Real estate tokenization is disrupting the property sector by democratizing access to real estate as an asset class while creating new funding opportunities for property developers.
Read on to learn what real estate tokenization is and how it works.
What is Real Estate Tokenization?
The tokenization of real estate refers to the fragmentation of real estate ownership and linking it to digital tokens stored on a blockchain.
The digital tokens represent a fractional share of an existing or under-construction property and are tied to the property’s value. The blockchain network on which the tokens are issued permanently records all transactions and validates all actions related to the token.
Real estate tokenization is an advanced version of traditional fractional ownership. It fragments high-value real estate for sale to a wide investor base, turning real estate into a more accessible and liquid asset class.
The main types of real estate tokens include:
- Residential Real Estate Tokenization: Tokenization of residential properties
- Commercial Real Estate Tokenization: Tokenization of commercial properties
Trophy Real Estate Tokenization: Tokenize popular buildings or landmarks
How Does Real Estate Tokenization Work?
Now, let’s take a look at how the tokenization process works. Real estate tokenization typically involves the following phases:
Phase 1: Smart contract deal structuring
The property developer or owner chooses what asset to digitize and what rules will apply to the old and new investors. At this phase, the roles and expectations of investors are outlined, including their rights to the property. The owner must create a legal wrapper over the property and comply with regulations.
Phase 2: Digitization of property
The issuer will identify a tokenization platform to work with and go through the digitization process. The type of tokenization platform depends on the needs of the property owner. The ownership information traditionally stored on paper is stored on a blockchain in smart contracts. The information includes the terms and conditions of the tokenization.
Phase 3: Appraisal and issuance
Next, the digitalized property is appraised and then split into digital tokens using smart contracts on the blockchain. The token is issued through an initial sale and can then typically be bought and sold on the secondary market as representation rights to the property. The token’s value is determined by various factors, including the property type and supply and demand.
Phase 4: Distribution and marketing
The newly minted tokens are brought to the market for purchase. Buyers can typically use different payment methods on the tokenization platform, such as stablecoins or other cryptocurrencies. Smart contracts genreally automate the process of buying and selling the tokens. Then, the transactions are recorded permanently on the blockchain.
Post-tokenization, the tokenization platform will be responsible for activity tracking and ensuring all the legal and regulatory requirements are followed.
In a property sale, investors receive the value of their share of tokens from the sale depending on the number of tokens they own.
The Benefits of Tokenization in the Real Estate Sector
Tokenization can eliminate many challenges in the real estate sector. Let’s look at some benefits blockchain technology can bring to the real estate industry;
- Tokenization enhances liquidity in real estate and eliminates the waiting time and paperwork that plague traditional models.
- Blockchain-based systems are more transparent than traditional business models; buyers can check and verify information stored in the network in real-time.
- Smaller investors who are otherwise locked out of expensive real estate investment opportunities can afford fractional property ownership.
- Smart contracts eliminate intermediaries and their added fees, as they can facilitate the immediate execution of agreements.
How to Invest in Tokenized Real Estate
Investing in tokenized real estate is fairly straightforward if you are familiar with investing in stocks or crypto assets. There are five general steps to investing in tokenized real estate.
- Choose a tokenized platform that has real estate assets you want to buy.
- Open an account with the exchange platform.
- Buy cryptocurrency to fund your account.
- Pick the type of property you want.
- Research the property and read the terms and conditions before purchasing.
- Make the purchase and securely store the token in your wallet.
Real estate tokenization is one of the most promising blockchain use cases, providing benefits for numerous stakeholders in the real estate industry. It will be an interesting blockchain sector to follow in the coming year.
