Why Real Estate Tokenization Has Emerged as a Profitable Investment Avenue

Tokenization of Real Estate is the newest fad that has captured the interests of investors, fintech enthusiasts, blockchain communities, and asset management companies. Real estate tokenization involves offering partial or fractional ownership of the asset to prospective investors. 

It opens the door for investors with limited financial resources by establishing a low threshold and providing adequate liquidity to property owners and developers. Each transaction executed on the platform will be stored in the immutable public ledger known as the blockchain. The value of the token depends on the ownership interest indicated by the token holder. 

The alternative to commercial real estate tokenization is Real Estate Investment Trusts (REITs) which functions just like mutual funds. Though it provides a tax-efficient structure, it has a higher minimum investment criterion which proves to be a big obstacle to cross-border transactions for investors. 

The advantages offered by the Tokenization of Real Estate

  • It offers access to global capital for investors, majority shareowners, and property developers, and also boosts the liquidity in a sector that is historically considered to be illiquid. There is no need for locking in the capital for a specified period and investors can cash out whenever they want. There is no restriction of time or location. 
  • Tokens can be traded 24×7 across borders, unlike a traditional exchange which has limited working hours and offers access only to the regional investors. 
  • The tokens can be tracked when it gets transferred from one owner to another. Blockchain is a traceable public ledger, 
  • The robust smart contracts will create automated protocols in compliance with the relevant regulations. 
  • It facilitates fractional ownership as the property can be divided into numerous fractions. Each part will be denoted by a specific number of security tokens. 
  • The wealthy class can ensure the diversification of their valuable investments and expand their portfolio by investing equity into multiple properties across the world simultaneously. 

Challenges to the adoption of Real estate tokenization

  • Developers may prefer not to share certain information with their competitors regarding accessibility to the ledger used by the participants and the potential frequency of token ownership changes. 
  • Some investors may still prefer buying shares from a REIT with just a few clicks on their phone. 
  • It is still not viewed as a democratic investment solution due to the volatility and uncertainty associated with blockchain-based systems. 
  • The concept of security tokens has not been clearly regulated across the globe. A uniform regulatory compliance structure is needed for optimizing the massive potential of Tokenization of Real Estate
  • More licensed platforms need to be formulated for operating and managing the different STO’s issued by different firms in the market. This is quite a complex process and multiple trial and error methods need to be implemented before becoming fully-functional in the industry. 
  • The details, terms and conditions regarding the custody solutions and the security aspects for the digital tokes need to be determined urgently. In case the tokens of the investors get stolen or hacked, the consequences could be dire as the lost tokens can never be recovered. 
  • Tax laws regarding cryptocurrencies are not at all defined in some countries. This leads to complexity in implementing the tax framework as there are different structures in each nation. 
  • For every property that is going to be tokenized, there needs to be sufficient demand for tokens and a reasonable amount of bids waiting to buy the shares at reasonable fair market prices. 
  • Sometimes investors may be forced to wait for a long time to place their respective bids as they want the price to settle at the fair market value. A few investors may decide to place discounted bids on the platform ahead of others hoping to pick up some valuable shares from a motivated seller in the market. 
  • Properties going to be tokenized based on a gross lease may require the creation of a maintenance budget and a maintenance fund in case the building is not bought by anyone or needs upgrades, repairs, and tax payments. 
  • In case, legal disputes arise between different investors or between the issuer of tokens and investors, it will take years to solve the case as judiciary rules are different from one country to another. 
  • It has to take into account government regulations at least to some extent to boost transparency and accountability. Hence, KYC (Know Your Customer) and AML (Anti Money Laundering) norms need to be complied with. 

The future for the Tokenization of Real Estate

Despite the presence of some serious roadblocks, tokenization offers huge benefits such as better access to capital, broader investor groups, reliable tracking of ownership, and real-time investing processes without any middleman in the system. It will help in streaming the growing real estate market which has global wings without completely turning it on its head. Since the industry is slow in the usage of emerging technologies, it will take some time before Real estate tokenization witnesses heavy mass adoption.

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