The Case Of Tokenisation Of Real Estate Market

Blockchain technology continues to cut through different sectors as most people bank on its features such as transparency, immutability, and security. The real estate sector is one of the sectors that stands to benefit a lot from this revolutionary technology. Some of the areas of application include deeds management, real estate assets management, transfer of property, and tokenisation.

Real estate is one of the most rigid sectors of the global economy. The slow process of changing ownership and low liquidity of real estate assets blocks a lot of potential investors from joining this sector. Real estate tokenisation is promising to address some of these challenges that have been witnessed in this sector for ages

What is real estate tokenisation & the business model?

Tokenisation refers to the process of representing fractionalised ownership of an asset on a blockchain. When it comes to real estate, it thus refers to the process of creating blockchain-based tokens that will represent a real estate asset. The idea has attracted mixed reactions from different players. Some feel that tokenisation will address some of the challenges that face the real estate sector. However, others feel that the real estate sector needs a complete overhaul if some of these challenges are to be addressed.

Different companies have different approaches when it comes to tokenisation. The first case is where the token can represent partial ownership of the asset. Some companies even work with existing frameworks such as REITs. St. Regis Aspen ICO was the first successful case for real estate tokenisation where investors got shares (tokens) of the REIT, which represents ownership of the hotel. Some companies tokenise private equity funds in the real estate sector instead of the physical asset. SpiCE VC & Blockchain Capital is a good example of the second approach for real estate tokenisation.

The democratisation of real estate assets

Most people are willing to invest in the real estate sector. However, the minimum investment size for this asset class locks out a lot of average consumers. This is not the first attempt at democratising real estate as similar efforts have been in existence since 2010. There have been numerous real estate crowdfunding platforms that have lowered the minimum investment to $100. However, most platforms demand investors be accredited.

Real estate tokenisation as well opens up the sector to retail investors. However, the developer (sponsor) will have less governance when it comes to a tokenised real estate asset. There will be no lead investor which impacts on major decisions like selling or refinancing. The investors thus have to do their due diligence before they invest. It is the work of the tokenisation platform to negotiate the terms that investors will operate on.

Increased liquidity

Turning a real estate asset to cash takes time, as one has to go through numerous processes. Advocates of tokenisation believe that the approach will create a marketplace for real estate assets and make them more liquid. There will be a pool of buyers and sellers who are ready to transact the same way a stock exchange market operates. The real estate marketplace is supposed to be available for 24 hours/ 7 days a week, unlike most stock markets that operate on weekdays only.

The marketplace needs to have a large trading volume for liquidity to be realised. Real estate tokens will be tradable at two points. The first trading point is the tokenisation platform, where the tokens are created. The tokens will then be listed on a secondary market where they can be traded against fiat and digital currencies. However, there must be demand for the real estate project in question for liquidity to be realised in this sector. Investors need to research the market value of the assets and their demand before they invest. There also needs to be a functional ecosystem that links different players such as brokers, investors, developers, and exchanges for liquidity to be achieved.

Eliminates some intermediaries and introduces efficiencies

Real estate crowdfunding platforms share a lot of similarities with real estate tokenisation platforms. However, the latter comes with blockchain efficiencies that make it easier, transparent, and secure to transfer real estate assets. In the current set up, transferring real estate asset involves a lawyer, the sponsor, seller, broker, and the buyer. The process is long and involves a lot back and forth processes, which make it expensive. A marketplace with tokenised real estate assets eliminates some of these people. The process can take just three days to make the transfer complete.

Transparency and security are some of the features that people want in the real estate sector. Most investors fail to invest overseas as they fear being scammed. Local property scams and frauds are also very common, which scares away potential investors. The blockchain makes it easy to verify the ownership trail of real estate assets and detect whether there are any defects in the title. Blockchain also makes it easy to comply with authorities, which is essential in real estate. The blockchain can also institute trading restrictions on the marketplace, which ensures that there is no oversupply or undersupply of the real estate assets.

The only worry when it comes to tokenisation is the display of personal data. Most tokenisation platforms use private blockchains for personal data. On the other hand, such platforms use public blockchains such as Bitcoin for communication and Ethereum for tokenisation. Such an approach ensures that there is a differentiation between public and private data.

The bottom line

The real estate sector stands to benefit a lot from the blockchain efficiencies. This space is still in its early stages, and different companies are working hard to lay the foundation. However, tokenisation will solve some of the real estate sector challenges only if most of the players agree to come on board. There is a need to bring the entire property lifecycle to the chain. This includes property sale and title management, land title and deed recording, real-time accounting and lease booking.

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