Wednesday, October 4

What Is Real Estate Tokenization?

Does the blockchain in real estate speak to you?

Whether you are a beginner or an experienced real estate investor. This new way of acquiring real estate and sharing the returns could appeal to you.

Indeed rather than acquiring a property via a company to sell its shares. It is possible to divide it into tokens and offer its acquisition on a dedicated primary market.

How does real estate tokenization work? Is this a step forward with real benefits for real estate investors?

What is real estate tokenization?

Real estate tokenization is a relatively simple concept to understand. It consists of dividing a property into several tokens which represent a fraction of the underlying property. In fact the real estate token is very similar to the shares of a real estate investment fund or an SCI (real estate civil society).

Where the capital (having made it possible to acquire the property) is divided into a multitude of shares conferring rights to their owner such as the collection of profits.

However unlike social shares real estate tokens are created and registered on a blockchain. To ensure the authenticity of the tokens and guarantee the accuracy of the information stored.

The concept of real estate blockchain

Blockchain did not appear with real estate tokens. It is a technology allowing the storage and the transmission of information in a decentralized way in the form of tamper-proof blocks. Each change results in the creation of new blocks replacing the content of previous ones so that the information contained is always up-to-date and accurate.

Blockchain is opposed to the centralized register kept by a single authority. Such as the cadastral register. Which makes it possible to identify and certify people’s property rights.

With the blockchain each member of the network contributes to the reliability of the information. So that an isolated individual does not have sufficient power to tamper with the ledger.

We then say that the blockchain is inviolable and ensures an unequaled level of security.

However and this is particularly the case with cryptocurrencies and other crypto assets. The blockchain has a real energy cost since it will be necessary for members of the network. To carry out validation calculations permanently to make the blocks evolve and to keep the system up to date.

The division of a building into digital assets

Therefore the blockchain can serve as a register to record. Process and carry out transactions relating to the various real estate tokens.

Indeed if it is possible to divide a property into digital assets. that is to say into tokens. It is still necessary to be able to exchange them and to certify at any time the effective ownership of each token.

In addition as we will see rights are attached to each token. For example the right to collect the rents of the property rented out. To facilitate the execution of the rights attached to each real estate token. It is possible to use smart contracts capable of interacting with the blockchain.

How is the value of a real estate token defined?

To define the value of a real estate token two signals can be taken into account.

The market value of the underlying real estate asset which evolves according to the behavior of the real estate market.

The market value of the real estate token which could depend on the supply and demand of the real estate token in question.

Theoretically the value of the real estate token should be equal to the market value of the underlying real estate. But it is now common especially in terms of active crypto. To observe a decorrelation between the price of an active crypto and its underlying.

In any case, the price of a real estate token depends on the rules defined by its issuer:

Some issuers of real estate tokens decide to set the price of the token according to the market value of the real estate. With for example an annual revaluation. The exchanges of tokens on the secondary market are then done by means of a waiting list. Without an imbalance between supply and demand of tokens being able to lead to an increase in the price of the latter.

Others may consider letting the price of the token set freely. According to supply and demand by allowing investors the freedom to buy tokens potentially decorrelated from fundamentals for speculative purposes.

What are the benefits of tokenizing real estate?

Moreover it is legitimate to ask the question of the interest of the tokenization of real estate. Indeed why not simply create a company to acquire a rental property and then sell shares to interested investors?

Tokenization to limit real estate transaction costs

One of the primary advantages of real estate tokens is the low transaction cost that comes from buying and selling tokens.

Indeed when you buy a property. You must pay registration fees which represent approximately 8% of the sale price for old real estate.

Similarly it will be necessary to go through a long and time-consuming contractual process (signature of the sales agreement. Expiry of the withdrawal period, fulfillment of the condition precedent. Signature of the deed of sale etc.) involving the intervention of numerous third parties (notary, real estate agent, administration, etc.).

Technology of smart contracts

Note: The technology of smart contracts in real estate sales could automate all these aspects by drawing. The effective consequences of the fulfillment of each contractual condition (obtaining financing for example) to operate an automatic transfer of ownership.

Therefore the tokenization of a property makes it possible to overcome the intervention of third parties. And lengthy contractual processes. Not being a property per se but a digital asset. It can be traded instantly on a secondary market for an unbeatable transaction cost.

In other words this amounts to allowing continuous listing of a property on a marketplace. Which is not possible with shares in civil property companies (due in particular to the obligation to have the sale approved by existing partners). Thus through its tokens the property enjoys better liquidity.

Increase the liquidity of a real estate asset thanks to geographical openness

Outside of major cities and capitals. Real estate is not an asset recognized for its liquidity. Indeed due to the multiplicity of real estate markets and the length of transactional processes. It is not uncommon to have to be patient before being able to sell your property. The intervention of private individuals in real estate investment remains. A very local dynamic where for example it is rare for an Alsatian to invest in Japanese rental real estate.

The division of a property into tokens then allows the asset to change dimension by becoming digital. Therefore a multitude of potential buyers can be interested in the property. And exchange real estate tokens continuously on a marketplace provided for this purpose. Regardless of the geographical location of the property.

Securing transactions

The other advantage of tokenizing real estate is the high security of the blockchain. Unlike a centralized ledger. The blockchain is known to be tamper-proof. So there is no chance of your token disappearing due to manipulation or human error.

You then have ownership of the real estate token without anyone being able to evict you from the keeping of the register.

This security is a real plus when you know that transfers of ownership of SCI shares are only recorded in a register kept by the company itself (in the best of cases).

The proof of the ownership of the shares is then done via a deed of transfer or subscription of shares. The loss of these contractual documents is not without concern.

Flexibility in the recognized rights of owners of real estate tokens

Although they are subject to specific financial regulations (financial securities or ICOs since the PACTE law), real estate tokens offer greater freedom to the issuer in the choice of rights recognized to token owners.

Indeed, it is for example possible to consider bond tokens backed by a debt security allowing the acquisition of real estate with a fixed or variable coupon paid at successive maturity to the owners of the tokens. These bond tokens can then trade easily on a dedicated platform.

Creating real estate tokens

There are many other possibilities such as creating real estate tokens relating to the ownership of a real estate property providing for a distribution of the rent collected monthly among all the owners of tokens.

In short, provided you comply with the regulations, it is possible to consider real estate tokens of a very different nature in order to stick as best as possible to the demands of investors.

Admittedly, today the real estate blockchain is only in its infancy, token offers remain very limited. However, it is not impossible, due in particular to the evolution of the regulatory framework, that tokens can replace a large part of investments in paper stone and seduce certain institutions to diversify their investment funds.