Real Estate Tokenization or Fractionalized Property Investment for Dummies

What is Fractionalized Property Ownership

When the ownership and value of a particular property are subdivided, the ownership stakes become much more diluted, as the term implies. To put it another way, the ownership of a piece of real estate can be divided into multiple portions, each of which is represented by a digital token.

It's now possible to transfer the ownership of real estate into digital tokens so that additional potential investors can buy digital tokens and then resell them to other potential investors. Traditional real estate investment includes both residential and commercial properties as well as industrial and retail locations that can be tokenized. The value of tokens will change based on the performance of the underlying assets.

Why do we Need Fractionalized Property Investment

i)               Market access is limited

There is a problem with the real estate industry, which has traditionally been reserved for institutional investors or wealthier retail investors. At the outset, this sector has high entry barriers, with only the most "well-resourced" institutions or high-net-worth individuals being allowed to participate as investors. There are also numerous requirements and fees incurred by engaging intermediaries such as bankers, brokers and lawyers to deal with those in the real estate industry.

By leveraging fractionalized property ownership via real estate tokenization, it is possible to share ownership of properties with relatively higher costs. Investors are now given the choice to buy a portion of property according to one’s affordability and choice, instead of purchasing the entire property.

On top of this, blockchain-powered systems eliminate the need for middlemen, which saves money in the long run. Imagine how much money one could save by cutting out the earlier mentioned third parties.

ii)              Lacking Transparency

You may not have experienced it personally before but it is likely that you have heard of stories that involved property owners being scammed. Some of the most common methods of doing so in Malaysia are via forged identities or misuse of power of attorney. The rampancy of such dishonest and illicit activities could expose investors to high risk when it comes to transacting these properties.

The immutability of blockchain significantly enhances the level of transparency by ensuring the ownership information and transaction records are not allowed to be altered, once they are entered. As such, fraudsters are being prohibited from entering this space and investors’ portfolios are being safeguarded with such a transparent record-keeping system.

iii)            Slow and Lengthy Transactions

Many real estate transactions take a considerably long time. Typically, it takes 6  months to find a property and another 3 to 4 months to complete all of the necessary procedures and criteria, provided there are no additional condition precedents to be fulfilled. 

As previously stated, blockchain technology eliminates third-party influence, allowing for direct transactions. It also helps to cut down on the amount of time it takes to complete paperwork. Furthermore, preserving all property-related data enables investors to make more informed judgments and spend less time researching properties.

How does Tokenization Work?

To begin with, it's important to know what a token is. Simply put, a token can be a representation of traditional shares or equity in a digital format. It is entitled to the same economic benefits as any other share. In the context of real estate, a token can represent a portion of the ownership of the property.

Real estate owners can undertake an offering to raise funds for real estate projects by issuing tokens, or they can also offer investors the option to exchange tokens. In simple terms, the procedure is quite similar to crowdfunded real estate sales; the only difference is that it's digitized and leveraged blockchain technology.

Investors have the option to sell all or a portion of their holdings via selling their tokens of a particular asset on an exchange or a fractionalized property platform.

Process of Real Estate Tokenization

i)               Seek Assistance from Fractionalized Property Platforms

It is advised that real estate owners seek help from fractionalized property platforms since they are trained experts in this field. A credible fractionalized property platform should be comprised of professionals from relevant fields and capable of providing practical advice as well as executing an entire deal in a timely manner.

ii)              Deal structuring

In structuring a deal, some fractionalized property platforms would be able to assist in identifying any existing real estate assets or purchase of new real estates for subsequent tokenization. This will be followed by purchasing, financing, and also appraising by the owner.

iii)             Generating Token:

As part of this step, the issuer will be advised by the professionals in deciding how many token types and how many tokens to issue by achieving the intended fundraising target. Tokens issued by the company are then available for purchase on a specific exchange.

iv)             Listing of Tokenized real estate:

In this stage, the tokens are advertised and listed on an exchange by the company. The tokens are listed through a security token offering.

v)              Marketing and Post-Support

Fractionalized property platforms will assist issuers in determining the best possible method for distribution of the security tokens as well as implementing marketing efforts for the security tokens in ensuring sufficient awareness is being raised.

Conclusion

We have seen the benefits of implementing a security tokenization strategy for real estate despite it being still in its nascent stage. In addition, the tokenization of assets is suitable in circumstances where illiquid assets might benefit from more transparency and efficiency, as well as lower minimum investment requirements via fractionalized real estate. Tokenized assets have been tested in a number of well-known industries, including real estate and fine art.

Visuals courtesy of PIXABAY and UNSPLASH