Real Estate Tokenization: A Complete Guide

Real Estate Tokenization: A Complete Guide

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Blockchain technology has made its entry into the global Real estate industry too. It has played a big role in several aspects like property search, property management, rental collection, and property investment. It benefits property developers and investors by providing more transparency, liquidity, immutability, and security. It is estimated that investments in Tokenized property will yield a whopping revenue of $4.2 billion in 2025.

Tokenization has huge potential as the traditional Real estate industry is currently affected by too many intermediaries, lack of transparency and accountability, low liquidity, high illiquidity discounts, and absence of accessibility. It will compete with the likes of Real Estate Investment Trusts (REITs), Project Financing, and Real Estate Debt funds.

What Does Real Estate Tokenization Denote?

It divides an asset into several tradable tokens thereby digitizing it completely. These tokens are offered to prospective investors by listing them on the leading cryptocurrency exchanges in the market. The process is also referred to as tokenized security offering or tokenized asset offering. Each token represents a stake in the underlying asset.

Advantages of Tokenizing Real Estate Asset?

➼ There are no intermediaries like brokers, agents, banks, and lawyers involved in the process. The buyer and seller of property can directly deal with each other. ➼ The tokens can be instantly traded for a low trading fee in the top secondary markets or exchanges. ➼ The barriers to entry in property investment are significantly decreased as even small investors can put in their money. It is not just reserved only for accredited and wealthy investors. A more diverse and broader group will now be able to invest in properties. ➼ Rich investors can efficiently diversify their portfolios by investing in numerous properties across the globe. ➼ Since the security tokens are financially supported by various real-world assets, they are comparatively less risky in contrast to ICO projects and cryptocurrencies. ➼ The value of the security token will be maintained at an optimum rate to prevent its value from falling below the property’s net asset value. This ensures that the price of the property is always close to its real value in the market. ➼ It can lead to more productive and innovative real estate development in the future. It can also lead to more financial resources being diverted from other well-known alternatives like private equity (PE) and venture capital (VC). ➼ It promotes automated processes improving the pace of settlement and also reducing administrative costs to a great extent. ➼ Pricing information can be shared on a real-time basis. This ensures that data is shared symmetrically and also facilitates better price discovery helping in the clinching of profitable deals.

Steps Involved in Tokenizing Real Estate Asset?

  • The kind of asset to be tokenized has to be decided in advance.
  • The existing regulations established by the authorities in a particular jurisdiction will have to be followed.
  • A Special Purpose Vehicle (SPV) needs to be established. It acts as a legal entity and the tokens offered to the potential investors will represent a certain share in the SPV.
  • The right blockchain network needs like Ethereum, Stellar, EOS, Hyperledger needs to be selected for creating the digital token.
  • A custody solution needs to be present so that the investors can store the tokens safely.
  • KYC/AML verification needs to be done for all investors to ensure a high level of authentication and transparency.
  • Once the token has been created, it has to be widely circulated in the market with the help of a well-planned distribution strategy.
  • The tokens can be either offered directly to investors or can be listed on a primary issuance platform.
  • Post-tokenization, dividend distribution to the shareholders must be done.
  • This will continue till the token matures or gets redeemed by the investors.
  • The tokens can also be traded by one investor with another through over the counter trading facilities.

Related: How to Tokenize Commercial Real Estate Asset

Additional Factors to Consider While Tokenizing Property in Different Countries?

➼ Approval is required from the Securities and Futures Commission (SFC) in Hong Kong. They will issue an operational license. Security tokens are considered as complicated financial products. ➼ Singapore’s Monetary Authority treats security tokens as a product of the capital market and it offers a capital market service license for the same. ➼ In the UAE, the tokenization of property is governed by the Securities and Commodity Authority (SCA). ➼ In the USA, the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) are in charge of Real estate tokenization. ➼ Switzerland has the Financial Market Supervisory Authority (FINMA) to take trading, custody integration, and settlement of digital assets.

Summing up

It is a big step forward for the industry as asset management will become more efficient and streamlined. A lot of progress is being made in Real estate tokenization in countries like the USA, Switzerland, Singapore, Hong Kong, Japan, and Germany. It enables the efficient allocation of resources. More adoption of blockchain technology and progressive regulations will drive the demand for Tokenization.

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