Real estate has been one of the most attractive investment instruments among investors for a long time. Yet there haven’t been any significant changes in the investment process of real estate, and the traditional drawbacks still persist. But now, it won’t last long as tokenization is here to solve and overcome these issues in the real estate sector. With powerful backing from blockchain technology and smart contracts, real estate tokenization will make real estate investment highly transparent and much more flexible.
Now you might have a question like how does real estate tokenization work, and does it even have a sustainable future? But don’t worry, as, in this piece of article, we will cover everything around real estate tokenization. So let’s get started.
What is Real Estate Tokenization?
Real estate tokenization basically refers to digitizing real estate properties. This process involves dividing the real estate property into digital tokens, which represent the direct ownership of the property. And the value of these tokens is derived from the price of the underlying property. Thus, smart contracts play a vital role in the entire process as there is no paperwork involved like traditional mechanisms.
Let’s understand this with the help of an example:
Assume that you are the owner of a property worth $10 million, and it’s a 100,000 sq ft property. Now you want to tokenize this property in such a manner that each token gets valued at $100 so that the entry barrier is low and maximum investors can participate. In this scenario, you will need to divide your property into 100,000 parts because 100,000 * 100 = 10 million.
Thus, from the above example, you can easily understand that the tokenization of real estate properties is just like shares in the stock market. Moreover, it can also be considered similar to crowdfunding, but the only difference is that it is much more secure, and transactions are recorded on the Blockchain network. So there is no issue of ownership rights, and the transfer of ownership is also effortless and smooth.
Different Types of Real Estate Tokenization
Primarily, there are three main types of real estate tokenization. So let’s have a look over them one by one.
1. Residential Real Estate Tokenization
Residential real estate tokenization is the process of tokenizing residential real estate properties. This is the most widely used type, among others, as investors can own a fraction of residential property anywhere around the globe from the comfort of their homes.
2. Commercial Real Estate Tokenization
Commercial real estate tokenization is quite similar to residential real estate tokenization. It involves tokenizing commercial real estate properties. But here, extra care needs to be taken to ensure that all the regulatory compliances are met and there is nothing illegal involved with the commercial property.
3. Trophy Real Estate Tokenization
Trophy real estate tokenization is the most iconic type of real estate tokenization. It is the process that involves tokenizing the prime and luxurious locations that are highly important and prestigious in terms of money and their underlying value.
Working of Real Estate Tokenization
The working of real estate tokenization is similar to crowdfunding, and the token acts like a digitized version of the underlying property. So investors can either hold their tokens for future price appreciation benefits or sell them in the secondary market at a premium. Just like shareholders get dividends from the shares they hold, token holders can also earn rental yield or profit shares from their investments.
There are three main stakeholders involved during the entire process of tokenization of real estate property:
-
Investors
Real estate investors use tokenization platforms to trade the tokens. By buying tokens of particular real estate property, they become the part-owners (fractional owners) of that property.
-
Real estate operators
They are known as operators as they are responsible for managing the real estate on behalf of the investors. Additionally, they also manage the funds and capital required for the investment in real estate.
-
Tokenization platforms
Tokenization platforms use their expertise and high-end software to issue the tokens. Along with that, they also manage initial and secondary market token sales.
By now, you might have understood the basic working of real estate tokens. So let’s move to the next section, where we will see the entire process of tokenizing real estate property in detail.
Processes Involved in Tokenizing Real Estate Properties
Below is the complete 5 Step process for tokenizing real estate properties:
Step 1: Structuring the Deal
This is the first step wherein various factors play a crucial role, i.e., types of shareholders and assets, applicable jurisdiction, and relevant laws. At this step, issuers typically choose to tokenize an existing deal before raising money to start a new venture, primarily to provide liquidity for present investors.
Step 2: Digitization
At this step, information previously kept in paper or document form is uploaded to the blockchain. Smart contracts are used for this process, and the type of fund or fund structure is also selected.
The most common fund structures are as follows:
- Real Estate Investment Trust (REIT)
- Real Estate Fund
- Single asset Special Purpose Vehicle (SPV)
- Project Finance
Step 3: Selection of Technology
At this step, various important technological decisions are made, like:
-
Selection of Blockchain
Selecting the right blockchain based on your needs and requirements is necessary, as the transaction will be recorded on the blockchain ledger.
-
Selection of a Custody Solution
A custody solution that can safely and securely store real estate tokens needs to be selected.
-
Selection of Marketplace
The marketplace through which investors can buy real estate tokens needs to be selected. You can choose either a primary or secondary marketplace based on your business requirements.
Step 4: Marketing and Distribution
At this step, the generation and distribution of tokens are the main focus areas. Various payment options, including stablecoins, cryptocurrencies, fiat currencies, and others, are accepted for the purchase of real estate tokens. Investors can buy these real estate tokens through:
- Primary Distribution
- Secondary Trading
Step 5: Additional Support
At this step, a real estate tokenization company offers further assistance to investors, such as creating a corporate code and assisting with mortgage concerns and legal matters.
Advantages of Real Estate Tokenization
Tokenization of real estate offers several advantages to both investors and issuers of the tokens. So let’s look at some of the most prominent benefits among them.
1. Improved liquidity structure
Currently, one of the biggest issues that real estate investors face is the lack of liquidity. But this issue will no longer persist with the tokenization of real estate property as investors don’t need to buy or sell the entire property in one go. Instead, they can buy or sell tokens that represent a particular fraction of the underlying property.
This way, investors don’t need to worry about liquidity and can sell their tokens at any point in time. Thus, tokenization of real estate properties provides an improved liquidity structure.
2. Increased efficiency through automation
Smart contracts are the backbone of real estate tokenization. They can easily handle various tasks that initially required a lot of time and manual interference. So now everything is done automatically and efficiently, i.e. regulatory checks, distribution of dividend yields, transfer of ownership, tax calculations and accounting, etc.
In addition to that, smart contracts are programmable codes. Thus, they trigger based on specified actions and can’t be changed or stopped from executing any action to favor any single party, so they are highly dependable.
3. Higher diversification and a lower entry barrier
Real estate is traditionally considered an investment instrument for wealthy individuals as it requires millions, sometimes even billions, to buy a single property. But this is no longer the case due to the tokenization of real estate properties. You, as an investor, can buy a very small part of a property in the form of tokens and thus need just a few hundred dollars to do so.
Moreover, you can now diversify your investments in the real estate sector by buying a small portion of multiple properties. Thus, your risk-to-rewards ratio is low, and you can enjoy handsome returns from your investments.
What is the Future of Real Estate Tokenization?
Real estate investing is a huge market, and you might be shocked to know that the revenue earned from it is also way more than in various other industries. Additionally, it is also considered a safe investment compared to other investment instruments like stocks, mutual funds, and bonds. But it is ruled by some of the elite players in the market who are way wealthier than others. So, real estate tokenization is not only the need of the hour but also has the vast potential to revolutionize the entire industry.
The future of real estate tokenization majorly depends on the following points:
- Adoption of this new technology by investors, issuers, and even the government will play a crucial role in making the entire ecosystem grow rapidly
- The ability to overcome traditional drawbacks like lack of transparency, security, liquidity, flexibility, and even simplicity will help this new technology grow leaps and bound
- Enhanced user experience and the option to trade the token in real-time within a fraction of a second will definitely act like fuel for the rocket
- Integration with Metaverse is also effortless, which can further help in diversification and mass adoption
Moreover, according to Prophecy Market Insights, the revenue through tokenization in the global real estate sector will skyrocket and reach $4.3 billion within the next 5 years. Thus, from the above points and crystal clear numbers, it seems that the future of real estate tokenization is very bright.
How can Prolitus help you with Real Estate Tokenization?
We at Prolitus are a leading blockchain development company in the crypto ecosystem. We have a team that comes with high-end experience and expertise in the field of developing real estate tokenization solutions. Our highly skilled team can help you securitize real assets, raise funds faster, and reach more and more investors.
Still thinking about what to do?
Just contact us, and let our experts handle all your doubts.
Final Thoughts
Real estate tokenization is here to drastically change the entire real estate industry. Furthermore, with the widespread adoption of blockchain technology, tokenization will undoubtedly skyrocket in demand. However, there are various roadblocks on the path to success for real estate tokenization. Some of them are the complicated process behind tokenizing real estate properties, different regulatory laws in different countries, accounting and tax complications, etc.
But don’t worry, as all these pitfalls can be handled by a real estate tokenization platform development company like Prolitus. So, if you are someone who wants to raise funds via real estate tokenization, then you can just contact us and let our experts guide you with the best advice.
