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Real Estate Tokenization: The Future of Property Investments

Real Estate Tokenization: The Future of Property Investments

Monday June 29, 2020,

5 min Read

Speaking of investments, the focus of the general population majorly fixates around cash, equity, commodities, and fixed income. The largest asset class of real estate is less acknowledged by the investors, owing to the legacy practices and norms integral to the sector. 

For ages, property investments have been thought of as something reserved for a specific section of the society, the ones with monetary benefits. However, owing to the advent of blockchain technology and real estate tokenization, that notion is changing fast.

real estate tokenization through blockchain platform

Real estate tokenization is one of the primary use cases of blockchain in real estate, that has displayed exceptional results globally. Alongside documenting global property tokenization statistics, this blog will also highlight the core concept, benefits, and other essential facts surrounding blockchain-based real estate tokenization.

What is Real Estate Tokenization?

Tokenization is the process of digitizing an asset. Property tokenization or real estate tokenization is the conversion of property value into digital tokens that are sold to the investors for fundraising. Tokenizing allows one to split the asset (property) into tokens or shares, through blockchain-based real estate tokenization platforms. These tokens represent a specific number of shares of a real estate.

Once put in the market for sale, the token can be bought by investors, granting them fractional ownership of a property with involvement in asset appreciation and further cash flow. The investors will have full authority to sell any number of shares as per their convenience and need. It is simple and eliminates the high-cost barrier associated with real estate investments making it accessible to all kinds of investors.

What is the Market Response to Real Estate Tokenization Globally?

As per the study and analysis of the American and the European markets concerning property tokenization, the implementation of this practice was able to yield positive results for the real estate investment markets. Between 2016 to 2017, tokenization caused the property investment sector to grow from 7.4 trillion USD to 8.5 trillion USD. It is expected that in 2025 the global real estate market will be able to yield a revenue of at least 4.2 billion dollars through tokenization investments.

What are the Benefits of Tokenizing the Real Estate?

Although in its nascent stage blockchain-based real estate tokenization has been able to display the following benefits for the investors:

Fractional Ownership of Property

As explained initially, tokenization allows division of a property into shares that can be owned by multiple entities. It splits the valuation of the property in parts among several rightful owners. Considering that maintenance and taxation of a property incurs a significant amount, fractional ownership takes the burden off of an individual and distributes sit among all the owners. It brings down the investment cost of the real estate for the investor.

Immutable Proof of Ownership

Blockchain’s inherent immutability allows digital and temper proof documentation of all the transactions about the purchase of the property along with the necessary documentation and real estate history, which remains shared among all the stakeholders. This record acts as immutable proof of ownership for the investors, reducing the chances of fraudulent activities, which is rampant in the real estate sector. Unethical actions like selling a single token to multiple investors can be prevented as immutability foils any kind of falsification of documents and transactions.

Automated and Enhanced Transactions

Real estate transactions tend to be lengthy and manual, posing one of the many reasons why often property deals fall through the cracks. Real estate tokenization happens over a blockchain platform and the execution of property deals takes place through smart contracts. Being automated, the use of smart contracts speeds up transactions, making investor management a lot easier. Owing to the built-in compliance of tokens real estate settlements become very quick and transparent.  

Higher Liquidity

Till now, low liquidity had been considered as one of the major drawbacks of real estate investments, but not anymore. The tokenization of the property augments the liquidity of the same through fractional ownership. With a comparatively low barrier of entry, tokenization enables quick conversion of the shares into fiat.

How do Tokenization Improve Investment Opportunities for Real Estate Investors?

The answer to this question lies in two of the key features of property tokenization. One is increased liquidity and the other is fractional ownership. If we go by the legacy norms, real estate ownership requires locked-in capital for a long period. Through tokenization the property shares get infused with high volume liquidity, giving the owner access to global capital.

The small individual shares can be sold increasing the liquidity for the major shareholders and developers. While traditional real estate is limited to regional investors, tokenization enables global participation in the buying process of property shares. Tokenization opens up investment opportunities for people with a small capital, debunking the notion that property buying is for the rich.

Real estate tokenization is undoubtedly a landmark solution to improve real estate investments and make it more accessible to all, like the other asset classes. However, there are legal and regulatory red tapes and compliances at play that needs to be dealt with first. The companies offering real estate tokenization and related services need to develop flexible and automated compliance solutions for AML and KYC, to make the process more transparent.

As blockchain reckons transformation throughout sectors, including real estate, it now falls upon the governments and regulatory bodies to establish improved infrastructural and legal solutions, so that operational efficiency can be ensured around such modernization.