Real estate is the second largest asset class in the world behind debt. However, the traditional real estate market has a lot of inefficiencies that can be addressed by tokenization.
There are a lot of values to be derived from tokenizing a real estate property from both a property developer/owner standpoint and an investor standpoint.
For the developer/owner side, most of the value is centered on automating processes and improving liquidity or raising capital.
And for this investor’s side, the benefits of tokenizing real estate are lowered barriers to entry enabled by fractionalized ownership, ease of buying and selling assets, real-time transactions, and improved transparency.
The objective for tokenizing a real estate property will determine what route a property owner or developer would take; they could issue security tokens or represent their property in the form of NFTs.
Real estate security tokens are more appropriate in a scenario when the individual or organization issuing the token intends to raise capital for a project (existing, new, or ongoing), or increase the liquidity of their asset by enabling peer-to-peer transfer of ownership.
It will typically involve offering fractionalized ownership i.e. multiple tokens representing ownership of an asset, where a single token could cost as little as $50 and token owners can easily trade their token on a secondary market.
The value in offering real estate security tokens to the token issuer includes:
Access to a greater pool of potential investors and a lower investment entry threshold that will attract investors needed to raise necessary funds faster.
And to investors, the opportunity to invest in real estate with small capital, and a quick exit strategy enabled by secondary market trading.
Real estate security tokens typically represent tokenized shares in a company that owns a property, where investors make a profit from property appreciation and may also be entitled to receive rent paid on the property. However, security tokens typically fall under regulation and token issuers must comply with securities law.
Real estate NFTs are appropriate for representing a real estate asset on the blockchain with a single token. This route is mostly followed to enable automation of the sale process.
The property is usually held in a special purpose vehicle like an LLC and ownership of the LLC is represented on the blockchain as an NFT. Appropriate rules and guidelines are coded into each non-fungible token. Legal documents that clarify the property are free and clear, and an appraisal/inspection report will exist within the token as metadata.
It is necessary to put the property in a special purpose vehicle because, in most countries, the existence and ownership of a property are registered on the country’s land registries. These land registries do not yet recognize tokens as a means of representing ownership.
The advantages of this approach include improved transparency and real-time payment via wallet-to-wallet transfer.
NFTs do not typically qualify as securities but they may, in certain conditions, such as if the NFT is backed by income-producing assets. In such instances, it is appropriate to register them under appropriate regulatory bodies as security.
Popular players in the space
Listing a property in the form of an NFT not only streamlines the closing process but also brings a lot of transparency as all the necessary legal documents are put in the NFT.
Properties listed on the real marketplace have their ownership split over several representative tokens. Investors can purchase one or more such tokens. Token owners are entitled to collect rent based on token shares.
The emergence of tokenization will transform the way we buy or invest in real estate. However, before deciding on a real estate platform, investors need to do a proper analysis of the platform to understand its business.
Here are some things to look out for before selecting a platform: