Types of Real Estate Suitable for Tokenization

If you’re familiar with real estate investment, you may not be a stranger to the common pain points being faced by the industry, amongst others, including the lack of liquidity, limited pool of investors, etc. In particular, unlike institutional investors, retail investors may not have equal access to different categories of real estates, such as commercial or hospitals. 

As such, the technology of fractionalized property ownership via asset tokenization has been developed as an effort to address these issues. Despite it being relatively nascent, it has the potential to fundamentally change the way institutional and retail investors engage in the sector. 

Tokenization practically expands the pool of investors with access to real estate assets substantially more than current practices allow for. In order to cut expenses and stimulate diversity, tokenized real estate uses blockchain technology and fractionalization. 

In this article, we will explore the use cases of real estate tokenization in both commercial and residential and also why real estate owners would be benefitted from this exercise.

1. Why do Real Estate Owners choose to Tokenize Real Estate?

Compared to the conventional method of raising funds, such as financial institutions, it's easy to see how real estate tokenization may provide a more affordable source of money. In order to attract a wider range of investors, it's important to lower the barrier to entry (e.g., by lowering the capital needed to purchase real estate). 

Real estate tokenization allows real estate owners to convert the ownership of their properties into digital tokens. Each token represents a portion of ownership of the particular property. Instead of struggling to fork out the prohibitive down-payment, retail investors can now opt to purchase a portion of a particular property, hence enjoying a more diverse portfolio.

The real estate owners will benefit from the desired flexibility by being able to sell minority ownership interests while still retaining control of the asset. Fractional shareholders like retail investors have less control over governance than institutional investors, who usually have more sway over key investment decisions (e.g. when to sell or refinance). In addition, the use of a blockchain-based system should result in cheaper expenses, since fewer middlemen such as bankers or lawyers will be required, paperworks would be eliminated.

i)               Commercial

Investment in commercial real estate soared to an all-time high of $830 billion in 2019 throughout the world. Investment in real estate, which usually requires large financial commitments and lengthy and costly transaction procedures, has historically been one of the least liquid asset sectors.

The advent of asset tokenization technology is revolutionising this space, which is bringing efficiency, security, and more accessibility to the sector. 

Some of the use cases in respect of commercial real estate are as follows:-

• St Regis Aspen Resort

Elevated Returns, the resort's owner, decided in 2018 to make hotel ownership available via token sales instead of traditional means. Each of these tokens represents a portion of the share of the resort.

The tokens that are issued by Elevated Returns are priced at $1 per coin. The Ethereum network saw its first successful real estate offering, with Elevated Returns eventually raising $18 million. 

With the use of asset tokenization via blockchain technology, Elevated Returns was able to tokenize the St. Regis resort, a real-world asset.

• London’s Luxury Hotel

An award-winning luxury hotel in London's Mayfair neighborhood, valued at US$600 million, is being tokenized by Liquefy in partnership with a group of Gulf families.

There will be a 51 percent ownership stake in the property and management firm owned by the hotel's existing owners in an offshore SPV. Smaller-ticket investors will be awarded security tokens reflecting a collective 49 percent ownership stake, which will be tokenized and distributed to smaller-ticket investors.

Investing in real estate as part of a group has several advantages, including the ability to get a larger return on a lesser investment.

ii)             Residential

The tokenization of real estate does not only benefit the commercial real estate, it also helps to extend the pool of possible home buyers and boost access to the residential real estate market.

First, since blockchain real estate tokens are simpler to purchase and sell than conventional real estate titles, tokenization reduces the illiquidity of real estate assets. Instead of a complex and time-consuming procedure adjudicated by many third parties, a blockchain real estate transaction may take place quickly, securely, and directly between the buyer and seller. 

Second, tokenization facilitates access to extra money by allowing real estate owners and developers to provide lower investment denominations by fractionalizing property ownership, hence widening distribution to a larger and more diversified investor group.

The cost of entrance into the home-buying market may be greatly decreased by fractionalization, enabling people to start building their own money for future real estate acquisitions. While many people may be unable to purchase a RM 1 Million house on their own, ten people may more realistically combine to jointly own the property for RM 100,000 worth of tokens apiece.

• Manhattan’s Luxury Apartment

A $30 million Manhattan apartment is the first big asset to be tokenized on the blockchain in the city.

Each of the 12 condominiums in the East Village building has 1700 square feet of space, and they have all been tokenized on the Ethereum network. Digital tokens have been created to represent the property and are available for purchase. Potential investors may now invest in luxury condominiums even with a tiny amount of money, something that was previously hard or almost impossible to achieve.

2. Rent-To-Own Scheme

On another note, asset tokenization can be used to enable the purchasing of rent-to-own for both commercial and residential properties via the use of real estate asset-backed tokens packaged with a utility component. 

More often than not, the exorbitant down payment is a major barrier to property purchase for many first-time homebuyers or interested parties in purchasing commercial properties. Fractionalized property ownership via real estate tokenization might allow real estate owners to tokenize their residential properties, allowing tenants to progressively acquire ownership of the property on a fractional basis. 

There would be less financial pressure on home buyers to make the down payment, and they would be encouraged to rent tokenized property, knowing that they could someday acquire the property tokens and eventually own their real estates. The rental revenue would be a benefit to the real estate owners as they waited for the property to be sold.

Conclusion

Real estate asset tokenization is quickly changing the market dynamics. Accessibility to investment in real estate is no longer restricted to a small number of institutional investors or high-net-worth individuals but also lowers the threshold for retail investors in doing so, since the adoption of real estate tokenization. 

Real estate owners can now better manage their portfolios and a larger pool of investors get to participate in this market as well. Because of this, the traditional real estate market benefits from more openness, more accurate track record keeping, increased liquidity, and even the ability to conduct transactions in real-time. As tokens may be traded in real-time, it offers up new opportunities for ambitious and imaginative real estate businesses.

 As a result of these and other factors, real estate tokenization and fractionalized property ownership are inevitably shaping the future of the real estate investment scene. 

To ensure your investment journey in real estate tokenization is in safe hands, it is pertinent to look for a sustainable fractionalized property platform to source for any promising tokenization deal as an investor or tokenize your existing real estate as an issuer. 

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