The emergence of tokenization has led to the transformation of various industries, including art, banking, cloud computing, gaming, music, real estate, and healthcare.
Tokenization of real estate refers to the process by which real-estate assets are converted into digital tokens that are stored over a blockchain network. This facilitates digital ownership and transfer of fractional shares.
The digital securities market accounts for 40% or $200 million of the entire real estate sector. As tokens are vital for digital securities, it’s evident that blockchain tokens are becoming a popular method of investment.
Tokenizing real estate brings several benefits to the table for mid-level and small-scale investors. For one, it allows them to buy and sell properties by lowering the barrier to entry. It also increases liquidity, making it easier to purchase and sell properties.
Therefore, if you’re looking forward to starting a platform for real estate tokenization, then it can turn out to be a fruitful endeavor.
Despite its strengths though, there are some challenges associated with the tokenizing real estate assets that you should consider before starting your real estate tokenization platform.
In this blog, we will discuss real estate tokenization in detail, including its definition, market prospects, benefits, and issues – as well as how hiring a real estate tokenization service provider will help you out. So, let’s start it.
Tokenization refers to the process in which some sensitive data – like credit card details – is substituted with a representative – non-sensitive – value known as a token. A tokenization system in place helps the token to refer back to the sensitive data.
The real estate market supply chain suffers huge losses caused by liquidity issues, middlemen, supply chain management issues, and so on. These issues can be mitigated by leveraging tokenizing real estate.
Although the real estate market has been slow in adopting new technologies, this might change with real estate tokenization as it has been picking up pace.
In the context of blockchain, tokenization is the process of issuing a blockchain token, also known as a security token or asset token. Blockchain tokens are the digital equivalents of real-world assets. A real-world asset is said to be tokenized when it is represented virtually as cryptocurrency.
Real estate tokenization is the process of tokenization applied specifically to real-estate properties. Thus, in this form of tokenization, a property is converted to its equivalent digital tokens.
The first ever real estate tokenization transaction took place in 2018 completed by St. Regis Aspen Resort in Colorado created a single-asset REIT on the Ethereum blockchain. Since then, numerous of such transactions have taken place.
Because tokenization is revolutionizing the ways immovable properties are purchased and sold around the globe.
1Increasing Adoption of Blockchain-Based Technology/h3>
With the increasing adoption of cryptocurrencies and blockchain technology around the globe, exchanging tokens for completing real estate transactions is becoming a faster and more efficient option.
2Incessant Growth of the Real Estate Market
The real estate market is growing at a steady pace. The US real estate market is projected to grow to $142.9 trillion by 2028 from $113.60 trillion in 2023 at a CAGR of 4.70%.
The non-stop growth in the real estate market makes it an excellent business avenue to explore. Moreover, it’s no brain teaser that the future of transactions is digital. Thus, trading tokens for real estate transactions is a good bet to place.
Tokenization of real estate involves dividing an asset into digital tokens, where each token represents a fraction of the property. Real estate tokenization opens the avenue of realty investment to a wide range of buyers by breaking down expensive properties into smaller affordable units.
Blockchain acts as the backbone for developing your real estate tokenization platform as it provides a highly secure and transparent medium for storing and transferring tokens.
Another technology that governs real estate tokenization is smart contracts. The conditions that apply when token transactions take place are defined in a smart contract. Thus, you need to develop a smart contract to facilitate tokenizing real estate transactions.
A smart contract is a self-executing agreement that defines the conditions of a contract and automatically executes transfers upon the successful fulfillment of specific conditions.
The pairing of blockchain technology with smart contracts not only eliminates the need for an intermediary but also streamlines the transaction process and makes it convenient, more efficient, and highly secure.
As all real estate properties are unique, there is no one-size-fits-all approach. Moreover, it is a detailed process that requires paying utmost attention to details of financial, legal, and technical nature. These are the four simple steps to launch a real estate tokenization campaign:
Start with choosing the asset type that you want to digitize and the jurisdiction to launch your campaign. Specify the type of shareholder and relevant regulations that play the essential role for structuring your project.
Take care of the legal structure of your tokenization project as well as create a legal wrapper around the real estate property. This will ensure complete compliance with applicable regulations.
The next step in tokenizing a real estate property is to choose the most appropriate technology. Also, ensure that you carry out the entire process of converting the property into its equivalent digital token carefully to avoid any legal issues that could affect the investment later.
Finally, start tokenizing your real estate asset. Once done, you can distribute real estate security tokens to represent ownership in the asset. It can also be listed for trading on relevant digital exchanges.
Tokenizing real estate brings several benefits to the forefront. It resolves the issue of illiquidity, decreases the barrier to entry, and enhances the efficiency of transactions.
By improving liquidity, real estate tokenization lets investors to trade their tokens quickly and seamlessly on a secure blockchain network. The requirement for intermediaries is eliminated entirely.
2Improved Transaction Efficiency
Traditional transaction processes are lengthy and take a long time to accomplish. Exchanging tokens can be comparatively fast. Therefore, the time that is required for a property seller and buyer to wait for transferring the ownership is significantly reduced.
Smart contracts automates the process of buying and selling of properties with instant settlements and ownership transfer. Moreover, tokenization decreases transaction costs by leveraging fast, P2P transactions on a blockchain platform.
3Facilitates Fractional Ownership
This is one of the leading benefits of tokenizing real estate. By owning a fraction of ownership in a real-estate property investors can diversify their portfolios while minimizing risk exposure simultaneously.
4Trust and Transparency
The inherent nature of blockchain promotes security and transparency by providing immutability. Hence, tokenization of real estate promotes trust among the parties involved and reduces the entry points for fraudulent activities.
Real estate tokenization offers a slew of advantages like better liquidity and fractional ownership, however, it also has certain limitations that should be considered before delving into it.
1Little to No Regulatory Framework
As there are no intermediaries involved in such transactions, there is a need to have a regulatory framework in place. There might be a lack of clear guidelines or specifications governing the custody, issuance, and trading of tokenized real estate assets. Such uncertainty can post legal and compliance risks for both issuers and investors.
2Limited Market Acceptance
Although the interest in real estate tokenization is on the rise, it is yet a relatively new concept. Thus, the market acceptance and adoption is low. Throw other factors to the mix like low awareness, regulatory uncertainties, and doubt among traditional investors and market acceptance goes even low.
The concept of tokenizing real estate rests on blockchain technology and smart contracts. Although these are secure and transparent media, they suffer from technical issues like cyber attacks, network congestion, and defects in software. Such vulnerabilities can be exploited to accomplish data breaches, loss of funds, and data thefts.
Although the disadvantages of real estate tokenization look grim, they are not inherent to the concept. In fact, these are challenges that the industry is presently facing as it continues to grow.
With the advancement in the technology and infrastructure supporting the tokenizing of real estate, these challenges will grow less in intensity and thus, offering a fruitful industry to potential investors.
Blocktunix is a leading blockchain development company that specializes in developing a real estate tokenization platform.
Our professionals specialize in creating cutting-edge platforms to exchange real estate tokens and make it easy for buyers, builders, investors, sellers, tenants, and others to interact on a unified platform.
We ensure adding all the latest and trending features in your real estate tokenization platform, including discovering and sorting, property management, and peer-to-peer transactions.
You can choose either our services to help you with a specific process of platform development, like NFT token development or support and maintenance, or share your project idea and leave everything to us.
Tokenization has the potential to revolutionize the real estate industry. In addition to bringing several benefits to the forefront, it helps to improve the supply chain management associated with real estate.
By facilitating fractional ownership, tokenizing real estate properties provides a wider and global access for investors to purchase real estate properties, may it be for diversifying their portfolios or selling them later for profit.
Developing a platform to exchange real estate tokens will help you reap benefits from the ever-growing realty market.
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