Levent Künzi is Co-Founder and CEO of Properti, a tech-driven real estate company dedicated to modernizing residential real estate in Europe.
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The coronavirus pandemic taught us one thing in particular — some things come completely unexpectedly. The pandemic not only brought the need for more digitization to the real estate industry but also sparked a trend that had become public primarily via social media. Overnight, non-fungible tokens flooded the feeds of thousands of users and gave digital art a bit of the character and uniqueness of analog art.
“NFT” has been on everyone’s lips ever since, often in relation to financial investments in the art sector, but increasingly also in connection with real estate. Would you have thought that the blockchain-based trend would have found its way into the sluggish real estate industry? Perhaps not many people, however a blockchain-based fund is a product my own company is in the process of creating in anticipation of its trending impact on the real estate community.
The sale of Canadian artist Krista Kim’s virtual “Mars House,” which traded for $500,000 on a non-fungible token marketplace, shows that the concept has long since ceased to be gamesmanship and become a serious investment.
The newfound ability to buy and sell land or real estate via platforms like Decentraland and Cryptovoxels also illustrates that there is demand in the digital real estate space. The investors of digital houses let their properties cost quite a bit. In some cases, the prices do not differ from the prices of real houses.
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Digital homes and properties in this form still represent a hybrid between art and real estate but are creating increased awareness for NFT in the real estate industry. This is because, in addition to this extraordinary form of real estate investment, the benefits of tokens and “blockchainization” are also being increasingly relied upon in the real world.
How It Works
From this perspective, blockchain technology is nothing new in the real estate industry. Already, smart contracts can be concluded digitally and easily, and elsewhere, blockchain technology enables digitized land registers.
The tokenization of real estate works in the same way as the digitization of offline artwork: The token represents the ownership information of the asset, recorded on a blockchain. In the process, all details such as ownership, construction plans, the location and the investor’s rights are mapped in digital form and recorded in a smart contract. The value of the property is then distributed among a fixed number of tokens and issued to investors. After the initial issue, these can be listed on a digital exchange for secondary market trading and easily resold by investors.
The tokenization of real estate brings with it a major advantage: The world’s most illiquid asset class is made accessible to a broad investor base. Once again, technology thus brings about the democratization of an exclusive system, opening up previously elite asset classes.
How is this possible? Unlike traditional real estate funds, which require certain minimum investments and high management fees, transaction fees in this environment are very low.
In addition to this obvious advantage, tokenization brings another benefit that should not be ignored: Real estate transactions that were previously opaque and left room for illegal activities such as tax evasion or money laundering are prevented by blockchain technology. That is thanks to the sophisticated functioning of the technology — the structure and linking of the individual links in the chain — which makes the blockchain secure against forgery.
The pioneer of blockchain-based tokenization is Black Manta Capital Partners. In 2020, it successfully conducted a RETO, or real estate token offering, for Berlin real estate worth more than $12 million in collaboration with Tigris Immobilien. Private and institutional providers from Germany and Austria were able to invest in a Berlin apartment in a premium location starting at a value of 500 euros.
This type of investment brings a great advantage. Through the tokens, the way to capital investment that is normally reserved for professional investors is also paved for ordinary citizens. In the case of the Berlin RETO, investors can look forward to a 20% share of the sales profit when construction is completed in 2022.
Buying real-world properties as NFTs works not only as crowdfunding, as in the Berlin RETO, but also for individuals, as the example of TechCrunch founder Michael Arrington shows. The latter auctioned off his loft in Kiev for $20,000. He received support for the transaction from Propy, a blockchain-based real estate brokerage platform.
Despite successful examples like this, technology still presents us with challenges. For example, Natalia Karayaneva of Propy also points out that one of the blockchain’s advantages can become a stumbling block at the same time. It can be argued that the blockchain is “burglar-proof” due to its resistance to forgery. Lost keys to crypto accounts have been impossible to crack so far.
In addition to security, which can also prove to be a major issue in the event of a lost key, the blockchain is still negatively embedded in the climate debate. That the ecological footprint of cryptocurrency is anything but good is confirmed by estimates from the University of Cambridge. According to the Cambridge Bitcoin Electricity Consumption Index, Bitcoin mining consumes more electricity per year than the entire Netherlands.
While the challenges described may be great, the opportunities for NFT in the real estate industry should not be underestimated.
These new opportunities are particularly interesting from a proptech perspective. Due to the cumbersome nature of the real estate industry, young real estate companies have an advantage: Proptechs are always on the move, looking for new technologies and ways to improve service. The status quo is not in the vocabulary of young companies that strive to innovate and do so quickly. With their high adaptability and affinity for technology, they can react faster to trends such as NFT and integrate them into everyday life, whereas the classic players in the real estate industry first have to go in search of resources to implement and adapt new applications.
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