We’re living in an era of disruption. The digital revolution isn’t just changing how we work, but also the way we live and do business. It’s generated new opportunities, questioned the old ones, and brought us into a completely new age. The real estate market is no stranger to this trend. It’s about new business models that leverage technology.
Real Estate and Innovation
It’s quite tough to find any industry which is still left untouched by blockchain disruption, given how it is massively changing the banking and financial sectors. Reality is, even real estate couldn’t escape the change.
The largest asset class in the world
The Real Estate industry is the largest single sector in the world. Globally, real estate has been valued at over USD 280 trillion — a more valuable asset class than all worldwide stocks and securitized debt combined and represents the largest store of wealth at three and a half times the total global GDP.
We will take a closer look at how and why blockchain for real estate can become the turning point of this sector.
Smarter, more transparent
Blockchain technology could shake the real estate industry in a variety of ways. One of them would be an easier, faster contract management flow that accelerates deals. Through smart contract technology, each part of a sale process is automated, and payments would be sent and received instantly – even on the weekends or outside of business hours.
Smart contracts could also automate due diligence or background checks. Blockchain technology can help verify identities, making the KYC process faster. Parties involved in a contract can access it with a personal digital key, reducing the possibility of fraud.
Tokenization on blockchain in real estate
Tokens are a digital store for value. Tokenization in this case means translating the right over an asset into a digital bundle of information, the token.
In real estate, tokens can represent many things like ownership of an asset, equity in the SPV (owner of the asset), part of the debt secured by the property, cash flow from the property, and others.
Saying that it’s quite immediate to understand that you could tokenize:
- Trophy asset
- Complex Portfolios
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Token types and Real examples
In the case of a “trophy asset”, one could create an investment token relating only to the ground floor, which gives rights to rent, because it is planned that the ground floor will all be rented out to commercial activities; at the same time, however, on the same operation, one could also create a separate token on the upper residential floors, thus giving the token owners the right to have the portion deriving from the subsequent sale of the apartments. - If you have, however, a large real estate portfolio, with different categories of properties, instead of going to make the classic division by risk, you could create a token that represents the link to a detailed intended use (ie: hotels, residential, logistic) in one particular region.
Then going to target, tokenize and break down, in a very granular way, the underlying asset, in order to then propose the right target of investors.
As you can see from these samples the major benefits of tokenizing real estate, as well as all illiquid assets are additional liquidity, lower investment barriers, cutting information asymmetries, programmable securities, and unparalleled security.
Liquidity and the benefits of tokenization – primary market
For investors undergoing the need to build a diversified portfolio, selling their assets can be difficult. Blockchain technology has the potential to facilitate this process if all investments are registered through a ledger that simplifies the exchange of shares between investors. In addition to increased security and transparency in the marketplace, it leads to treating real estate assets, which are themselves illiquid, as if they were publicly traded stocks. With the blockchain, in fact, having a transactional registry all over the world, the geographical barrier is eliminated, so it is possible to sell a real estate-related token – after the appropriate identifications – both to a subject in Paris and a subject in New York.
Also, this is a market with multiple entry barriers, one of the main ones is the investment size. Tokenization allows a broader investor base because one could buy fractional portions of the real estate, making it possible to diversify their portfolio much easier.
These are not just theoretical examples, all around the world the real estate tokenization cases are spreading, not just in Dubai, Singapore, or the US but also in Europe.
Opening the gates to a Secondary Market
In addition, with reduced transition time and costs, investors can trade the asset with each other on the secondary market in just a few clicks. And that’s not all, the interesting thing is that the secondary market doesn’t have to be based solely on transactions from the real estate world. Since tokens all have the same standard, a real estate token can also be exchanged for a token that represents the share of a Picasso or SME tokenized bond, or something else..
The tokenization standard represents, in fact, the main feature of blockchain as an investment opportunity.
Today there is no real secondary market for Real Estate and security tokens, not yet at least. But we’re sure that’s about to change.
Sources:
https://www.ibm.com/blogs/blockchain/2019/09/blockchain-in-real-estate-how-technology-is-changing-the-industry/
https://www.investopedia.com/news/how-blockchain-technology-changing-real-estate/
https://www.cbinsights.com/research/blockchain-real-estate-disruption/
