Real Estate and Tokenization

Real Estate and Tokenization

The real estate industry is ready for tokenization

One of the industries where tokenization will soon change the rules of the game is in the real estate industry. By using blockchain, it is possible to tokenize houses, apartments, properties and represent them on blockchain.

This will shake up the real estate market and inevitably change the traditional way of doing things. Blockchain has great potential, as it builds trust and helps shape a world of frictionless transactions. Tokenization will solve, among other things, liquidity problems in the commercial real estate sector. Besides many other of applications and the pioneers in the industry are ready to lead the way in developing promising projects.

In this article, we will take a closer look at how real estate tokenization works, the advantages and use cases. Tokenization will be a big trend in 2021, as the possibilities of fragmenting a property  allows investors to build a risk-optimized portfolio. The future is digital, and blockchain is now bringing this development to one of the oldest industries.

The concept of tokenization is gaining more attention again and is gaining momentum. Ideas and projects are being worked on everywhere, and one such case is real estate tokenization.

The underlying technology is blockchain. In simplified terms, a blockchain is a distributed, decentralized database stored on a large number of servers. A single update on one server results in the simultaneous update of data on all servers. Transactions on blockchain-based platforms can never be altered or deleted.  Tokens can now be linked to these transactions, primarily as digital representations of assets, money or securities.

Tokenization solves many known industry problems

Especially during the COVID-19 pandemic, one of the problems in the real estate industry like the reliance on physical meetings to conclude contracts stands out. Procedural difficulties and inefficiencies are jeopardizing the success of this market.

In addition, a large number of intermediaries (lawyers, brokers, financial institutions, etc.) continue to cause, to some extent, avoidable and costly frictions. Establishing the necessary trust between these intermediaries and ensuring compliance requires a great deal of red tape.

These cumbersome circumstances lead to increased costs and time expenditure. However, if real estate is tokenized, time-consuming and inefficient processes through intermediaries become obsolete, as blockchain is based on the peer-to-peer principle.

Therefore blockchain technology creates trust between two contractual partners and guarantees a secure process through its technical basis. It also increases transparency and automation while enabling the international transfer of tokens (real estate shares) in seconds.

The real estate sector itself is not agile and the buying and selling processes are very complex. In addition, unpredictable events such as construction errors and natural disasters can have a negative impact on liquidity.

While blockchain cannot counteract physical risks, it does allow for efficient and cost-effective process solutions to be designed. This significantly increases liquidity and mitigates the negative impact. Therefore, a huge liquidity boost is generated by the possibility of fragmenting real estate investments through tokenization, i.e. offering smaller shares effectively at the desired price and the associated “partial tokenization”.

This allows the intangible assets of the property to be effectively utilized through the sale of certain shares something that will certainly transform the sales process from static to dynamic. And this will offer owners much more flexibility.

Tokenization gives both institutional and retail investors the opportunity to diversify their portfolios.

Let’s look at an example how tokenization could be applied: Normally, you either pay rent or purchase a property. With tokenization, a combination of these two options is possible. You could own 60% of the property and tokenize 40%. This 40% can be offered on a secondary market and can function as a mortgage. For this, you will not need a financial service provider or a bank. Therefore, the required capital can be obtained at any time through assets that are already owned and are not yet fungible.

In general, it can be said that smart contracts make the entire investment process faster and safer. These processes can be carried out in a matter of seconds and without the need for an intermediary.

Potential of tokenized real estate

Equipped with registration functions, real estate tokens can map the corresponding ownership and liquidity relationships in the digital world. This enables efficient and above all day-to-day management of the liquidity of real estate. It is possible to convert the entire spectrum of properties into digital assets via blockchain (i.e. without a deed or analog property registration entry).

Another option is payments to owners, which are mapped in this way. Real estate feeds are an ideal tool for asset managers to create liquidity efficiently and cost-effectively. In addition, a door is now opening for institutional investors to access previously tied-up capital.

The new model reduces direct and indirect marginal costs due to the trading of partial ownership and the increased liquidity of the asset itself. In addition, land transfer tax is avoided, as it was previously significantly reduced by high liquidity premiums. This allows properties to be liquidated efficiently without deducting costs.

Now with tokenized real estate it is possible to actively trade on the secondary market without liquidity discounts. This offers simple and economical possibilities to invest in real estate at any time.

Location costs or friction caused by superfluous intermediaries will not play a role. In addition, it also offers a fine-tuned user interface for asset managers and their institutional investors. This gives investors and financial institutions access to traditional and completely new asset classes (e.g. equity tokens).

Compliance and technical security are also ensured. Important custody activity includes the storage of private keys, which are necessary for the secure transmission, storage and, above all, safe custody of tokens.

The decentralized blockchain concept allows owners and investors to join forces without the involvement of an intermediary.

Future perspective

The simple concept of tokenization, converting the rights to an asset into a digital token, will have a significant effect on the real estate industry. By enabling the trading of digital assets, including tokenized shares of real estate, on secondary markets, blockchain technology will fundamentally change the way this industry is financed and processed.

It is time for the real estate industry to prepare for Web 3.0 and begin to truly participate in the digital transformation. Aspects of tokenization, such as property fragmentation, will be of great value to institutional and retail investors. With tokenization, true portfolio diversification can be achieved. In this way, investors can better mitigate their risks by not having to buy 100% of an asset and instead can now partially participate.

For retail investors, this development will provide a much greater number of opportunities to invest, even with small amounts of capital. While we still have a long way to go before this $200 trillion market is part of the emerging token economy, the accompanying benefits make it difficult to neglect this future development: The minimum investment size required will reduce drastically.

In addition, tokenization will lower high barriers to entry and help change an industry plagued by high barriers to entry and illiquidity. Tokenization will open up this illiquid market and help democratize this sector, while allowing large new amounts of capital to enter.

Finally, another important aspect is that the underlying blockchain technology will allow tokenized assets to be exchanged every day, 24/7, also increasing liquidity. If you want to learn more about tokenization in real estate and other sectors, then you should definitely download our report!

As you can see tokenization will change completely change how the real estate sector operates, and in this change allow anybody to be able to invest in tokenized asset by acquiring their corresponding tokens. Join Brickken now, and be part of this revolution!