The exciting emergence of Blockchain technology has entered the realms of the Real Estate industry too. Earlier, real estate was not considered to be an attractive investment because of several reasons such as high entry cost, illiquidity due to the huge time involved, and high depreciation costs. However, the trend has changed now as it is considered safer than stock markets.
With a rising interest level in the purchase of cryptocurrency through security tokens, shareholders can use them in the form of debt or equity securities to purchase a single property or a variety of properties. Real estate tokenization refers to the conversion of the physical or tangible property into manageable shares or tokens for getting a stake in the ownership of the property. The tokens can represent all or part of a building, shares in a real estate fund or a complete project.
Analysts of cryptocurrency generally believe that security tokens which are highly liquid operate like Real Estate Investment Trusts (REITs). REITs operate by trading at a discount to their underlying Net Asset Value (NAV) and tie-up with the equity market which limits the portfolio.
REITs are using the Proof of Asset Protocol which allows them to release tokens based on the footage of the apartment. Through this, all investors can sell their tokens and recover their money invested in the project. The token price is stable and appreciates while the apartment is built.
Through these security tokens, a small improvement in sales cost of investments can create billion dollars of new value for companies. The reasons why security tokens are in demand is because of less entry cost, removal of middlemen, diversification of the portfolio, and standardized transactions. Due to the introduction of crowdfunding, small investors can also participate and get a high return on investment.
The steps involved in real estate tokenization would be Deal structuring, selection of Technology, Token creation and distribution.
There are many ways to tokenize real estate property now. The many types of tokenisation are Commercial, Residential, Single, and Trophy Real Estate tokenization.
However, some factors must be taken into consideration. The important factors are liabilities of the property, smart contracts for automation, the ratio of tokenization, local and national taxation requirements, knowledge of the token holder’s track record, and fulfilling KYC/AML requirements.
Some Advantages of Real Estate Tokenization Are
- Access to additional capital – Through small investment denominations of properties offered as the stake, real estate owners can access a broader and diverse investor group.
- Liquidity premiums and higher liquidity discounts – Both individuals and institutional investors are at a level playing field now due to tokenization. Publicly traded REIT’s are getting a hefty premium now. This has resulted in a broad variety of assets to be traded and brings the asset’s executable price close to its true value.
- Enhanced price discovery – Real-time pricing information based on order books can be obtained accurately from the secondary market. It also improves transparency as data regarding valuation is available without any factual errors.
- Reduction in costs – Automated processing reduces the costs involved in the administration and improves settlement speed.
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