The Tokenization of Real Estate
How Blockchain Technology will revolutionize Real Estate.
It is no longer news that the Blockchain technology will disrupt lots of industries, in fact, it has been touted as one of the major tools to bring about the fourth industrial revolution alongside the Internet of things, artificial intelligence, 3D printing, and robotics. The real estate industry is not left out as one that will also experience this revolution. The financial world is witnessing a seismic reshaping of grand proportions. The tokenizations of real-world assets are disrupting the status quo. The way ownership is dealt with is about to shift for the better.
Understanding Tokenization
Tokenization as a term has several definitions relative to different fields. But for the sake of this article, we’ll focus on its meaning as it applies to Blockchain, Finance, and Digital assets.
Simply put, tokenization is the process of turning things into digital assets. Lets deep dive into a broader meaning and explanation with a real-life example. Tokenization is the process of representing a fractional ownership interest in an asset with a blockchain-based token. Okay, I know it gets clearer when described with a practical example, you got this.
Let us forget about blockchain and smart contracts for a moment. Imagine you want to invest in real estate but your initial investment is modest — say #50,000. Perhaps you want to start small and increase your investment gradually. For instance, you decide to invest a couple thousand every three or four months. Obviously, with the traditional real estate market, this is quite awkward to do. How are you supposed to buy two or three square meters in an apartment?
Let us reverse the situation. Imagine that you have some property — say an apartment. You need cash quickly. The apartment is valued at #150,000 but you just need #10,000. Can you do this quickly without much friction? To the best of my knowledge, this is next to impossible.
Tokenization is a method that converts rights to an asset into a digital token. Suppose there is a #200,000 apartment. Tokenization can transform this apartment into 200,000 tokens. Thus, each token represents a 0.0005% (#1 per token) share of the underlying asset. Finally, we issue the token on some sort of a platform supporting smart contracts, so that the tokens can be freely bought and sold on different exchanges. When you buy one token, you actually buy 0.0005% of the ownership in the asset. Buy 100,000 tokens and you own 50% of the assets. Buy all 200,000 tokens and you are 100% owner of the asset. Because Blockchain is a public ledger that is immutable, it ensures that once you buy tokens, nobody can “erase” your ownership even if it is not registered in a government-run registry.
In this example, it was shown that tokenization allows individuals or entities to own a fraction of a real estate asset using a secure, immutable and verifiable system — a process was impossible prior to the advent of Blockchain.
See how blockchain can allow us to tokenize things now? We took a real estate property and created its digital representation that exists on a blockchain. In short, this property is now a tokenized asset.
Why Tokenization?
The benefits of Tokenization to real estate are quite numerous and worth the switch or disruption. The most profound being the Liquidity of assets.
Liquidity or Liquidation of an asset refers to the ease at which an asset can be converted to cash. In general, Liquidity is the degree to which an asset can be bought or sold quickly in the market without a drop in the original value of the asset.
By their very nature, real estate properties are very illiquid due to a number of factors. Blockchain has the potential to address the issue of liquidity. Tokenization permits individuals and entities from different geographic and financial background to invest in a basket of real estate assets that perhaps were once too expensive.
Other benefits of Tokenization includes:
Frictionless Transfer of Ownership — Tokenization of real estate assets makes for quick transfer of ownership. Instead of lasting days to go through banks or establishments, it is a straightforward peer-to-peer technological innovation that facilitates instant transfers.
Access Around the Clock — Just as cryptocurrencies, real estate properties might be purchased and sold at any time of the day through the blockchain and via smart contract technologies, from anywhere in the world with an internet connection.
Fractional Ownership — Each token can easily stand for a fraction portion of a real estate property’s value. This reduces barriers to purchase and also enables anyone to have a fraction of an asset like a property or a painting, opening up the industry for investors. Additionally, they could stand for the rights to a portion of earnings on an asset‘s worth, or even voting rights within the circumstances of equity in a business.
Real World Use Cases
The following are practical use cases and scenarios where real estate properties were tokenized using blockchain technology.
In October 2018, owners of the St. Regis Aspen Resort in Colorado became one of the first major real estate properties in the U.S. to sell real estate security tokens. The sale raised $18 million via Indiegogo, which was able to list the Aspen Coin through a partnership with Templum Markets LLC, a FINRA and SEC-registered operator. Each Aspen coin was sold at $1 and investors were required to purchase at least 10,000 coins. In June 2019, the AnnA Villa in Paris, France was tokenized in a €6.5 million transaction deal. The purchase was facilitated by Equisafe and tokenized using the Ethereum blockchain. Similar to the St. Regis deal, tokens were broken down and divided into smaller units so individual shares of the building could be purchased and traded via secondary market platforms at €6.50 per token.
Most recently, on July 23, 2019, the Fundament Group, based in Berlin, Germany received approval from the German Financial Market Supervisory Authority to issue the nation’s first tokenized bond backed by German real estate. The real estate portfolio will include residential, commercial, and hotel properties that when complete will amount to over 680,000 square feet real estate property. The real estate token — issued on the Ethereum blockchain — is valued at 250 million euros. More importantly, however, the company expects to pay investors an annual dividend between 4% to 7% until 2033. By this point, investors will be reimbursed in full for the nominal amount of their initial purchase. These types of transactions will continue to increase as buyers and sellers recognize the benefits of tokenizing real estate assets.
Conclusion
Currently, a real estate transaction involves many participants, including buyers, sellers, brokers, and banks. A blockchain-based smart contract eliminates the need for intermediaries and expedites the overall process. For example, the seller may upload all of the details of the real estate asset and the buyer puts all of their information on a 100% encrypted and secure block. The blockchain protocol will verify the information by both parties and facilitate the transaction without an intermediary. This facilitates enhanced speed of transactions, reduced overall real estate costs, eliminate intermediaries and middlemen and substantially reduce fraudulent conduct stemming from forged documents.
Blockchain technology has the potential to revolutionize the real estate industry and create opportunities that were once unthinkable. The tokenization of real estate assets will increase liquidity in the market and create a more cost-effective and efficient marketplace. As blockchain continues to attract interest from all sectors, the real estate industry is in a position to reap many of its benefits. Undoubtedly, institutions and investors alike are seeing the benefits of tokenization. As the presence and usage of blockchain technology continue to grow, the real estate industry will continue to see properties tokenized and sold on secondary markets — allowing individuals to own property interests in real estate that once was impossible.
References
http://tokenpost.com/Equisafe-completes-first-ever-real-estate-sale-tokenized-on-ethereum-2435
https://cryptoslate.com/st-regis-aspen-resort-raises-18-million-via-security-token-offering/
