- It removes the role of middlemen such as brokers, agents, banks, underwriters, and lawyers reducing costs and time for investors to buy or sell real estate and for owners to raise capital.
- Investors can trade the tokens easily and instantly for low fees in the leading exchanges.
- Investors benefit from high returns and sufficient liquidity of the stock market.
The game-changing blockchain technology has made its foray into the growing real estate sector in the form of tokenization. It helps owners of assets to raise capital cost-effectively. Small investors would benefit from an increase in access to a wide variety of properties located in different parts of the world along with high transparency and sufficient liquidity.
Meaning of Real estate tokenization
It refers to dividing an asset into many shares for selling it to the investors. Each token will represent a predefined share of the underlying asset. The tokens can be traded in the leading crypto exchanges and alternative trading systems. When the value of the tokens is summed up, it would be equal to the total value of the securitized asset.
The process involved in a Security Token Offering
* It is also known as a tokenized security offering or a tokenized asset offering.
* The tokens will be offered by the owner of the property to investors via a crowdfunding campaign.
* The investors of the tokens will know the real value of the underlying asset they are buying and will benefit in case there is a price appreciation of the asset.
* Investors can trade their tokens on the leading exchanges in the market.
* Asset owners are in complete control of deciding how they want to market their STO.
The different advantages rendered by Real estate crowdfunding
* It removes the role of middlemen such as brokers, agents, banks, underwriters, and lawyers reducing costs and time for investors to buy or sell real estate and for owners to raise capital.
* Investors can trade the tokens easily and instantly for low fees in the leading exchanges.
* Investors benefit from high returns and sufficient liquidity of the stock market.
* They are less risky than cryptocurrencies or ICO’s as all the real estate tokens are backed by real assets ensuring less volatility. Stabilization measures can be undertaken to ensure that the value of the security token does not fall below the underlying net asset value (NAV) of the property.
* The entry barriers are very low in real estate tokenization and ordinary people can also invest in real estate assets easily. They can invest a few hundred dollars and become a fractional owner.
* It promotes better transparency as the distributed blockchain ledger would track the history of every single token. Investors can prevent from resorting to underpaying or overpaying by figuring out details of past deals and estimate if the asking price set by the property owner is realistic or not.
* Better compliance can be ensured by automatically programming the legal obligations into the digital assets to permit the participation of only eligible parties in the process. This enables tracking of secondary transactions without any complications.
* The rapid settlement is assured as the cap tables can be managed on a real-time basis 24×7 reducing the operating and reporting costs.
* Liquidity is enhanced as there will not be any discounts and premiums. A variety of assets can be traded on the secondary market and this ensures that the executable price of the asset is as close as its true value.
The future of Real Estate tokenization
Owners who want to professionally manage their real estate will prefer to go for tokenization. They can market their property to accredited institutional investors, retail investors and financial institutions. It has the potential to promote ambitious and unique real estate development in the industry which is generally slow to adopt emerging technologies. Tokenization is more advantageous than Real estate Investment Trusts (REITs) as they have high minimum investment criteria, huge upfront and brokerage costs, and represent a huge portfolio of companies without having a single property or new development. Tokenization will take away business from other illiquid asset classes such as private equity and venture capital as it promotes fractional ownership.
Currently, the real estate industry is suffering from confusing regulations, unpredictable transaction costs, lack of transparency, volatile prices, and different stakeholder rules.
It promotes more financial inclusion as it allows access to a broader investor base. It has made significant progress in Europe, Asia and the U.S. Many companies are launching their own tokenized real estate funds taking note of the strong demand. Transaction costs are also significantly lower in real estate tokenization. This will enable a liquid secondary market with virtually no minimum investment norms by ensuring that investors can easily resell their assets by listing their tokens on digital exchanges. Hence, tokenization will make a positive difference for investors, developers, fund managers and the industry as a whole.
The integration of Defi exchanges and real estate tokenization
Aave protocol which is one of the second target DeFi tokens in the world by market capitalization has made its foray into real estate tokenization by teaming up with RealT, a blockchain platform that offers fractional investment in tokenized assets. Users will be allowed to deposit their tokens into the Aave protocol and use them as a form of collateral to borrow stablecoins enabling new use-cases for their valuable assets. It boosts liquidity for investors. All the investors will undergo an extensive KYC verification with RealT.
The challenges to the growth of real estate tokenization
It is still far away from mass adoption despite possessing a lot of promise. It has to follow the various government regulations along with KYC (Know Your Customer) and AML (Anti Money Laundering) norms with due diligence. A uniform international framework is needed to recognize the concept of tokens. If more businesses adopt the use of blockchain technology, then tokenization would assist in streamlining the entire real estate market without completely turning it on its head. It will make the industry more transparent and reliable.