A modern industry overhaul
The real estate industry has been long overdue for a technological overhaul. This overhaul is taking place right now through the “tokenization” of real estate. Tokenization is the process of representing fractional ownership interest in an asset through a blockchain-based token.
Traditionally, the real estate industry has had a reputation for being slow-moving and paper-dependent, but tokenization will bring a new speed and ease of access. At present, the completion of an average real estate listing contract can range from three months to a year or longer. These drawn out processes significantly impact a global industry with a value of over $217 trillion.
Examining the Data
Tokenization is the representation of a stake in an asset, similar to having shares in a business.
The promise in tokenization lies in the liquidity—even assets that are typically illiquid such as real estate can easily be transferred to cash.
Tokenization also lowers barriers for investment. Anyone with an internet connection who meets the capital requirements can invest, or invest through fractional ownership.
Tokens would also be digitized, meaning they’ll be digitally allocated with auto-enacting smart contracts that would also handle potential payouts.
Since tokenization takes place using blockchain technology, all transactions are recorded and verified, making fraud more difficult.
What Are Smart Contracts?
Smart contracts are computer protocols that can facilitate and enact contracts that are also logged on to a publicly verifiable digital ledger. Smart contracts can be of huge value to the real estate industry because they enact transfers in a more transparent and efficient way.
Smart contract technology, when implemented in real estate, could enable investments across borders, creating new international opportunities.
Smart contracts could change various aspects of the industry, such as home searches, rental agreements and more, with less risk of fraud or reneging on agreements.
Using smart contracts can drastically reduce costs, by removing expensive and slow intermediaries from real estate processes.
Real estate has been a safe but relatively illiquid asset, locking away the investor’s money for extended periods of time. An asset with high liquidity differs as it can be changed into cash quickly and with relative ease. While real estate assets can become liquid, the costs and processing times associated with this process remains high. Tokenization creates this liquidity in a more efficient and cost-effective manner through tokens, which can be traded at all hours from nearly anywhere in the world.
Liquidity can positively affect the value of assets by removing intermediaries and helping investors maintain current costs and prices.
As another application, tokenization could help hard money lenders achieve liquidity and gain access to capital much faster.
Fractional ownership is one of the most promising innovations in tokenizing real estate. Through blockchain technology, tokens are divisible when representing an illiquid asset such as real estate—so investors can own a portion of a token.
Fractional ownership allows multiple possessors to have access to profits with lower general exposure to risk.
Fractional ownership is also applicable to rental agreements. Rental payments can automatically be enacted via smart contracts and investors can own “fractions” of these rental properties and collect payments of passive income. For less experienced investors, or investors with little seed capital, this method of investing is more accessible.
The Real World Examples
Examples of successful tokenization can be found around the globe, from the U.S. to Europe to Australia.
In Manhattan, a multistory property in the East Village became the first property to be tokenized on the Ethereum blockchain. Similarly in Italy, a 1,613-square-meters mansion designed by Giacomo Della Porta was auctioned by Propy using blockchain technology.
The most successful tokenization example can be found in Aspen, Colorado, where the St. Regis Aspen Resort was sold for Aspen Coins.
Beyond traditional properties, examples of real estate tokenization can even be found in virtual reality.
Tokenizing Investment Platforms Around Real Estate
New solutions are being created by innovators to meet the demand of the industry. As one example, OpenLTV, is an open, tokenized passive investment platform where investors can invest in loans backed by U.S. real estate debt, get a token, earn passive income and, in some cases, sell the token on an exchange.
Tokenization is due to renovate the real estate industry. Traditional real estate processes are slow, costly and inefficient, fueling interest in new technologies. The use of smart contracts, the benefits of liquidity and fractional ownership and successful existing examples of blockchain in real estate are ensuring the future of the technology in the real estate sector.