Real Estate Tokenization: Factors to Consider
Real Estate Tokenization: Factors to Consider
In this article we look at what tokenizing a property entails. Who this innovative service offering is primarily aimed.
For what type of investor is tokenization focused?
It would be very easy to explain the advantages of tokenized real estate only from the perspective of the retail investor. A better inclusion of small investors in the real estate market can have its appeal and satisfy idealistic concepts.
But it will not cause all small investors to suddenly invest in regional real estate projects. Nor will their neighbors tokenize part of their terraced house or at least not in the next few years.
Instead it will be mainly existing real estate funds and larger projects that will start to be tokenized. First of all both the market and the regulation must grow from their infancy to a maturity.
Where everyone can tokenize a piece of their property and trade it on a stock exchange. Theoretically this is possible but impractical today.
With great probability the existing players in the real estate business such as real estate funds listed on the stock. Exchange or REITS (Real Estate Investments Trusts) will be the first to make the leap to tokenization in this first phase.
These tax-optimized investment vehicles actively manage large real estate portfolios. Around US$3 trillion of real estate capital is tied up in these REITs a fraction of the entire US$280 billion real estate market.
These investment structures could benefit from smart contracts by reducing administration costs. While offering better accessibility to all types of investors through tokens.
A more individual design facilitated by a programmable token can create real estate products that are not only cheaper but also more in line with the needs of the investor. The main goal is therefore to tokenize existing portfolios and investments and optimize them.
These optimizations are not limited to the design of smart contracts in the security token but extend to real estate management. Of course in the end investors have little to do with how maintenance costs are settled on an apartment or insurance fees but also in these cases.
Blockchain technology can generate significant savings thanks to the reduction of costs. Administrative costs which ultimately translates into a better performance of real estate funds or stocks. Currently there are already start-ups that are working on Blockchain solutions to implement these optimizations.
Therefore in real estate there are two predominant use cases:
On the one hand the more efficient management of real estate and a better design of real estate investments. Financial products (for example, REITS) through tokenization and smart contracts.
On the other hand there is a new and better way of financing and trading as described in the previous article.
Both of these use cases in turn lead to reduced costs and increased accessibility. Therefore the already attractive real estate market should attract even more capital thanks to rising yields and investment opportunities.
Both small investors and real estate companies and funds worth billions can benefit from the new opportunities and improved framework conditions.
What precautions should investors take?
It is not surprising that there are already countless Blockchain companies that are working with more or less success on the tokenization of real estate.
Of course, watch out for black sheep that promise unbelievable returns without offering a substantial service and solid investment proposition.
One of the problems is the still low supply of tokenized real estate. The market is still at a very early stage as a differentiated offer has not emerged. The regulatory system in most jurisdictions also makes offering tokenized real estate projects expensive and time consuming.
However this scenario is quite common at the beginning of an innovation in the financial sector. It is only a matter of time before it becomes easier to offer projects that can convince real estate companies investors and authorities alike.
Token offerings in real estate can be very different in nature.
While some providers only offer a marketplace for tokens, others may specialize in the tokenization process or offer cryptocurrency payments. Investors should be clear in advance what types of investment or services they are interested in.
Today, many of those services are still limited to the regional level. Imbrex’s Blockchain real estate market for example currently only offers real estate in the United States. However regionality should not be confused with regional access restrictions.
After all this is exactly where crypto economics comes into play.
For a Spaniard for example it should be as easy to acquire shares in an apartment in Japan as in Spain. Therefore, in these real estate projects, the question arises as to whether the offer is available in the jurisdiction itself or is compatible with other jurisdictions.
For example a German tokenization company focused on real estate is Brick block. The company has already tokenized a residential property in Wiesbaden for which real estate shares with a total volume of two million euros were issued.
Acquisition or ownership of the token entitles investors to receive dividends from rental income as well as interest and principal distributions. However only accredited investors were able to participate in this offer. Due to regulatory obstacles intended to protect consumption.
The most complex or especially risky assets are only available to institutional or accredited investors. This will also change with the increase in token adaptation and regulatory practices.
Even if certain real estate investments are only initially available to some investors small investors can often invest in the tokens of real estate development companies.
A Blockchain real estate platform with a broader real estate offering is Propy.
The Silicon Valley startup handles all online real estate transactions through smart contracts which largely automate the buying and selling process.
It is also possible to pay with cryptocurrencies such as ETH or BTC. Also it has its own token which is tied to the platform. This token can also be purchased normally on the corresponding exchanges.
In addition to the companies and tokens mentioned above there are other real estate projects that allow participation through tokens. However, anyone who invests in these tokens should be aware of the risks involved. The danger of fake projects and some tokens completely losing their value is real.
Consequently you should pay close attention to the seriousness
Of the offers and inquire beforehand about the properties and the companies. In order to address these concerns many real estate projects opt for security tokens that can prove possession of a license from a financial market supervisory authority.
For example Crowd li token is currently conducting an STO to raise capital for real estate investments in Western Northern and Eastern Europe. The security tokens are structured as bonds and guaranteed by the properties themselves.
The Swiss platform Token estate, on the other hand, sees itself more as a platform for real estate managers and developers who can access their real estate portfolio through the platform and offer it for trading. Security tokens and an STO will also be used. However, the project is still in its infancy.
In the field of tokenization technology service providers.
We can highlight Digishares, which offers an integrated platform where you can issue a public offer for the sale of tokens with integrated KYC and later exchange those tokens on your exchange and distribute the income in a way automated through smart contracts.
The above examples show us that we are still at the beginning of this incredible financial innovation. This year not only will the first security tokens be put up for sale regulated not only for the classic financing of companies but also for participation in the real estate sector.
You should only invest in unregulated real estate projects outside your region if you are sure of the seriousness of the offer. Some small-cap ERC-20 tokens that are already exchangeable do not meet these criteria.
Investors should also pay more attention to regulatory standards:
Security tokens approved by financial regulators offer greater protection to investors. Investors with only limited real estate experience in particular should carefully examine what the investment offer is about.
As discussed there are many different ways to get involved in the real estate market. In addition security tokens should also be purchasable with fiat currencies and not just other cryptocurrencies. Most of the real estate projects mentioned above offer this possibility or at least it falls within their plans.
One thing is clear:
this year there will be an endless number of tokenized real estate projects. The projects mentioned above only represent a small selection of promising projects. These projects have yet to prove their worth but we can be sure that some will offer attractive investment opportunities for open-minded investors.
Well-structured real estate projects should benefit from a bit of publicity in the coming months and years. After all very few investors are aware of the possibilities offered by tokenized real estate platforms. Whoever bets on the right projects early enough will benefit from high demand and above-average profitability.
The entire Blockchain market will benefit from the convergence between the tokenized economy and the real estate industry. The stronger the tokenized real estate sector becomes established, the more attractive cryptocurrencies like Bitcoin, Ethereum, etc. will become.