How has Real Estate Tokenization Grown?
Real estate tokenization is a promising use of blockchain technology. Liquidity, fractionality, low cost, efficiency and diversification has caused real estate tokenization to grow over the last two years. The real estate sector now comprises nearly 40% of the digital securities market. This amounts to around $200 million.
The premise was raised to solve real estate’s major problems such as illiquidity, high barriers to entry and inefficient transaction methods. Tokenization of the industry has caused these problems to be minimized.
4 reasons why real estate should be tokenized?
Liquidity
The process of tokenization creates a solution where liquidity can be accessible to investors, while also being able to partake in a crowdfunding-like deal without the problems that crowdfunding poses in relation to using it for a real estate investment. Liquidity has the potential to be high because tokens are easily and securely transferable between parties. Property and renovation projects can be instantly traded. Investors hold a more liquid position when tokenzing their investments. Therefore, investors are able to minimize risk.
Liquidity is however still limited. There are regulatory constraints around who is able to trade these assets as well as a lack of a decentralized solution to connect broker-dealers with each other. Deals are only able to be made with accredited investors or eligible investors by jurisdiction, which eliminates others who would have the funds to invest, but do not have the accreditation.
Diversification
Tokenization allows for investors to access multiple property types and different geographies. Investors effectively have the ability to have fractional ownership. Portfolios of investors are diversified because they are able to invest in various types of real-estate (commercial, residential, funds, and more). Investors can invest in homes or various businesses across a diverse number of locations. This allows for a diversified income for investors with regard to interest returns and business growth returns — depending on the variety of businesses the investor chooses to tokenize. Furthermore, the opportunity to invest in multiple locations means the security net is improved due to a wide range of income possibilities because of varied economic growth among the different locations. Tokenization means investors can essentially be anywhere in the world and purchase tokens for a property elsewhere. Traditionally, the investor must be present in the country for it to be legally possible to make a purchase. Blockchain is accessible to all those who have internet access.
Since only accredited investors or eligible investors by jurisdiction can have access to these deals, it can often limit the variety of deals that are available. Potential to diversify portfolios is decreased because of local laws in certain jurisdictions, where one must be an accredited investor. This means that investors are generally only open to invest in their own jurisdiction. This limits diversification opportunities from a global standpoint.
Post management and security
Traditionally, when a real estate asset is to be sold to another party, one must go through a heavy process of transferring documentation. This takes time and there is a high plausibility that security can be scrutinized. Token transfer, however, is a very quick and easy process that can be done between two parties anywhere in the world on the blockchain.
This allows for a better experience in post-issuance management, rather than going through paper documentation which is a lengthy troublesome process. Blockchain gives us permanent storage of data with regard to contractual agreements, documentation and cap-table. Whenever a person needs access, all relevant data is there for use and is available to all parties associated with the token on the blockchain. This improves the settlement process for real world scenarios and reduces risks associated with documentation storage.
Low barriers to entry and increased efficiency
Tokenizing property attracts a diverse group of buyers that wish to invest without actually buying the entire property. For example, a house can be owned by multiple investors as they each own a part of the property through creation of many tokens for said property. Thousands of people could have fractional ownership of a property by means of tokenization, which effectively democratizes the real estate market.
There is a high public listing cost for Real Estate Investment Trusts (REITs), and a high private market tokenization of real estate allows for increased efficiency through an accelerated process of ownership. The issuance costs associated in the private markets are more troublesome for both investors and issuers. This cost is far less in the digital market. Traditional written contracts for transfer of project ownership is made easier through blockchain. Transferring tokens or buying/selling tokens is a quick process which takes far less time than traditional methods.
Barriers to entry are still somewhat high in the digital securities industry. This is due to investment opportunities only being open to accredited investors. Furthermore, a third party intermediary still exists for transaction purposes, which investors and issuers must go through.
Conclusion
Tokenizing real estate is useful to both issuers and investors. Property and real estate fund managers benefit from lower issuance costs and streamlined post-issuance management. Barriers to entry are also lowered due to financial requirements, as fractional ownership generally means fractional investments. This means issuers have access to a wider pool of investors. Real estate investors benefit from maintaining a more liquid position. They have access to more markets which means they are able to diversify their portfolios.
