One of the sectors where tokenization will soon be a game changer is real estate. By using the blockchain it is possible to tokenize houses, apartments, properties and represent them on the blockchain.
This will shake up the real estate market and inevitably change the traditional way of doing things. Blockchain has great potential as it builds trust and helps shape a world of frictionless transactions.
Tokenization will, among other things solve liquidity problems in the commercial real estate sector. In addition to many other applications and industry pioneers are ready to lead the way by developing promising projects.
We’ll take a closer look at how real estate tokenization works its benefits and its use cases. Tokenization will be a big trend in 2021 as the opportunities to shard real estate allow investors to build a risk-optimized portfolio. The future is digital and blockchain is now bringing that evolution to one of the oldest industries.
The concept of tokenization is once again gaining attention and gaining momentum. Ideas and projects are being worked on everywhere and one of them is the tokenization of real estate.
Now you can check the benefits of real estate tokenization at digishares.
The underlying technology is blockchain. In simplified terms a blockchain is a distributed and decentralized database stored on a large number of servers.
A single update on a server results in simultaneous data updates on all servers. Transactions on blockchain-based platforms can never be modified or deleted. Tokens can now be linked to these transactions primarily as digital representations of assets money or securities.
Tokenization Solves Many Known Industry Problems
Particularly during the COVID-19 pandemic one of the problems of the real estate industry like reliance on physical meetings to close deals stands out. Procedural difficulties and inefficiencies undermine the success of this market.
In addition a large number of intermediaries (lawyers, brokers, financial institutions, etc.) continue to cause to some extent avoidable and costly friction. Building the necessary trust between these intermediaries and enforcing the rules requires a lot of paperwork.
These burdensome circumstances lead to increased cost and time expenditure. However if real estate is tokenized time-consuming and inefficient processes through intermediaries become obsolete. As the blockchain is based on the principle of peer-to-peer.
Blockchain technology therefore creates trust between two contractual partners and guarantees a secure process thanks to its technical basis. It also increases transparency and automation while allowing the international transfer of tokens (real estate shares) in seconds.
The real estate industry itself is not agile and the buying and selling processes are very complex. Additionally, unpredictable events such as construction errors and natural disasters can negatively impact liquidity.
If the blockchain cannot counter physical risks it allows to design efficient and profitable process solutions. This significantly increases liquidity and mitigates the negative impact.
Therefore a huge boost to liquidity is generated by the ability to fragment real estate investments through tokenization. i.e. effectively offering smaller shares at the desired price and “partial tokenization » associated.
This makes it possible to effectively use the intangible assets of the property through the sale of certain shares, which will certainly transform the sale process from static to dynamic. And it will give owners a lot more flexibility.
Tokenization gives institutional investors and individuals the opportunity to diversify their portfolios.
Let’s take an example of the application of tokenization:
Normally you either pay rent or buy real estate. With tokenization a combination of these two options is possible. You could own 60% of the property and acquire 40% per token. This 40% can be offered on a secondary market and can work like a mortgage.
For this you will not need a financial service provider or a bank. Therefore the necessary capital can be obtained at any time through assets that you already own and which are not yet fungible.
In general, it can be said that smart contracts make the entire investment process faster and safer. These processes can be completed in seconds and without the need for an intermediary.
The potential of tokenized real estate
Equipped with registration functions, real estate tokens can match the corresponding property and liquidity relationships in the digital world . This makes it possible to manage the liquidity of real estate assets efficiently and above all on a day-to-day basis.
It is possible to convert all real estate into digital assets via the blockchain (i.e. without a deed of ownership or an analog entry in the real estate register).
Another option is to make payments to owners, who are thus mapped. Real estate feeds are an ideal tool for asset managers to create cash efficiently and profitably. In addition a door is now opening for institutional investors to access previously tied up capital.
The new model reduces direct and indirect marginal costs due to the exchange of partial ownership and the increased liquidity of the asset itself.
In addition, land transfer tax is avoided whereas previously it was considerably reduced by high liquidity premiums. This allows properties to be effectively liquidated without deducting costs.
Now, with tokenized real estate, it is possible to actively trade in the secondary market without liquidity discounts. This offers simple and economical possibilities to invest in real estate at any time.
Location costs or friction caused by superfluous intermediaries will not play a role. Furthermore, it also offers a finely crafted user interface for asset managers and their institutional investors. Investors and financial institutions thus have access to traditional and completely new asset classes (e.g. equity tokens).
Compliance and technical security are also ensured. An important custody activity includes the storage of private keys, which are necessary for the transmission, storage, and most importantly, the secure custody of tokens.
The decentralized blockchain concept allows owners and investors to join forces without the intervention of an intermediary.
Future prospects
The simple concept of tokenization, which is converting rights to an asset into a digital token. Will have a huge effect on the real estate industry. By enabling the trading of digital assets, including tokenized real estate stocks in secondary markets blockchain technology will fundamentally change the way this industry is funded and transacted.
It’s time for the real estate industry to prepare for Web 3.0 and begin to truly participate in digital transformation. Certain aspects of tokenization, such as the fragmentation of properties will be of great use to institutional investors and individuals.
With tokenization true portfolio diversification can be achieved. Thus investors can better mitigate their risks by not having to buy 100% of an asset and can now participate in it partially.
For retail investors this development will provide a much greater number of investment opportunities even with small amounts of capital. While we still have a long way to go before this $200 trillion market becomes part of the emerging token economy.
The benefits that come with it make it hard to overlook this future development: Minimum investment size required will decrease drastically.
Furthermore, tokenization will lower high barriers to entry and help change an industry plagued by high barriers to entry and illiquidity. Tokenization will open up this illiquid market and help democratize this sector while allowing the entry of significant new capital.
Finally, another important aspect is that the underlying blockchain technology will allow tokenized assets to be traded 24/7, which will also increase liquidity.
If you want to learn more about tokenization in real estate and other industries, you should definitely check Digishares real estate tokenization.