Tokenized Real Estate: How Asset Tokenization is Revolutionizing The Real Estate Industry

Isn’t it quite interesting how new models are erupting every day around blockchain technology? In fact, one of the biggest disruptors of the $3.8 trillion global real estate market is asset tokenization.

Tokenization of assets on the blockchain has already gained a lot of traction not only in asset management but also in different markets by ensuring that they are safer and more democratic. It is a revolutionary concept that has totally transformed people’s perception about the unending capabilities of blockchain in transforming the entire physical asset management process.

The global tokenization market is estimated to grow to US$5.6 billion by 2026, at a compound annual growth rate (CAGR) of 19.0% during the forecast period. Some of the major factors driving the growth of the tokenization market include its ability to maintain fraud prevention levels due to increasing financial frauds, and the need to mitigate the risk from data breaches.

Basically, the process of tokenization involves the transformation of ownership or rights of an asset to a tradable, on-chain token. These assets are transformed into tradable digital tokens – similar to non-fungible tokens (NFTs) – representing a particular asset or utility backed by cryptocurrency, and secured by blockchain technology and immutable distributed ledgers. Some of the benefits of tokenization that has facilitated its growth over the years include increased liquidity of traditionally illiquid assets, fractionality, efficiency, diversification, greater accessibility, and low administrative costs associated with the trading of these assets, including issuance, management, and transactional intermediaries.

There are two forms of asset tokenization on the blockchain: tangible and intangible assets. Nowadays, one can tokenize tangible assets like gold, a piece of art, real estate, or intangible assets such as ownership rights, voting rights, or content licensing, allowing it to become a fully tradable asset similar to a cryptocurrency. This has unlocked a whole new realm of opportunities for investors and individuals looking to participate in the real estate industry.

The Tokenization of Real Estate Sector

A recent report revealed that real estate assets account for about 40% of the digital securities market, amounting to approximately $200 million. The idea behind the tokenization of real estate assets involves creating virtual tokens that are generally linked to the value of the physical asset, thus representing a fractional share of ownership stake in a real asset. These tokens serve as a proportional part of the real estate asset that’s broken down into smaller parts. They can represent ownership of part/entire real property due to their flexibility in use.

Additionally, the tokens can represent an interest in a debt secured by the real asset, an equity interest in a legal entity that controls real property, a right to share in the revenue or profits generated by real property. Thanks to the inclusion of smart contracts, potential issues with a token and its setup can be eliminated, and investments in the future can be protected.

How Tokenization is Redefining the Traditional Real Estate Market

At this point, it's hard to identify a sector that hasn’t been impacted in any way through blockchain technology. And the real estate market is not left out. Blockchain technology is redefining the real estate sector and creating innovative, new business models with amazing opportunities for investors of every level.

There's no doubt that investments in real estate can offer significant returns over time. However, property investment has always been limited to a special handful of people. Markets such as the real estate market are predominantly owned by institutional investors, thus making it difficult for retail investors to invest in these markets. This is where asset tokenization comes into play.

Tokenization is creating a world full of opportunities by opening up the market to anyone, allowing readily available capital to flow into the illiquid market. This way, people do not need to solely rely on stock and crypto market investment opportunities due to lack of substantial amounts of capital to invest in real-world assets like real estate. By leveraging tokenization, investors of any level can now invest in real assets and secure substantial gains based on the performance of the asset they have invested in .

To achieve this, digital tokens are created and issued on blockchain during a tokenized security offering. Every fraction of ownership is converted into a token and then coded and fed to the blockchain to grant ownership. Ownership can then be transferred directly from one investor to another on digital securities marketplaces almost instantly via alternative trading systems that offer a relatively low transaction fee.

Understanding the Concept of Fractional Ownership in Real Estate

Fractional ownership is a fast-growing concept that is paving the way for the creation of a massive, liquid, and highly transactional market of real estate interests. Indeed, it has provided a more affordable way to own a high-value asset.

Fractional ownership of an asset is an arrangement where a group of people pool in money to share the costs and gain joint ownership. Basically, each fractional owner owns a share/percentage of the property and is indicated on the title and deed as an owner.

Fractional owners partake in the initial capital, use, maintenance expenditure, and management of the asset. Each of these individuals own an interest or percentage in the shared asset and also take on the benefits or losses that result from changes in the asset's value. They share usage rights, income and access to their shared property in proportion to the percentage of the asset they own.

Therefore, fractionalized real estate is a tokenized form of asset that is owned jointly by multiple interested parties.

What are the Pros and Cons of Fractional Ownership?

Typically, every other type of property investment has potential drawbacks and fractional ownership is not left out. However, it does not imply that fractional ownership cannot be advantageous if you invest in a property/asset at the right time and in the right place. Meanwhile, here are some of the pros and cons of fractional ownership in real estate.

Pros

• It is more affordable than traditional ownership.

• It offers more diversification of risk.

• It provides the opportunity to invest in high-end properties.

• Individuals can sell their shares in the property anytime.

• It helps to establish a passive revenue stream for asset owners as shares tend to appreciate over time.

  
  

  Cons
  

• Ownership partners have less control over the property unlike sole ownership.

• Shares of the property can depreciate over time.

• It can be more difficult to sell shares of the property than to sell an entire property.

  
  

The process of trading fractionalized portions of a property allows investors to enjoy the ROI generated by rent and operations without the legal and time-consuming processes associated with paper-based real estate investing and management. Eventually, the concept of tokenization using blockchain technology will make trading real estate properties possible beyond the geographical boundaries.

Final Words

The concept of tokenization is a safe and effective tool for investing which provides solutions to many of the disturbing issues that are currently experienced in the industry such as fraud, inefficiency, high cost of real properties and so on. By metrics, asset tokenization is one of the most popular blockchain use cases currently achieving real-world enterprise adoption. While there are numerous ways to invest in real estate, tokenization is a secure and innovative option for investors looking to dive into the real estate market.

It is worth noting that investors and real property owners interested in plugging into the trend of real estate tokenization should seek advice from experts including, legal, financial and real estate professionals for a well-informed and profitable investment.