We often read news in the media about successes in real estate tokenization. Blockchain technology offers an exciting, almost revolutionary opportunity to transfer assets in the form of real estate, which will lead to significant changes for the entire market. The global real estate investment market was worth about €8.6 trillion in 2019, roughly a tenth of the worldwide stock market’s capitalization. Tokenization of real estate investments will reduce costs for issuers and reach significantly more investors due to the divisibility of real estate into smaller units.
What is real estate tokenization?
Real estate tokenization is the issuance of tokens assigned to a particular commercial property. Each token has a specific price and assigns its owner ownership of the property.
You don’t have to invest in cryptocurrency to buy a stake in real estate with a token. Any blockchain can be used for real estate tokenization: Ethereum, Binance Smart Chain, Polygon. Based on the blockchain, a smart contract is created, which contains a lot of information:
- Number of tokens issued
- Rights related to the purchase of a token
- Public key
Blockchain-based real estate tokenization is still in its infancy, as its technical requirements have yet to be improved/developed. In the future, smart contracts will contain much more information related to real estate. However, various properties have already been tokenized.
Real estate tokenization has already been done for a villa in a luxury suburb of Paris, as well as for some buildings in the United States, Germany, and Switzerland. When real estate is tokenized, both institutional and private investors can invest in smaller amounts. While institutional investors have a lot of money and can buy expensive real estate, private investors often do not. Thus, the division of real estate into several components lowers the entry threshold for private investors.
Blockchain is used to tokenize real estate and store a digital image of an object. The building (commercial property) plan, location, ownership, and investor rights are stored digitally in a smart contract. The property’s value is determined and allocated to a predetermined number of tokens.
Investors do not have to be in the same country or city where the property is located. Once tokens are purchased, they can be stored, bequeathed, or sold on the secondary market. Thus, real estate tokenization provides higher liquidity compared to the classical real estate market.
With real estate tokenization, you can sell tokens at any time. Selling real estate (apartments, buildings, etc.) in the classical version is not easy.
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Benefits of real estate tokenization
Various studies and experts have studied the tokenization of real estate. Almost all statements and results come to one conclusion: the real estate tokenization market will grow in the coming years.
In fact, it’s a multi-billion dollar market. The real estate tokenization model is disruptive and can turn the entire real estate market upside down.
If we look at the modern real estate world, it is mainly inefficient, non-transparent, and national. Real estate tokenization can lead to greater efficiency, transparency, and internationalization of the global market.
Real estate tokenization has many advantages over the classical market structure:
- Increase efficiency by eliminating intermediaries. Digitized real estate will exclude banks, insurance companies, intermediaries, and brokers from the interaction chain. By digitally buying/exchanging real estate, as well as eliminating additional market participants, the overall real estate market will increase its efficiency.
- Increased transparency. The traceability of tokens contributes to greater transparency, as well as providing a quick and easy form of investment.
- Making the real estate market more accessible. Today the market for expensive real estate is available only to the rich and powerful people. The division of real estate into smaller components in the form of tokens reduces the price of the investment for smaller investors.
- Reducing the manipulation of the real estate market. The potential for market manipulation will be reduced through tokenization. After all, every real estate transaction is transparent and clear to investors. Regulators can also access the data and thus prevent unauthorized actions.
By the way, diversification in real estate is just as important as in any other type of investment. It is important for the distribution of risk. And tokenization contributes significantly to this. How does real estate tokenization diversify risk? For example, by buying tokens, you can invest in real estate from different countries or in residential real estate, hotel chains, commercial real estate, and public buildings. Today it is very difficult to buy commercial real estate in another country without being there.
With real estate tokenization, people get access to commercial properties in desirable locations.
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Research on tokenization of commercial real estate
Real estate is one of the largest asset classes in the world, given the amount of investment. However, the number of real estate investors does not match the staggering $280 billion in assets worldwide. This is because the necessary capital is not available to small investors. Second, real estate requires a lot of paperwork. There is a growing concern about transparency in the handling of real estate assets.
In the early 1960s, attempts were made to attract investors and change the status of illiquid real estate assets by creating REITs (Real Estate Investment Trusts). One property was divided into several parts, each owned by numerous investors gathered in the capital. This act can be seen as a precedent for tokenization in real estate.
Hamburg Commercial Bank (HCOB) worked with the Frankfurt School Blockchain Center (FSBC) to analyze tokenized real estate as part of a study on real estate tokenization, analyzing tokenized real estate providers around the world and comparing companies and deals based on objective criteria such as technology, yield, and term.
What’s slowing down the development of real estate tokenization?
There are more and more reports of real estate whose shares are sold to investors in the form of tokens and thus become available for trading. The market for these tokenized objects is developing dynamically, although it is still characterized by high uncertainty. This is because there is still no legal and regulatory framework to improve the legal certainty and attractiveness of tokenized real estate for issuers and customers.
U.S. and Germany lead the way in real estate tokenization services
As part of a study conducted by HCOB and FSBC, the authors examined tokenized real estate providers worldwide and compared their respective technologies and financing structures. Overall, the study shows that the market is growing rapidly. 41 companies from 17 countries were identified that had already tokenized real estate. They operate mainly in the United States (13), Germany (6), and Switzerland (4). However, the authors also make it clear that this quantitative analysis can only be a rough estimate because of the market’s opacity.
Today, real estate tokenization is mainly based on the Ethereum blockchain, as it is particularly well suited for this due to its ability to use smart contracts and ERC20 tokens.
New technologies will affect real estate market conditions
The tokenized real estate market is still in its infancy, but it is very dynamic and can become a serious problem for real estate funds. This is because investors associate tokenized real estate with higher returns and lower costs, which should be especially interesting for those investors who are open to innovation. Combined with the divisibility of real estate and a much larger potential investor group, tokenized real estate will markedly change this investment class in the long run.
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Conclusion: huge potential for real estate tokenization
Investing in tokenized real estate allows investors to access the real estate market with minimal effort, little capital investment, and little bureaucracy. Transaction costs can also be low if tokens are issued through a specialized exchange.
Because tokens are recorded on a blockchain, every investment will be tracked and not manipulated. Residential property owners can tokenize their property in the future to get capital for maintenance or upgrades.
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