Real Estate Tokenization: The Biggest Contribution of Blockchain to the Real Estate Industry

Feb 25, 2020

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The process of tokenization of real estate is the representation of real estate assets in a virtual environment with digital tokens similar to other asset classes as discussed in a previous article on Asset Tokenization. These tokens are issued by property owners or their representative by securitizing their real assets, this enables the asset to be traded digitally on tokenized asset markets.

Blockchain technology allows for transparency, immutability and fractional ownership which provides several key benefits for real estate markets. Blockchain technology made democratization of real estate possible where any individual across the world can invest in real estate by purchasing tokens that represents a share in an asset [1].

Benefits of Real Estate Tokenization

  • Tokenization of real estate assets plays a vital role in capital raising as it removes the middle man interactions by making it simpler and easier for investors and owners to buy or sell their real estate assets in the form of tokens at low fees similar to the stock market.
  • Real Estate Tokenization allows fractional ownership of real estate assets, which will democratize real state investments and bring more liquidity by enabling any individual around the world buy and sell a share in a real estate project.

Real Estate Tokenization Process

Real estate asset tokenization can be summed up in three main steps as follows:

1. Deal structuring: Where the asset owners determine the asset type, shareholder types, jurisdiction and applicable regulations. The most common legal structures are Single asset Special Purpose Vehicle (SPV), Real estate fund, project finance, and Real Estate Investment Trust (REIT).

2. Technology selection: This process includes the selection of Blockchain platform, KYC/AML Vendor, and primary/secondary marketplace.

3. Token creation and distribution: This is where the token is created, launched and distributed. This is a process involves determining what type of payment and funds are accepted, KYC verification of investors, and token distribution where the investors will receive their tokens.

Real estate asset tokens are usually issued in a regulated Security Token Offering (STO) and are sold to the primary investors. The tokens can be also issued for secondary trading on a digital exchange market.

Adoption Is Right Around the Corner

Tokenization can remove the pressure of traditional financing and it is much efficient for owners, developers, investors and stakeholders. Traditional property investments and their issuing techniques were challenged by Bastiaan Don, the founder and managing director of Blockimmo by using blockchain as a platform for private and professional investors. Similarly, Stephane De Baets, the pioneer of tokenized real estate launched the first real estate Security Token Offering (STO) [2]. His journey to the real estate STO began by purchasing a single hotel. De Baets bought the St. Regis Aspen, Colorado Hotel from Starwood in September 2010 for the value of $70 Million [3]. To facilitate the public with this property investment, De Baets with the collaboration of his team created a single asset Real Estate Investment Trust (REIT) [4]. Similarly, In 2018, A property project was tokenized in New York by Propellr and Fluidity. [5].

“Once a property, real estate fund, or financial instrument is tokenised, the real advantages come into play: subsequent transactions are instant, nearly free of charge, and, if done properly, without counterparty risk. This is an absolute game-changer for the industry.” [6]

– Brickblock CEO, Jakob Drzazga.

According to a report by MSCI the size of global real estate investment markets grew from $6.8 Trillion in 2013 to $8.9 Trillion in 2018 [7]. However, the market is expected to grow much faster as the adoption of tokenization will provide high liquidity to the market.

Concluding Thoughts

Real Estate Tokenization has the potential to change the perspective of investors and owners dealing with their assets and properties around the world. Tokenization provides more liquidity for majority shareholders and developers beyond the regional limitations across the digital borders. Thus we can conclude that real estate asset tokens will become an important alternative investing vehicle in the near future.

At elivise, we help investors realize the potentials of real estate tokenization and other asset classes by providing tailored advisory services and insights into the world of blockchain, digital assets and tokenized financial markets.

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