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How Can Tokenization Help Disrupt the Real Estate Investment Market
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While the world has mostly gone digital, the system that governs buying and selling real estate remains redundant. This is particularly true in the commercial real estate market, where the investment sector is extremely illiquid and out of reach for the majority of the population.
In addition, real estate owners may always wish to obtain liquidity without losing ownership over the property that one owns. This sounds like having a second bite on the same cherry and does not seem feasible at all. Thus, this is apparently mutually exclusive in real estate investing.
However, such an inefficient real estate market and the above-mentioned aspiration of real estate owners may somehow able to be fulfilled by the budding technology, fractionalized property ownership.
In brief, utilising blockchain technology and fractionalizing property ownership via tokenization could automate middlemen operations, increase liquidity, reduce capital requirements for investment, and improve transparency
What
is Tokenization?
To put it simply, tokenization is the process of converting real estate assets into a number of digital tokens. The purchaser of a certain token becomes the owner of that share of the asset.
Every token in real estate tokenization signifies direct ownership of an asset. As a result of tokenization, property buyers can conduct transactions digitally using tokens rather than relying on traditional paper documentation.
The purpose of tokenization is to protect real assets, which is why it's also known as security tokens. Tokenization is the process of breaking an asset into tokens that represent a specific share of the underlying asset, similar to how securitization is the process of dividing an asset into shares.
How Does Tokenization Disrupt the Real Estate Market?
Proof of Ownership
Legal ownership of a particular property is demonstrated through legal documents that demonstrate the new investor's ownership rights. Tokenization, on the other hand, is the process that leverages distributed ledger across which records the relevant ownership for each transaction. In a couple of seconds, any modifications to the ledger are transferred to all participants. To avoid any issues originating from various ownership claims, each transaction is sent and authenticated.
Increased Transparency
The distributed ledger on which tokens are held not only serves to reduce the issue of indisputable proof of ownership, but also helps to increase real estate market transparency. By tokenizing your real estate, you will gain complete protection as well as great transparency. As previously said, tokenization is based on blockchain technology, so there are no concerns about security because blockchain is a well-proven technology.
This is because once digital tokens of real estate are recorded on a blockchain, its ownership and transaction history are immutable and the data is accessible by everyone globally. That being said, this will prohibit any potential fraud from occurring.
Reaching Wider Pool of Potential Buyer or Investor in Distant Future
With the arrival of tokenization, it is possible to provide an easier search mechanism for the property you want to invest in given that the adoption of asset tokenization by enterprises has reached the critical mass. Followed by that, real estate assets could be tokenized by asset owners and choose to list them on fractionalized property platforms. As a result, the investor’s task is made easier because the search for a suitable investment can now be done in one spot. In addition, investors will not be limited by the constraint of different jurisdictions too by assessing the available tokenized real estate projects on the fractionalized property platforms or any equivalent online marketplace. There are also caveat to this: fractionalized property platforms will first need to ensure that they have complied with the requisite regulations being set forth by relevant jurisdictions.
Compared to the traditional method where investors will have to gather information regarding properties that are scattered everywhere, investors will now be able to search for potential investments in various geographic locations, and sellers will be able to reach out to a larger number of potential buyer or investor.
Possibility of Doing Away with Intermediaries
Tokenization addresses one of real estate's most serious problem: lengthy and slow transaction. In the conventional system, several parties are involved in the legal transfer of assets, but tokenization simplifies the process of purchasing and selling real estate.
It may not happen overnight but the idea of eliminating the intervention of intermediaries such as bankers or lawyers in structuring a real estate deal may come to fruition provided mass adoption of tokenization technology has taken place. This enables direct ownership transfers from one investor to the subsequent owner without much hassle.
Breaking Down the Barriers to Entry for Investors with Fewer Capital
Investors with fewer capital would find it difficult to invest in real estates given the conventional system. As a result, it would only hinder these investors from being investing more investors . However, because assets are divided into smaller amounts and transactions take place in a virtual environment, tokenization lowers the barrier to entry for smaller investors. Furthermore, fractionalized property ownership allows investors to invest in real estate without the hassle of going through a lengthy legal process to transfer ownership.
Seamless Communication
Imagine if you’re buying or selling properties via conventional system, there will be a number of middlemen being involved which will essentially slow down the communication process.
By leveraging blockchain technology and also existence of fractionalized property platform, end-to-end communications between asset owners and potential investors are now available where communications between parties are now much more streamlined.
Reduced Transaction Costs Incurred from Middlemen
Because it uses blockchain technology to exchange tokens, tokenization reduces transaction costs significantly. These tokens allow investors to sell and acquire real estate without having to pay the typical closing charges. Although a real estate investment trust (REIT) offers a comparable value proposition, it comes with upfront fees and a high minimum investment requirement.
Conclusion
The worldwide real estate market is worth more than $200 trillion. Only accredited and institutional investors had access to the most intriguing real estate developments prior to the tokenization of real estate. However, asset owners and developers can now advertise their projects to both retail and institutional investors around the world on fractionalized property platforms.
Tokenization also adds much-needed liquidity and transparency to a sector that has always been opaque. The ability to trade real estate instantly and being able to compare its relative value in real-time should draw in more investors and open the door to more ambitious and distinctive real estate projects.
Despite investors can already purchase and sell real estate investment trusts (REITs), but these typically need hefty minimum commitments and reflect a vast portfolio of companies rather than a single property or new development.
The fractionalization of real estate ownership now allows both investors and owners to raise and invest funds in their own way
Visuals courtesy of UNSPLASH & PIXABAY
