In 2021, the value of the global real estate market reached $ 6.8 Trillion and by 2027, it is expected to surpass $7.8 Trillion. In spite of its size, the real estate industry suffers from heavy losses due to intermediaries, liquidity issues, supply chain management issues, and more.
As we know the real estate industry takes time adopting new technologies to overcome its inherent challenges. However, this time the most trending topic in the real estate industry today is the blockchain based technology of Tokenization and we are seeing the real estate industry start to adopt this technology. The first real estate tokenization happened in late 2018 in Colorado. Since then we have seen a lot of projects emerge to support asset tokenization services.
Let's first understand how it works :-
In real estate tokenization, digital or blockchain tokens are issued through an initial coin offering (Similar to what we know as Initial Public Offering). These tokens represent an asset, which in our case is real estate. Once issued, these tokens are then traded on a secondary market.
By eliminating multiple steps and making the assets easily accessible, tokenization or the use of Distributed Ledger Technology to fractionalize real estate in order to increase liquidity, and addresses key concerns related to securitization.
Real estate tokens are similar to non-fungible tokens (NFTs), which are non-interchangeable units of data stored on a blockchain that can be sold and traded, with the exception that real estate tokens are generally tied to the value of a physical asset. A real estate token can represent, among other things:
- Ownership of part of a real property
- Ownership of the entire real property
- An equity interest in an entity that controls real property
- An interest in a debt secured by real property, or
- A right to share in the profits generated by real property
Now lets see Benefits of real estate tokenization -
- Liquidity - Real estate is generally considered to be an illiquid market. That’s because the market will not always have buyers and sellers available. Tokenization of real estate acts as a liquidity booster as instead of selling the equity to the bank, the real estate owner can release the equity in the form of tokens. These tokens are then released onto a market where they are traded among a pool of investors. Overcoming liquidity challenges is a big plus as it increases the value of any real estate or asset.
- Lower transaction costs - “Tokens” enable transactions that are more cost effective. An increase in efficiency regarding the transaction execution is observable due to faster processing and settlement.
- Automation - Through smart contracts, numerous intermediate steps, such as compliance, document verification, trading, opening an escrow account but also dividend payments, can be carried out automatically via the blockchain with minimal human interaction.
- Lower barrier to entry - By facilitating investment in fractional portions of real property, real estate tokenization enables small-scale investor participation and lowers barriers to entry for retail investors. Lower minimums and smaller investment amounts can thus be leveraged to benefit from the potential high returns available to traditional real estate investments – which typically require significantly more upfront capital.
- Transparency - From contract clauses and transaction details to your preference details and interest due dates, every data is programmed into a secured, digital token. Therefore, there is complete transparency between the investor and the seller. Plus, with fewer intermediaries and reduced administrative work, the whole process of buying and selling houses becomes less expensive as well while ensuring that every participant or stakeholder has complete visibility over the market. This ensures the removal of information asymmetry between participants in financial markets.
To understand Why Real Estate urgently needs tokenization on the Blockchain?
Why Real Estate Urgently Needs Tokenization Blockchain
An article by our Founder & CTO Srinivas L on Tokenization of Real Estate.
So, is Real Estate Tokenization the Future?
The real estate investment process involves lengthy administrative processes, heavy capital infusions, and multiple commitments. However, tokenization addresses these issues and benefits all the stakeholders involved.
For small investors, tokenization allows fractionalized ownership and offers an easy gateway to foray into the real estate sector. Along with fractionalized ownership, it facilitates portfolio rebalancing and management for high-net-worth individuals.
When it comes to the token issuers, automation and digitalization streamlines processes, reduces operational costs, and opens the asset for a wide pool of investors
It’s clear that Blockchain Technology and Tokenization are set to disrupt the markets. The future of real estate tokenization is accepted and seconded by many researchers.
As the popular saying “ The best investment on Earth is the earth itself,” can now be made possible to all with the help of fractional ownership.