Real estate has always been viewed for ages as an illiquid asset with lots of hidden costs. However, professional management can go a long way in altering that perception. Let us overview this emerging trend that will take the whole world by storm in the future.
It is a cost-effective method that facilitates small investors with limited financial backing to get fractional ownership in the asset. Through the decentralized blockchain platform, it helps owners of assets to raise capital at an affordable cost by issuing valuable tokens.
Tokens will have a predefined value and represent a specific amount of shares for a real estate asset. Investors will benefit from liquidity and transparency regarding information about lucrative offers.
Unearthing the Different Types of Real Estate Tokenization
- Commercial Real estate tokenization — With the rise in the entrepreneurial spirit and business mindset, commercial real estate tokenization has a promising future ahead. The illiquidity in these assets is due to a lack of market depth, and transparency as deals are executed in shallow private markets. Liquidity is boosted by dividing assets into smaller representations and reducing the entry barriers for investors and increasing the chances of saleability.
- Residential Real estate tokenization — The need for owning a home has become increasingly important now. Having a safe rooftop over your head gives a sense of security as well as satisfaction. Thorough residential real estate tokenization, interested homebuyers can own a share of major properties across different geographies. They can also benefit from increasing capital gains and dividends.
- Single Real estate tokenization — Those who own multiple properties will benefit from single real-estate tokenization as it helps to reduce their liquidity premium and raise funds for different projects by tokenizing their single real estate.
- Trophy Real estate tokenization — Investors can liquidate their most valuable and worthy asset, which is nothing but the trophy asset and raise funds for their various projects in a compliant, secure, and immutable ledger.
Steps to Follow for Executing Tokenization of Real Estate on the Blockchain
- Find a reliable blockchain platform that provides investors ownership rights on their respective tokens through a proper authorization. Ensure that the regulations are followed with due diligence.
- Make sure that the rights can be transferred partially as well as fully by the owner to anyone as and when the situation demands.
- The owner should also be able to exchange the token for a specific value. Hence, each asset should get its proper value represented in tokens.
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How Investors Gain from Real Estate Tokenization
- The settlement process is efficient as intermediaries are eliminated, leading to a situation where buyers and sellers directly deal with each other.
- While participants will see the deal executed at an affordable price, owners will be able to raise capital quickly.
- Tokens can be traded by investors for a very low fee.
- There is no need for the involvement of underwriters for a project that is going to be tokenized.
- It provides the twin benefits of high and consistent returns along with sufficient liquidity.
- Since they are backed by real assets, they are less risky when compared to digital assets such as cryptocurrencies and ICO (Initial Coin Offerings).
- Stabilization measures can be taken periodically to ensure that the value of the security token does not fall below the underlying NAV (Net Asset Value) of the property.
Why Real Estate Tokenization Has a Promising Future
Access to real estate has increased manifold of late. Earlier, only authorized and institutional investors would get exclusive access to the top projects. The scenario has changed due to Real estate tokenization as owners and developers of assets can market their projects successfully to retail investors and institutions.
It has resulted in better enhancement of the investment experience by bringing in higher levels of liquidity and more transparency. Since shares in property can now be traded on a real-time basis, it will create the possibility of profitable real estate development to take place regularly in the market.
Investors who satisfy the criteria of a minimum investment will get access to a greater portfolio of companies compared to a single property. Owners and investors are given full freedom to raise or invest capital as per their choice.
It can also change the business models of private equity and venture capital in the days to come.
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Challenges to Real Estate Tokenization
- Regulatory obstacles — Since the concept of security tokens is not clearly regulated across different countries, it leads to compliance issues. A common framework in the form of a compliance structure is needed for the optimization of the benefits of no intermediaries.
- The need for availability of more licensed platforms — Licensed platforms are required to operate and manage STO’s (Security Token Offerings). It is quite a complex process as a substantial amount of resources need to be spent for running through multiple trial and error methods before becoming fully functional.
- Security issues — Though blockchain platforms are equipped with top-notch security measures, custody solutions and safeguarding of tokens need to be finalized. In cases where a token gets stolen due to incidents of hacking, the risks would be heavy.
- Tax implications — Whenever a property is tokenized, it gives access to global markets, promoting a sense of inclusion. However, clear tax rules are absent regarding cryptocurrencies in most countries. As a firm expands, it gets caught in the regulatory bottleneck as ambiguity would emerge due to the variation in tax structure from one nation to another.
Although tokenization has a bright future ahead due to its disruptive nature and efficiency in saving costs, it has to face major tests before operating on a full-fledged level in the industry. Investors who do not prefer to take risks will opt to avoid blockchain technology and security tokens at all costs. Scalability and working models are needed for success in the industry. In the long run, real estate tokenization can transform the whole sector and take it to another level.