The world of real estate has been abuzz with tokenization. Real estate tokenization has been in vogue for quite some time in the recent past, and a lot of blockchain app development companies have been in the spree of creating real estate tokenization platforms.
Is this asset tokenization a fad or the future? What will be the future of the tokenization of real estate assets? What advantages do they bring?
The oncoming paragraphs answer these trillion-dollar questions!
One of the cheesiest lines used by a lot of real estate companies to lure their clients is ‘the best investment on Earth… is Earth self!’ – it surely does sound cheeky, but it cannot be denied that real estate is one of the best avenues of investment. The lucrativeness of real estate is country-agnostic. Real estate is a good investment that holds good in the United States as much as it does in India.
A Few Impressive Statistics
- Real estate as an investment avenue has been steadily growing. The size of professionally managed real estate grew by a staggering $1.1 trillion within a span of one year – it was $7.4 trillion in 2016, and it skyrocketed to $8.5 trillion in 2017.
- For most American households, 66% of the family’s wealth is their family home. This proves that home equity can be a source of capital for all asset building goals. It also presents a significant legacy of wealth for the next generation.
- 8.25% of all American households count as accredited investors. The 8.25% might not seem like a great number, but if it translates into real numbers, it accounts for about 10,108,811 households. They hold about 70% of all the private wealth in the country, and the value stands at a staggering $45.5 trillion.
The challenge with real estate
There is no question on the profitability of investing in real estate. However, real estate and at least commercial real estate is beyond the limits of affordability for a lot of people. This limits the number of prospective investors when it comes to high-value real estate.
In addition, a real estate property cannot be broken down into smaller parts. A property worth $100 million can only be sold to some affluent investor who has $100 million at their disposal. Both these challenges result in real estate being rendered highly illiquid. It is a classic case of an oxymoronic situation where and as it is extremely profitable when sold, but it is extremely difficult to have it sold!
Tokenization – the silver bullet
What if the entire asset could be, in some way, broken down into smaller representative units without any loss in value? If a real estate property worth $100 million can be broken down into 100 units, each valued at $1 million or even 10,000 units, each valued at $10,000, it becomes extremely liquid and affordable. At the same time, it does not lose its value or its prospective profitability.
This act of breaking down an asset into smaller representatives, each having a tangible value, is called tokenization. In the classical realm of investment, it was called securitization. Securitization was limited to stocks, and it was not quite versatile. However, these tokens can represent underlying ownership in an asset, or equity in the legal structure that owns the acid, or an interest in the debt secured by the real estate, or even voting rights in the ownership.
The dynamicity of these tokens is enabled by a new technology called the blockchain. Blockchain is a digital, decentralized, immutable, and secure ledger that can be used to store transaction data and even to execute automated transactions. The most standard blockchain-based token used for asset representation is the ERC-20 Standard token designed to operate on the blockchain called Ethereum.
The act of tokenization is not confined to real estate – it pervades all high-value, low liquidity assets including but not limited to fine art, collectibles, real estate, and even archaeological discoveries and monuments.
Related: How to Tokenize Real Estate Assets?
Advantage of Tokenizing an Asset
On the surface, it might seem that the only advantage brought about by asset tokenization is in terms of liquidity. There are quite a lot of advantages that we will discuss below:
Liquidity – we have discussed this a lot, but it still deserves more details. Tokenization enhances liquidity in two methods. One of them is by lowering the barriers of the entry period, a token is surely more affordable than the entire asset, and it ensures that a lot of prospective investors can invest in the asset that was considered inaccessible until now. In addition, the diversity of the investors also enhances the possibility of the asset getting sold to someone else, at least in part. The increase in the magnitude of saleability directly impacts the liquidity.
Regulation – it has to be explicitly stated that security tokens pass the Howey test and are considered securities even by the traditional definition. This also implies that the token and the process of selling these tokens is subject to the regulations of bodies like the Securities and Exchange Commission (SEC). The involvement of the regulatory body ensures that the interests of the investors are protected. This considerably reduces the possibility of fraud. This also mandates the token offering body to complete the KYC/AML formalities.
Global reach – since the entire process of tokenization runs on the blockchain, and there are no geographic or temporal constraints associated with it. A person in any part of the world can invest in a real estate property through tokenization, provided the jurisdiction of their location gives room for it. Also, the market is available 24×7, and the transactions are almost immediate. This ensures that trade is always active and passively. It also contributes to enhanced liquidity.
Automation – security tokens are not just representatives, but they also contain a self-executing program called smart contracts. They can be programmed to pay out dividends or any other forms of return automatically. This ensures that quite a lot of money is saved because there are no costs associated with intermediaries and transactions.
Tokenization of real estate assets is all set to be the order of the future when it comes to seeking investments with a democratic outlook and an enhanced degree of liquidity. If you would like to capitalize on this wave powered by cutting edge technology like blockchain, all you need to do is get in touch with blockchain development companies who will take care to develop your own real estate tokenization platform.
Once you have customized it according to your requirements, and you have established your regulatory credibility, you are all set to rule the world of real estate investments!