A few years back, the concept of owning and trading fragments of physical real estate might have seemed too far-fetched for many. But with the advent
A few years back, the concept of owning and trading fragments of physical real estate might have seemed too far-fetched for many. But with the advent of blockchain technology, real estate tokenization is providing new opportunities for fractional ownership and investment.
Blockchain technology’s long-overdue debut in real estate has made real-world asset tokenization a heavily-discussed topic in the industry. After all, tokenization ticks all those boxes that are often required to ruffle many a feather in a traditional industry — it’s digital, global, complex and future-oriented.
But how exactly does real estate tokenization work, and how can it help transform illiquid real estate ownership into a liquid one? Let’s take a look.
What does tokenization mean?
Tokenization is the process of taking traditional assets (like real estate) and dividing them into digital tokens that can be traded on a blockchain. This makes it easier for people to invest in and trade such assets and helps create a more liquid market.
In essence, tokenization is the process of converting asset ownership rights into digital tokens on a blockchain and can be used to tokenize several things, including:
- Tangible assets like precious metals, real estate, art and more;
- Intangible assets such as intellectual property rights; and
- Regulated financial instruments like bonds and equities.
In the context of real estate, tokenization refers to the fractionalization (dividing the property into smaller parts) of property through tokens stored on a blockchain. This way, investors can directly own a piece of a token’s underlying real-world asset without having to purchase or manage the entire property.
Tokenization can help make investing in real estate more accessible and liquid. Rather than purchasing an entire property, investors can now buy tokens representing a portion of the property. This makes it easier for people to invest and also helps create a more liquid market.
The benefits of tokenization
Tokenization has the potential to revolutionize the way we invest and trade assets by making it easier and more accessible for everyone. For example, tokenization can help with:
Liquidity
The conversion of illiquid real estate assets into “tokens” implies that a direct investment in a property is treated as an indirect one. This allows issuers to secure higher liquidity, as the number of buyers is not limited to those who can afford the entire asset. In addition, tokenization also allows for fractional ownership, opening up investment opportunities to a larger pool of potential investors.
Transparency
The use of blockchain technology brings a new level of transparency to the real estate industry. Since data is stored on a decentralized ledger, all transactions are visible to everyone on the network. Completed transactions can no longer be changed, manipulated or canceled, in turn creating a more secure and trustworthy system. This increased transparency helps to build trust and confidence in the market, and reduce fraudulent activity.
Automation
The use of smart contracts can help to automate several processes involved in real estate transactions, such as title transfers, document verification, dividend payments and compliance. This can help make the process more efficient and streamlined, saving time and money for all parties involved.
Accessibility
Tokenization removes current limitations on the fractionalization of real-world assets, making it possible for a wider investor base to participate. Barriers to entry are removed since assets once available only to a select and privileged few can now be accessed by a larger number of people. This increased accessibility helps to democratize the market and level the playing field.
Reducing geographic constraints
The global nature of public blockchains facilitates the tokenization of assets, making them available to investors anywhere in the world. This helps break down geographic boundaries and connect global markets. For example, a real estate property in New York can now be tokenized and made available to investors in Japan, and vice versa, provided the participating blockchain complies with relevant Know Your Client and Anti-Money Laundering laws.
How do you tokenize real estate assets?
There are three steps involved in tokenizing real estate assets:
Step 1: Deal structuring
This step involves deciding on the type of asset to be tokenized. Typically, property owners either:
- Form a subsidiary created by a parent company (to isolate financial risk) called a special purpose vehicle, or;
- Become part of a real estate fund, or funds that already exist and are focused on investing in real estate securities
During this step, the rights of shareholders to dividends, partial governance and equity shares are also determined.
Step 2: Choosing a platform
The next step is choosing the tokenization platform for creating the tokens. Some examples of popular platforms for tokenizing real estate assets include RealT, Harbor and Slice.
The…
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