Real Estate Asset Tokenization- Everything You Need to Know!
Real estate has always enjoyed the reputation of being one of the most dependable avenues of investment. Parallel to this, it has also enjoyed a dubious reputation of being one of the most illiquid assets. In essence, it is surely profitable but it is not quite easy to enjoy the fruits of that profit. Is there a possibility for real estate to retain its value but at the same time, but at the same time, enhance its liquidity? The answer lies in real estate tokenization!
What Is Tokenization?
Tokenization has been in vogue only in recent years when crypto fundraising started to gain prominence. Classically, the term “securitization” meant what tokenization means in today’s context. Tokenization implies the act of dividing a tangible asset into discrete representations that denote a share in the asset. These tangible representations are called tokens, and since they are backed by security, they are called security tokens.
The key difference between traditional securities and tokens are the fact that these tokens are stored in the immutabile digital ledger called the blockchain. These tokens are tradable on alternative trading systems (ATS).
Creating a Real Estate Token
As discussed above, real estate tokens are designed to represent shares of a property. The total value of all the tokens is equal to the total value of the tokenized property.
If there is a 10,000 m² property worth $1 million, it can be divided into shares that represent 1 m². There will be 10,000 such shares, each valued at $100. Alternatively, if you would like to make the offering even more democratic, you can even consider dividing the 10,000 m² property into 100,000 shares representing 0.1 m² each — each share will be valued at $10.
Tokenization also gives room to tokenize a certain percentage of the assets, so the owner retains the majority while they can still raise funds for developing the property. This holds true in areas where people have large pieces of land but have no funds to develop them.
The real estate tokens are built according to the ERC-20 Ethereum standards.
How to Offer Your Real Estate Token?
The initial sale of real estate token or any other token backed by a security is called a security token offering, commonly abbreviated as STO. Sometimes, they are known as tokenized security offerings (TSO), or tokenized asset offerings (TAO). The terminology might be different, but the core remains the same.
It is understood that an STO is not the same as an ICO. In an ICO, the investors are issued utility tokens, and they have their value confined to the company’s platform or the ecosystem. Security tokens are capable of standalone existence because the value of the tokens is tied to a real asset with real value.
Security tokens can be marketed and sold in multiple methods, including crowdfunding, listing it on dedicated token platforms, social media, search marketing, and even messaging platforms like Telegram.
A good example of a real estate security token would be the Aspen Coin. This security token was designed to represent fractional ownership in the Saint Regis Aspen Resort in Colorado. The campaign successfully raised $18 million, resulting in the creation of a grand resort. It is interesting to note that the marketing for this token happened through crowdfunding.
Getting the Token Listed on an Exchange
The value of a token is realized only when it is traded. Therefore, investors need to find their tokens listed on a reputed exchange. The number of exchanges that accept security tokens today might be quite limited, but the future looks promising as the numbers steadily continue to grow.
The reason behind this slow growth is positive more than being negative — the exchanges that trade security tokens need to be compliant with regulatory requirements laid out by bodies like the SEC. This might seem like a cumbersome process but the involvement of the SEC only ensures that the instances of fraud and malpractices are kept as close as it can be to 0.
Another possibility to list tokens is to partner with an alternative trading system. ATSs are FINRA-registered institutions that can partner with security asset token owners to list the tokens on the trading systems. This helps provide investors with access to the secondary market with a high degree of liquidity.
The Benefits of Real Estate Asset Tokenization
- Real estate tokenization isn’t all about moving the segmented value of the asset to a blockchain. Tokenizing real estate comes bundled with a lot of advantages, both active and passive:
- One of the biggest factors contributing to the cost of rising real estate capital is the involvement of intermediaries. Intermediaries are indeed inevitable when it comes to establishing trust and handling counterparty risk. However, the first factor is effectively taken care of by smart contracts.
- The most obvious advantage of tokenization is, of course, enhanced liquidity. If we go back to the example that we were looking at, it might not be easy for investors to offer $1 million, and even if they had $1 million at their disposal, they would think twice about putting all their eggs in the same basket. With tokenization, however, investors now have the flexibility to divert a part of the capital towards an asset. In addition, it also brings in lots of small level investors who have always been under the impression that real estate investments and especially commercial real estate investments are way beyond their reach!
- Since real estate tokens are traded on the blockchain, there is no specific trading window — the market operates 24 hours a day, 7 days a week, and 365 days a year. It also removes all the geographical borders associated with real estate investments. A person in any corner of the world can invest in real estate projects anywhere provided they meet the regulatory requirements and that investing in real estate abroad does not violate the legal framework of your country/jurisdiction.
What Is the Future of Real Estate Tokenization?
The global real estate market has a staggering value of about $228 trillion — the numeric value would be so long if represented with all the zeros!
This huge market was confined to a few accredited institutional investors before the era of tokenization. However, tokenization democratized the entire ecosystem making the opportunities available to retail investors as well!
Considering the need for liquidity and the globalization of trading, real estate tokenization is all set to be the order of the future when it comes to real estate investments.
Conclusion
If you would like to jump into the game even before it becomes intense, you can consider creating a real estate tokenization platform. If you’d like to create yours, all you need to do is get in touch with a real estate tokenization company that has proved its excellence and expertise in handling a new technology like blockchain. They will take care to understand your requirements and build the platform for you, so you are future-ready for reaping profits!
