Real estate assets are some of the most common to undergo the tokenization process. Real estate tokenization has several benefits for both buyers and sellers. As a result, real estate tokens have revolutionized the real estate market and made real estate investing more accessible.
Tokenized real estate relies on blockchain technology. If you are unfamiliar with blockchain technology, follow the helpful links in this sentence to learn more about it with our helpful HiTech blog resources.
This post will examine real estate tokenization. First, we will explain what real estate tokenization is and how tokenized real estate works. In addition, we will cover the benefits of real estate tokens so you can better understand the value of this emerging trend in real estate.
What Is Real Estate Tokenization?
A real estate asset is a significant physical asset, which makes liquidating it more difficult and time-consuming. Real estate tokenization utilizes blockchain technology to fractionalize real property assets into digital tokens.
Each token represents an ownership stake in the property. In addition, real estate tokens can also be used to represent:
- Ownership of a single property
- An equity interest in an entity that controls real property
- An interest in debt secured by a real property
- A right to share in profits generated by a real property
A real estate token is similar to a non-fungible token. However, a real estate token’s value is typically tied to a property’s value. As a result, most real estate tokens are security tokens whose value is tied to real assets.
If you are familiar with real estate investment trusts (REITs), you might think that real estate security tokens are merely a digital form of this type of real estate investment.
However, REITs typically facilitate the investment into pools of real estate assets, whereas real estate tokens facilitate the investment into a specific underlying real estate property.
The first notable real estate tokenization offering took place in 2018 when $18 million was raised by the famous ski resort Aspen through the offering of fractional ownership in the resort in the form of Aspen Coins.
How Does Real Estate Tokenization Work?
Like most digital assets and blockchain-based technology, real estate tokenization relies on smart contracts. Smart contracts are automated bits of code on the blockchain that execute when the terms have been met.
In the case of real estate, a smart contract will implement and enforce equity transactions related to the token that is sold. Smart contracts are designed to make all features of a particular token, whether that be distributing dividends or sales to retail investors, fully automated.
From an organizational perspective, the first step in real estate tokenization is to choose a property, whether that is a proposed real estate project, a commercial real estate property, or another piece of property to sell.
Choose a property that will draw interest for private real estate investments. Real estate tokenization will cost your organization money, so if you choose something no one is interested in buying, tokenization will be a waste of time and resources.
Once you have determined which properties to tokenize, you must develop smart contracts and choose a blockchain network to launch them on. In addition, you must ensure that you are adhering to securities laws.
Once your tokens are launched, your organization can also explore sales opportunities on alternative trading systems.
The Benefits of Real Estate Tokenization
We know that real estate tokenization makes real estate ownership more accessible to retail investors. Real property ownership typically requires a significant investment that eludes most interested people.
While tokenized assets are great for market participants, are there benefits for businesses? Yes, the benefits of real estate tokenization can be enjoyed by organizations too. The top benefits of real estate tokenization include the following:
- Greater liquidity
- Lower costs
- Access to a wider pool of investors
Real estate tokenization gives property owners greater liquidity. Typically, real estate is considered an illiquid asset, which means it cannot be quickly sold or converted to cash without losing substantial value.
Yes, you can always sell a property, but if you want to do it very quickly to create liquidity, chances are you will have to sell it below actual market value. Real estate tokenization enables owners to sell their property or shares of their property quickly without having to offer a substantial discount.
If your organization wants to access the liquid value of its properties, consider real estate tokenization as the solution. Tokenization is especially good if you don’t want to sell your property fully.
There are many costs associated with real estate transactions, from listing fees to agent commissions, inspections, lawyers, etc. Real estate tokenization will cost money, but the costs are lower than traditional real estate deals.
The true bulk of the costs for tokenization is related primarily to the development of smart contracts. In addition, there are costs associated with transactions and sales on blockchain networks.
However, considering all of these costs, tokenization will ultimately cost less.
Access to a Wider Pool of Investors
Real estate tokenization gives your organization greater access to investors. Purchasing real estate is out of reach for many buyers. However, real estate tokenization enables small-scale investor participation, which means more people can purchase real estate.
For example, most people cannot even consider purchasing a ski resort. However, with Aspen Coin, anyone can purchase an ownership stake in one of the world’s premier ski resorts, Aspen.
When more people can purchase real estate tokens, your organization has more opportunities to make sales.
Real estate tokenization is an exciting approach that organizations can take to access their properties’ value quickly. If your business needs to raise funds and is considering selling its property, real estate tokenization is worth considering.
If you want to learn more about real estate tokenization and its benefits, contact an experienced blockchain and FinTech development partner like Koombea.