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Tokenization and Blockchain in Real Estate

Tokenization and blockchain in commercial real estate

Tokenization and Blockchain in Real Estate

Real estate is the world’s largest asset class, with an estimated value of $240 trillion — over three times the value of the global stock market, at roughly $72 trillion.

However, less than 7% of the world’s real estate is currently liquid or tradeable on public exchanges.

What would happen if this changes in the next 30 years?

There’s good reason to believe the real estate market will see substantial growth from the advent of tokenization within our lifetimes.

So What Is Tokenization of Real Estate?

Real estate ownership is converted into an LLC, which is then associated with a stable coin value. This is then listed on a blockchain-backed marketplace, where investors can go to purchase portions of the property in token form.

Various types of cryptocurrency can be used, but a stable coin is most desirable to peg a reliable value to the physical asset.

There are many platforms coming to market to enable all investors, from institutional-level down to beginning investors, to get a slice of the action.

Key takeaway: Just because real estate is tokenized does not mean it will instantly sell. The same principles for raising money still stand: risk and reward. Tokenization provides an added benefit on top of that fundamental.

Why Is This Good?

  • Smaller capital investments are much easier for the sponsor to offer. It’s easier to offer a $1,000 investment than a $100,000 one.
  • The tokenized asset can be traded in a secondary market, making it more liquid. Historically, the more liquid an investment is, the more secure a buyer feels. This in turn enables capital raising to take place with less friction.
  • Risk is still the most important aspect of evaluating an investment. If tokenization can decrease the perceived risk by allowing the investor to exit if they want, it will increase investor confidence.
  • Potential increase in value: because the asset can be traded in a secondary market, if it is performing well, there is potential for the investor to sell their token shares and realize a capital gain — similar to the stock market, where investors can realize an increase in value for a well-performing operator without waiting for a full exit.
  • Efficiency: for both the investor and the real estate token provider, the ability to govern ownership, distribute earnings, and handle investments can be more efficient when handled on the blockchain, along with continued security.

The Naysayers

1. “REITs already let you easily buy and trade real estate. How is tokenized real estate any different?”

  • REITs typically only offer very large properties that provide a significant economy of scale to make them worthwhile. With tokenization, any asset anywhere can easily be offered to the public.
  • Publicly traded REITs are affected by the overall rise and fall of the stock markets where they trade, making them valued halfway as a stock and halfway as real estate. A straight tokenized asset is not affected by stock market sentiment in the same way.

2. “What about crowdfunding platforms that already offer real estate opportunities?”

  • Like REITs, many of those assets are larger properties, needed to make sense of bringing them to the marketplace. Tokenized platforms can offer more options.
  • Tokenization provides a currency standard that more easily facilitates trading across borders, potentially opening up more investors in other countries who want to invest in the U.S. real estate market.

3. Regulation

The regulatory framework is still unfolding, and blending securities with a still-developing tokenization framework can be complex. Currently, most offerings are governed as securities under SEC rules, similar to other real estate fundraising.

4. Fraud Risk

There is potential for tokenized real estate sponsors to commit fraud with less of a track record than an established REIT institution or syndication sponsor. Investor due diligence on the sponsor matters just as much as it does in any other real estate offering.

5. Taxes

While it may be challenging to understand the tax implications, most tokenizations happen when ownership is converted into an LLC, and shares of that LLC are then sold with stable coin values to investors. The tax implications may still be a bit of a gray area.

Based on current growth and continued platform development, tokenized real estate is expected to reach an estimated $4 trillion by 2035.

Conclusion

If you are looking to continue a growth trajectory, make sure your eyes are tuned to where the future is going. Those who adapt with the times tend to benefit from it.

Many clients we serve have benefited from the traditional method of selling real estate. If you would like to be part of the tokenization movement, contact us to discuss how we can help sell your property on the blockchain to recognize your future profits now.

Sources

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Naomi Brown

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