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Even as an ardent blockchain advisor and advocate, I sometimes have difficulty clearly explaining the emerging technology in plain English. Through my work as a U.S. Regional Chair for the Foundation for International Blockchain and Real Estate Expertise (FIBREE), I’ve learned how to more clearly share my passion for this technology through the lens of its implementation across the real estate industry. Blockchain is now truly transforming the landscape of property investment, development, operations and sales.
The tokenization of real estate is, quite simply, the process of representing a fractionalized ownership stake in a real estate asset through a blockchain-based security token.
Tokenization is having a significant and profoundly positive impact on the real estate industry. This process will ultimately enable anyone to invest, say, $1,000 in a property and, sometime down the line, trade that investment (just as one would now trade a share of a blue-chip stock) for a tiny fee through an app on their smartphone. I believe this is where real estate investment, development and ownership are heading, and it is going to be big.
As a matter of fact, we’ve already proven the efficacy of the tokenization model through the successful sale of numerous property tokenization offerings around the world. As a very recent example, one Texas-based commercial real estate (CRE) marketplace has tokenized $2.2 billion worth of real estate assets from Texas to New York to California.
This is the new world of real estate investment, where efficiency, liquidity and customizability through smart contracts based on the blockchain take property investment possibilities to the mass market, such that virtually anyone can own a piece of any property that is offered. This also brings about a massive potential investment pool for property owners to source for liquidity as well. The following is what tokenization stands to bring to the real estate industry, in plain English, so you can be prepared for the coming wave of property ladder opportunities.
1. Fractionalization
Fractionalization is the division of owner equity into bite-sized chunks for the intention of sale. For example, if a building owner holds their property outright (no mortgage, no debt) and wishes to purchase another building to increase their property exposure and earn more rental income, they may choose to tokenize their existing asset through the use of a security token offering (STO) in order to sell a percentage of their equity to purchase the second apartment building. They remain the majority owner; however, the investors who have jointly purchased the equity stake are now owners with a defined set of rights, such as dividends, voting privileges, equity appreciation and tradability.
The commercial real estate asset class has long had a high barrier of entry because there is usually a large upfront capital expenditure required. With a fractionalized property, the asset becomes democratized, and access is opened to smaller investors.
2. Liquidity
As it relates to investing, liquidity is defined by how quickly an asset can be converted into cash. Assets such as stocks or bonds can be exchanged for cash quite quickly as compared to assets such as real estate. Real estate has long been known as one of the most illiquid asset classes due to the length of time it takes to cash out of a property investment.
When a property is tokenized, the asset is unlocked to a global pool of potential investors and secondary markets for trading the fractionalized asset tokens facilitating additional liquidity. Liquid assets tend to command a premium in the marketplace, thus increasing the underlying asset value.
3. Cost Efficiency
This is among the greatest benefits that tokenization brings to any real estate deal. There are many intermediary costs and processes involved in any purchase, sale or lease transaction, such as brokerage fees, lender charges, closing costs, appraisals, inspections, legal fees and the list goes on. When utilizing a blockchain-based smart contract as the source of the transaction, these external, third-party costs are disintermediated, bringing about unprecedented efficiency to the process, because the smart contract has already been loaded with all of the information that these third-party players would contribute to the transaction. The smart contract now acts as the arbiter, broker and lawyer, and it performs exactly what is spelled out in the contract as it happens in real time, reducing deal friction and now-unnecessary costs.
4. Automation
Smart contracts also allow for automation. Many real estate transaction-related processes that facilitate a deal, such as document verification, underwriting, compliance, escrow, legal, etc., all require a great deal of time and effort from other people. A blockchain-based smart-contract such as that used to tokenize properties makes these human interactions unnecessary, because each process has been built into the code of the contract, and each action or performance obligation in the contract is instantly carried out, saving a great deal of time and money.
5. Transparency
In a deal, transparency is critical for all parties involved, and proper recording of data is essential for so many reasons, which is why I find the assurance of tokenization of real estate transactions is so amazing — enter the blockchain. One of the most easily recognizable features of a blockchain-based deal is the record keeping. Visible to all parties to the contract, immutable and secure, the underlying data, such as date and time stamps, payments and all other contractual obligations, is recorded on the blockchain at each step of the deal process, ensuring that every facet of the investment is clearly linked to its underlying value driver.
The tokenization of real estate assets is flipping the equity and liquidity paradigm that has long limited real estate investment to the elite class of investors. As we move forward into this revolutionary new world of tokenized real estate assets, we will experience a sea change in the ways developers raise capital, investors diversify their portfolios and owners liberate their equity.