Opportunities For Tokenization In Real Estate
Security tokens offer key advantages over traditional financial structures for real estate developments.
Tokenization of real estate assets represents one of the most profitable use cases for security tokens. The process of tokenization involves representing ownership of an asset, such as real estate, through digital security tokens on a blockchain. It is valuable to note that tokenization does not adversely impact traditional ownership structures or sales initiatives, it enhances them. Security tokens have several key value propositions for real estate developments:
- They can be swiftly issued to raise liquidity from an international market.
- They can be continuously and globally traded.
- They are secure, in the event of loss or theft, they are returned to their owners.
- They can be fractionalized to access a broader investor base.
- They are covered by similar laws to those protecting owners of traditional securities.
Tokenization of existing real estate developments involves migrating ownership into digital security tokens. Once a company or asset is tokenized, it can be sold to the market through a Security Token Offering (STO). The STO can involve private placements with High-net-worth individuals, institutions and family offices, and/or a public offering. In the future, it is expected that STOs will outshine IPOs, due to the advantages they deliver to both issuers and investors. The World Economic Forum estimates that the global market capitalization for digital securities could be worth $24 trillion by 2027.
Liquidity and cost savings are key advantages that security tokens offer over traditional real estate financing structures.
Several factors contribute to delivering real estate liquidity through digital securities.
- A global investment pool. Tokenization allows access to a truly global pool of investors. Only capital and an internet connection are required for compliant investors to participate in buying, holding and selling global real estate. Compliance processes take only minutes to complete online. Tokenized real estate provides access to investors in other digital asset classes such as cryptocurrencies. Security tokens can be traded around the clock with anyone, anywhere.
- Reduced cost of entry. Security tokens can be programmed for fractionalization. This subdivision lowers the minimum investment cost, opening up investment to a significantly greater number of smaller investors who would otherwise be unable to participate in real estate ownership.
- Reduced sale time. Compared to traditional methods of real estate sales, well marketed, effectively structured STOs can be placed swiftly. This is particularly pertinent during a period of global lockdown when traditional investors are unable to travel to the real estate location.
Cost savings associated with the tokenization of real estate assets not only improve profit margins but also streamline operations.
- Reduced cost of public offering. Compared to an IPO, an STO is faster, cheaper and global.
- Standardized transactions. Security tokens are built around smart contracts programmed on a blockchain. These smart contracts are standardized and can be coded to represent sale and purchase agreements. Contracts are therefore not required to be individually negotiated as the terms are automatically enforced. This substantially reduces transaction costs.
- Immutability. As transactions are completed, they are registered and confirmed on the blockchain. This immutability gives investors confidence that their transactions cannot be falsely altered at a later stage and ensures there is no illegal double selling of land.
- Streamlined management. There are numerous transactional touchpoints throughout the life of real estate contracts. Tokenization offers significant cost savings for managing investors and their ownership rights. Transactions are transparent, and the programmable nature of smart contracts ensures automation of dividend distribution and other ownership rights, such as voting.
There are several kinds of security tokens which could be applied to real estate investments. Each of these tokens offers a different value proposition.
- Tokenization of a real estate asset. The ownership rights of a property can be tokenized to access liquidity from a global investor base. The value of the token is backed by the value of the land.
- Tokenization of equity in an entity. The ownership of the legal entity that owns real estate can be tokenized. These equity tokens can provide rights to any of the other tokens issued by that legal entity.
- Tokenization of profits. The rights to profits, such as rental income from real estate, can be tokenized.
- Debt interest. Ownership in a debt instrument secured by real estate can be tokenized.
- Carbon credits. The carbon credits generated by real estate can be tokenized.
As the advantages of tokenized real estate become increasingly implemented we will see a growth in security token adoption. This process will bring advantages for all stakeholders in real estate transactions: landowners, developers and investors. Wider adoption should spur new and innovative approaches between the various forms of security tokens for real estate. The combination of land and blockchain will create a vibrant, interesting marketplace.
Sonata Capital is registered in the Labuan International Business & Financial Centre, and invests in companies successfully exploiting the vast opportunities of the digital economy.
100% of the equity in our funds have been tokenised, and will be listed on digital securities exchanges in Labuan and elsewhere. The equity of Sonata Capital Ltd (LL16076) has also been tokenised, and the rights to the equity is represented by the SONATA security token issued on the Ethereum network.