Real estate is considered one of the most attractive investment assets. At the same time, real estate transactions remain a complex process, despite many implemented solutions to facilitate the process.
When securities manipulation has long been available with a few clicks on a mobile app, real estate transactions continue to be associated only with headaches. A new transaction method - real estate tokenization - will make buying and selling real estate easier. Unfortunately, tokenization in real estate isn’t still widespread.
How Does Tokenization in Real Estate Work?
The topic of real estate tokenization received much attention at the European Real Estate Society (ERES) 2021, but people have started talking about it since the beginning of 2020. Tokenization of real estate involves owning shares of a real building in the form of virtual tokens in a blockchain. Instead of title in the traditional way, investors can transact real estate with tokens.
The tokenization in real estate is based on the same technology used for Bitcoin and initial coin offering (ICO), adapted to meet the requirements of securities laws. Experts believe tokenization will revolutionize the real estate market, and several reasons exist. The benefits of real estate tokenization are:
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Increased liquidity due to the high speed of purchase and sale transactions.
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Ability to buy and sell real estate shares around the world without restrictions.
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Reducing the entry threshold - just as anyone can now invest in securities with a smartphone, with the introduction of tokenization in commercial real estate, more users will be able to invest in it. This is one of the leading real estate tokenization benefits for issuers.
These are 3 of the main benefits of commercial real estate tokenization. The idea of tokenization is not new. For example, on the OpenSea platform, you can buy tokens backed by real diamonds, gold, company shares, sardines, burgers, and sushi. That is, absolutely any asset can be tokenized.
How Are Blockchain and Cryptocurrencies Solving Real Estate Market Problems?
Despite universal globalization, the real estate market's main problem is that it is still not global. Mass buyers and investors generally look at the real estate market within their country or city. Accordingly, for real estate development companies and property owners, this means an artificial reduction in demand, limiting opportunities for growth in their business.
Smart contracts and tokens solve these problems. Together, they erase boundaries for real estate transaction participants, reduce transaction costs many times, and open new opportunities for market participants.
Today, the number of crypto-users worldwide exceeds 50 million, and the number is multiplying. All of them are potential real estate customers. With commercial real estate tokenization, it is possible to attract investments from Shanghai, New York, or Tokyo to build a hotel complex in Dubai.
Like dailysunexpress.com says, “In the blockchain, borders do not matter. It does not depend on political attitudes. The user will consider your project solely from the point of view of investment attractiveness.” And make a decision, based on their capabilities, whether to invest $10 or $10 000 to get an appropriate share of future income.
The annual turnover of cryptocurrencies is approaching $2 trillion, which is not the limit. It is already a significant financial source looking for an application in the form of exciting investment projects. The resource is easily accessible and cheap compared to traditional offline ways of attracting investment, such as issuing bonds or bank loans.
Is the Future of Real Estate Tokenization Bright?
So far, it looks more like science fiction, but there are already objects under construction that will be divided into tokens. Blockchain real estate tokenization can expand the buyer's market and create a quality rental offering. There is a great real estate tokenization example.
A $350 million tower is being built in Kiyv. 80% of it will be split into 50,000 tokens at $5800 per unit. It turns out that anyone with that amount of money can invest in part of the building and get rental income. It's like the stock market. Only instead of securities, it's parts of the real estate property.
When convenient applications for buying/selling stocks appeared, investing became much easier, and now you can start trading even with a small amount of money. A couple of clicks, and you're a part-owner of Google. The same thing with tokenization real estate can happen in the market: in a couple of clicks, you become a co-owner of a tower in Kiyv.
But there are some stop factors. For example, the laws of many countries do not yet allow real estate tokenization, but this can change quickly. Another factor hindering the widespread introduction of real estate tokenization is an insufficient level of trust in the technology. Stereotypes surround the blockchain and cryptocurrency market, and many users still feel rejection and distrust.
In Europe, blockchain technology's energy consumption is a significant factor against the tokenization of commercial real estate. The data approval and verification process based on blockchain is very energy intensive and generates greenhouse gases on a par with the emissions of small countries. And this contradicts ESG (environment, social, governance) policy.
Also, with the mass tokenization of real estate, there will be a need for a new class of management companies. They will have to provide competent management of properties with 1,000, 10,000, and 100,000 owners.
Types of Tokenized Assets That Can Be Used for Real Estate Investing
There are currently 3 types of tokenized assets, depending on the goals of the tokenized property owner.
Tokenization of Real Estate: NFT
The simplest type of tokenized asset is a non-fungible token, suitable for selling a single property to a single buyer. Suppose you want to sell an apartment or commercial property and realize it is unlikely to be of interest as an investment property.
Your potential buyer will want to buy it for personal use. You issue an NFT that contains all the valuable and necessary information for the buyer. Then you set a price on it. As soon as someone buys it, you automatically get the money in your crypto wallet, the buyer automatically receives the rights to your property, and a transaction record appears in the NFT and in the blockchain in which it was issued. The new owner of the object will be able to resell it by putting the NFT up for sale again.
Tokenization of Real Estate: Utility Token
Before the advent of tokens, your real estate options were limited. You could put your expensive property on the market and wait a long time for a single buyer. Now, you can have any number of tokens tied to your property in a couple of hours. It depends on the level of investors you want to attract to the deal.
For example, for an object with an estimated value of $1 million, you can issue 10 utility tokens at $100 000 each, or you can issue $1 million each. Any number of tokens can also be offered for sale. For example, only 30% of the total amount, thus retaining the rights to 70% of the income generated by the property.
Once utility token sales begin, all information about the transactions will go on the blockchain. Most likely, one of the participants in the smart contract will be the management company that rents your real estate or operates it - the amount and order of its remuneration will also be public information at the time of the transaction.
It will also be possible to prescribe in advance the conditions under which the token holders can make consolidated decisions about the fate of the property when the utility token is issued.
Tokenization of Real Estate: Security Token
Each property is divided into any number of security tokens, with the owner himself determining the entry threshold for future co-owners. If we issue some, the threshold will be high, and professional investors with big capital will be able to enter. With mass utility token issues, many amateur investors who operate with tens and hundreds of dollars will come to you.
Utility tokens can be sold on specialized platforms at a fixed price. They can be offered on cryptocurrency exchanges as digital assets whose value will be determined by the classical supply and demand exchange laws.
Experts recommend splitting the security token issue into two stages to attract construction financing in the early stages. At first, 10-15% of issued security tokens are offered to a predetermined closed circle of potential buyers. They are given the most detailed information about the construction, counterparties, details of the investment deal, etc.
Conclusion: Tokenization of Real Estate
The future of real estate tokenization is bright. Blockchain real estate tokenization could dramatically change the investment routine worldwide, but many legal and technical problems need to be solved to implement this technology. It will require the help of experienced securities regulation, taxation, accounting, real estate specialists, and careful planning by blockchain developers and professional advisors.
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