object, such as a picture on the Internet, a song, a meme, some virtual fairy-tale animal, and so on. Such tokens aroused interest among investors because they could be traded like on the market, only virtually. And at some point, this technology led the developers to think that it was possible to do the same with real assets.
Real estate has always been considered the most stable, valuable, and sustainable asset, which is an integral part of the investment portfolio of a conservative investor. Most investors want to own real estate, but for all its advantages it is not available to everyone, because it has a high cost, and in addition, the process of acquiring real estate in some cases can be difficult and time-consuming due to administrative bureaucracy. Therefore, in order to circumvent these difficulties began tokenization of real estate, where, for example, one large and expensive object is divided into hundreds or thousands of shares in the form of tokens, which a person can acquire possession in a few clicks and for the amount that allows his budget. In addition, real estate tokens are much more tradable compared to the real object, they can be traded on special digital platforms and found at a fairly favorable price. For investors, the benefits of real estate tokenization are obvious, but thanks to this and large companies, owners of large properties can greatly expand and simplify the work with foreign investors, in addition, it is much easier and faster to sell many small shares than one large building. In addition to the above, the benefit of purchasing real estate tokens is that there are no additional maintenance and transaction costs such as real estate tax, insurance, closing costs, marketing costs and so on. With tokens, everything is simpler: you find a share of interest, click a button, pay, buy. And so it goes both ways. What about market analytics and real estate potential? How to take possession of exactly the object that will help to save and increase the investment, if you do not see the real value and what is happening in the market. Here, too, is the approach that most investors who invest in real estate via blockchain choose to take. Since the value of individual tokens is much less than the value of an entire building, investors most often diversify their risk by buying real estate tokens in different geographic locations, which allows them to be independent of the local real estate market and in control.
As for the real estate digitization process itself, it is relatively simple. First, the real estate object and its value are measured by an expert, and then the ownership of the real estate is transferred to a legal entity that issues tokens. After registration of the object, a certain number of tokens of equal value is issued, which correspond to the real shares of the object. Typically, the number of tokens is correlated to the appraised value of the property, but the number of tokens is also regulated by the legal framework that restricts property splits, the platforms that issue the tokens and the property owners who can set a limit on the number of tokens. Technically, the blockchain allows the issuance of any number of tokens, no matter if it is 10 or 1000000, but in practice it is often best to issue the number of tokens that maintains the balance between availability and value of shares in the project. After that the tokens are separately offered for sale on digital platforms, where any willing investor can buy it and become the owner of real estate. For example, for hotel properties or those that are rented out in the real world, the income from the use of the property is shared with the token holders in proportion to the share they purchased.
The possibility of investing in real estate from your smartphone seems to be a great breakthrough in the world of investments, and technologically it is certainly true, but there are also questions to answer before choosing to invest in tokenized real estate. First and foremost is the legal framework for tokenization, which differs greatly from country to country, and in some countries is still in its infancy. Regulation and taxation of digital assets can vary, and this in turn can hinder or create difficulties when selling them. In addition, despite one of the key advantages of technology – the high liquidity of tokens compared to real estate – this is not really the case right now. The token market is still too small, it is just developing and so far all the assumptions about what will happen to it in the future are not supported in practice. Most likely, this technology has a very good potential to gain a foothold among investors, but at the moment it is difficult to state this unequivocally. And also a very important point to consider is technology risk. Tokenization is a relatively new technology, and like any other technology, it has technical risks, the possibility of failure or information leakage. Of course, the blockchain itself provides a fairly high level of data protection, but investors also depend on the reliability of the platform that issues the tokens.
We are seeing a gradual digitization of the market due to tokenization. Thanks to this, the transaction process is simplified, more investors come to the market and, accordingly, the financial flow becomes larger. However, what will happen with this technology in the long term is still unclear, and it is important to consider this risk in your investment strategy before choosing to invest in tokenized real estate.