Real Estate Tokenization: Digitized Approach to Handle Business Transactions
When we talk about the ‘next-generational ecosystem,’ it covers everything around us. The run for technology across multiple industries is nothing new. The commercial real estate market has advanced over the years with the introduction of big data, artificial intelligence, machine learning, virtual reality, IoT, and cloud computing. Talking about transaction upgrades with technology, tokenization is one trending process involving language processing (NLP) and computational linguistics.
What exactly is real estate tokenization?
Real estate tokenization is converting the value of real estate assets into digital tokens on a blockchain or distributed ledger. Each token represents a fractional ownership or investment in the underlying real estate asset. These tokens can then be bought, sold, and traded on various digital asset exchanges, providing liquidity and accessibility to a traditionally illiquid asset category.
At present, the boom in real estate tokenization is primarily driven by factors like:
- Reduced purchase time
- Reduced purchase costs
- Elimination of middlemen (real estate agents, trust agents, and lawyers)
- Ease of use & legally compliant with blockchain technology in the picture
As per a recent report, the global real estate tokenization market is forecasted to acquire a valuation worth $3.89 billion by the end of 2029.
Role of Smart Contracts & NFT
Specifically, smart contracts are labeled as self-executing codes available on the blockchain. Smart contracts possess the terms of the agreement signed between the buyer, and seller maintained as lines of code. With this setup in place, NFT enters the space. Non-fungible tokens, or NFTs, are typically linked with artwork or so-called digital collectibles. However, with the day-to-day advancements in the blockchain realm, NFTs are also being preferred for real estate tokenization.
For example, ERC-721 tokens, based on the Ethereum blockchain, are commonly utilized for NFTs as part of real estate tokenization. Smart contracts permit owners to encode the various guidelines and terms of the fractionalized property. For instance, who receives what fraction of the earnings or will have the right to use the property.
What is the Approach to Real Estate Tokenization?
Real estate tokenization involves the conversion of real estate assets into digital tokens representing ownership or investment in the underlying property. The process typically follows these steps:
1. Asset Selection
An enterprise, real estate developer, or owner selects a real estate property or a portfolio of properties to be tokenized. The desired property can be commercial, residential, or land.
2. Legal and Regulatory Compliance
Before proceeding with tokenization, the enterprise must ensure compliance with relevant laws and regulations, including securities laws, property rights, and any other legal requirements specific to the jurisdiction in which the property is located.
3. Asset Valuation
The real estate asset is professionally valued to determine its market value. The property’s value will be used to determine the number of tokens to be issued and the corresponding fractional ownership or investment represented by each token.
4. Token Issuance
Digital tokens representing ownership or investment in the real estate asset are created and issued on a blockchain or distributed ledger. The blockchain serves as a decentralized and transparent ledger to record the ownership of these tokens.
5. Offering and Investment
The tokens are offered to potential investors through a token sale event, which can be an initial coin offering (ICO), security token offering (STO), or another legally compliant fundraising mechanism. Investors can purchase these tokens using fiat currency, cryptocurrency, or other acceptable payment methods.
6. Fractional Ownership
The real estate asset’s value is divided into smaller fractions; each token represents a specific share or portion of the property. For example, if the total value of the property is $1 million and 1,000 tokens are issued, each token would represent a $1,000 ownership stake.
7. Trading and Liquidity
Once the tokens are issued, they can be traded on digital asset exchanges or other secondary markets that support tokenized assets. This provides liquidity to investors who want to buy or sell their real estate investment without going through the traditional real estate sales process.
8. Asset Management
The tokenized real estate asset can be managed using smart contracts. These self-executing contracts facilitate various aspects of asset management, such as distributing rental income, handling property maintenance expenses, and voting on major decisions related to the property.
9. Transparency and Security
Blockchain technology ensures transparency, security, and immutability of ownership records. All transactions related to the real estate tokens are recorded on the blockchain, providing a transparent and tamper-resistant history of ownership transfers and investment activities.
Major Advantages of Real Estate Tokenization
Fractional Ownership: Tokenization makes it more accessible for investors to invest in high-value properties by dividing real estate assets into smaller, tradable portions.
Better Liquidity: Real estate assets can become more liquid through tokenization since they are simple to buy and sell on digital asset markets. This greater liquidity draws in a wider range of investors and may shorten the time needed to sell an investment.
Access to Global Investors: Gaining access to a global investor base through tokenization makes it simpler for businesses to entice foreign money to support real estate projects.
Reduced Entrance Barrier: Tokenization allows smaller investors who might need more funds to invest in a whole property to take part in real estate investments with a lower entrance barrier.
Enhanced Transparency & Security: Blockchain technology offers a clear and impenetrable ownership ledger, boosting security for all parties involved.
Final Say…
The real estate industry has always kept the world awake with its hot deals. Tokenization entering the real estate space has positively encouraged small-scale investors to also be at the party. The market for tokenization is expected to take a bigger leap in the next couple of years with the simplification of regulatory issues and technological upgrades happening.
Before your real estate company ventures into the world of tokenization, blockchain testing should be the first step. Speaking with a professional consultant for better knowledge and complete verification of blockchain transactions is preferable.
