Real Estate Tokenization: A Complete Guide

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Real Estate has acquired the status of being an asset not so liquid but considered highly lucrative. It is very helpful in growing an investor鈥檚 wealth through capital appreciation. It does suffer from the issue of accessibility as accredited investors have had a greater opportunity to invest in real estate.聽

This is where tokenization steps in powered by blockchain technology. Tokenization refers to the division of large assets into small digital shares without compromising the total value of the asset. Apart from giving out a stake, the participants get voting right and an automated payout of rental income. The blockchain plays a stellar role in enabling secure storage and transfer of these tokens.聽

The tokens are tradeable on alternative trading systems (ATS). ATS is a FINRA (Financial Industry Regulatory Authority) registered institution that partners with security asset token owners to list their tokens on the trading systems. This helps to provide investors access to the secondary market with a high level of liquidity. The total value of all the tokens is equal to the total value of the tokenized property. All the real estate tokens are generally built following the ERC-20 Ethereum standards.聽

Benefits to Gain from Blockchain-Based Tokenization

  • Higher liquidity聽- Real Estate long considered to be illiquid is broken down into small representatives and the entry barriers for investors is removed. The entire asset鈥檚 saleability gets a boost and shoots up the overall liquidity.聽
  • Ensures democratization聽- The notion of considering real estate as a luxury has vanished courtesy the emergence of tokenization. Hence, a tokenized property can be simultaneously purchased by a lot of retail investors. It helps institutional and high-level investors to diversify their portfolio of investments.聽
  • Cost-effective聽- The tokens are self-sustained programs and can be automated to execute certain orders like payouts based on thresholds directly to the holder of the token. Since it eliminates intermediaries like agents and banks, it cuts down all the costs associated with the middlemen. Smart contracts which act as pre-programmed executors ensure trust and handle the counterparty risk involved.聽
  • Global reach聽- The tokens can be traded across the globe through the blockchain network. Geographical barriers and time constraints are absent. However, it has to satisfy the legal guidelines in the jurisdiction of the purchaser for the purchase and sale of real estate tokens.聽
  • Facilitates fractional ownership聽- Both asset owners and investors stand to benefit from fractional ownership. The owner need not sell the entire asset in his urgent need for money. He can tokenize a part of his real estate asset and retain ownership of the rest.聽
  • Complies with regulations聽- The real estate tokens are either offered through a security token offering (STO), asset token offering (ATO), digitized securities offering (DSO) or tokenized asset offering (TAO). A special purpose vehicle (SPV) is used in most cases. In the USA, the SEC (Securities and Exchange Commission) regulates the business of Real Estate Tokenization for protecting the interests of investors and keeping incidents of fraud and malpractice to zero. Real Estate tokens balance the need for investments powered by a new technology known as the blockchain.聽
  • 24x7x365 trading聽- No specific trading window is present when real estate tokens are traded on a blockchain network. It operates round-the-clock. Any person from any part of the world can take part in the process of tokenization by fulfilling the regulatory requirements and does not violate the legal framework fixed in his respective country or jurisdiction.聽
  • 聽The token is generally offered for sale through methods like crowdfunding, listing it on dedicated token platforms, social media networks, search engine marketing and through messaging tools like Telegram. The true value of a token to an investor would be realized only when it is traded.聽

Related:聽How to Tokenize Commercial Real Estate Asset

Limitations of Real Estate Tokenization

  • Lack of an international framework- The concept of security tokens is not clearly regulated across the world. A proper compliance structure is needed sooner than later for ensuring optimization of Real Estate Tokenization.聽
  • Need for establishing licenced platforms- There is a requirement of licenced platforms to operate and manage STO鈥檚. It is quite complex as multiple trial and error efforts would be needed before growing a fully-functional platform.聽
  • Security issues- Though blockchain platforms are considered to be highly secure, details of custody solutions and security for tokens need to be sorted out soon. The consequences would be costly in case the tokens are hacked or stolen.
  • Tax implications- Hiccups in taxation would be faced as tax regimes regarding cryptocurrencies are not even defined in some countries. Hence, it creates a complex structure as there are different tax slabs and rules in various countries.聽

Understanding the Future of the Tokenized Real Estate

It can radically transform the entire real estate sector and make it more efficient. It has to face several challenges from authorities and intermediaries before operating in the industry. A lot of investors are not aware of the massive potential that lies in blockchain technology and security tokens. The technology also needs to be scalable and cope up with the demands of the growing industry. Hence, investing in areal estate tokenization platformis right now due to the absence of competition.聽 It will become a lucrative business in the future. Get in touch with a reliable blockchain app development company in the industry and create a well-functioning platform customized for your requirements to thrive from the business of asset tokenization.聽

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