Why Tokenized Real Estate Is an Innovative and Transformative Method

3 mn read

Real Estate Tokenization is being pioneered by Fintech companies, institutional investors, and blockchain developers. It refers to dividing the ownership of a real estate asset into small tradable units known as tokens. It opens the door for small investors who found it difficult earlier to invest in high-end properties due to huge minimum capital requirements.

Every tokenized sale is supported by a smart contract that records each transaction that takes place on the blockchain network. The owners of the tokens can get interest income from the debt secured by real estate, a stake in the equity, or regular cash flow from the asset.

The general procedure in Tokenizing Real estate assets on blockchain involves identifying the asset, developing the smart contract, creating the token, marketing and distribution of the token, and rendering post-listing support for the prospective investors.

How Tokenization of Real Estate Asset Has Been Implemented Practically So Far

  • St.Regis Aspen Resort in Colorado was tokenized for $18 million. The tokens were bought and sold on a trading platform named Tzero. Aspen coins were offered to all the investors.
  • Each Aspen coin was priced at a nominal value of $1 and each investor had to purchase a minimum of 10,000 tokens. The coins could be bought in US Dollars, Bitcoin, or Ether.
  • A condominium property worth $30 million in Manhattan was tokenized by a company named Factora on the Ethereum blockchain network. The deal was executed by Fluidity, a startup established for Tokenization, and Propellr, a firm that assists in token sales.
  • Elevated Returns, a digital asset management firm plans to tokenize a whopping $1 billion in the future. The token holders can discover the price available on the equity positions and also leverage their respective positions efficiently.
  • Ubitquity, a blockchain platform for real estate transactions and title recordkeeping has teamed up with a Swiss Fintech company named Mt.Pelerin for property tokenization.
  • KlickOwn AG, a real estate rental agency in Hamburg, Germany tokenized a property worth 1.5 billion Euros. They partnered with a well-known European bank named Bankhaus von der Heydt for the safekeeping of investor tokens.
  • MountX Real Estate Capital, an international crowdfunding real estate platform, tokenized two apartments successfully in Mexico for a total price of $5.2 million.
  • REINNO, a Fintech company in Connecticut, USA launched a market for tokenized commercial real estate with a total of 5 offerings to accredited investors worth about $237 million. It also tokenized a commercial real estate fund of $105 million earlier this year.
  • WeInvest Capital Partners, a boutique firm specializing in private equity real estate is planning to tokenize its first real estate fund in Luxembourg, in partnership with Tokeny solutions.
  • The United Kingdom Sotheby’s International Realty is planning to tokenize a luxury property in London with Smartlands, a digital capital management platform.

Some of the Obstacles to the Growth of Tokenized Real Estate

  • There is still a lot of uncertainty surrounding blockchain-based systems as firms are unwilling to move a step forward owing to concerns over the scalability of the technology.
  • Some Real estate tokenization deals still require the participants to be accredited investors which means they should be earning at least a couple of millions of dollars.
  • Real Estate Investment Trusts (REITs) can take away business from the Tokenization of Real estate asset as shares can be purchased with just several clicks of a mouse.
  • It creates disclosure issues as developers may not want certain information like changes in the token ownership with their competitors.
  • The concept of security tokens is not uniformly regulated across the globe. A uniform regulatory compliance structure is needed to optimize the potential of Real estate tokenization.
  • Licensed platforms need to be established to operate and manage STO’s efficiently. Multiple trial and error methods need to be tried out before becoming fully functional.
  • The custody solutions for storing tokens safely need to be worked out. In case if the investors’ tokens get hacked or stolen, the consequences would be fatal.
  • The tax rules regarding cryptocurrencies are not even defined in some countries. This creates a lot of complexity as the tax structure will be different across various locations and one investor will benefit when compared to another.

What to Do to Make Real Estate Tokenization a Big Rage in the Future?

The real estate industry is always slow to adapt to change and hence have not fully realized the potential offered by blockchain-based tokenization. It can effectively address the market inefficiencies faced by the sector. The change will obviously not take overnight and requires close cooperation with governments and regulatory bodies. Diversified portfolios can be built with modest sums of money as the illiquid assets will be converted into tradable digital securities.

The fractionalization of single assets is a win-win opportunity as it provides a higher yield for individual investors. Apart from the usage of blockchain technology, a well-defined legal framework a proper Proof of Concept is needed. More work is required in terms of regulation and infrastructure development to profiteer from the advantages of Tokenized Real Estate.

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