The traditional real estate industry suffers from a lot of problems like unequal access to all the investors, unclear regulations, lack of enough liquidity, and the presence of too many middlemen in different processes. This leads to real estate not being considered as an attractive investment avenue affecting its credibility.
Real Estate Tokenization is a viable substitute where blockchain technology is used to digitize the entire asset in the form of tradable tokens. Anyone can invest in those tokens and they can purchase just a fraction of the asset leading to more financial inclusion. They can also benefit from capital appreciation and income in the form of rent, interest, cash flow, and dividends.
Many regulatory bodies like the Securities and Exchange Commission (SEC) of the USA and the Financial Industry Regulatory Authority (FINRA) view tokenized real estate assets distributed through security tokenized offerings like financial instruments just like equity shares or stock.
How Tokenized Real Estate Is a Unique Game-Changer?
- It establishes a system where both money and real estate assets can be transacted frictionless.
- The distributed ledger powered by blockchain technology will take care of all the information, transactions, and documents of the buyers and sellers of property.
- The tokens which are a digital representation of the physical asset can be used for identifying the ownership of the property, traded easily in the leading secondary markets, and also be transferred effortlessly on the decentralized platform.
- Smart contracts automate all the operations and record the sale of each token on the blockchain ledger so that it will be visible to all the parties maintaining a higher level of transparency. The smart contract acts as the broker, lawyer, and arbiter.
- Wealthy investors are put at an advantage as they can efficiently diversify their portfolio by simultaneously putting their money in multiple properties across the globe.
- Both property owners and developers will get instant access to liquidity through the Tokenization of Real Estate Asset.
- There is no minimum capital requirement in tokenization and buyers can put whatever amount of money that they can afford to invest.
- It can simplify both the registration of properties and investors by streamlining the entire process.
- Direct exchange of digital assets is facilitated in the blockchain network without the participation of a centralized intermediary. This significantly helps in decreasing the level of counterparty risk.
- Tokenization will help in eliminating various costs like brokerage fees, lender expenses, closing expenses, legal charges, appraisal, and inspection fees.
The Important Factors to Consider Before Developing a Real Estate Tokenization Platform
- Algorithms should be established for the interaction of all the participants in a decentralized system.
- Regarding tokens, the tokenomics such as the total supply, the distribution strategy, and the life cycle must be finalized.
- The private and public keys of the users should be managed properly and safely.
- A mechanism must be prepared for the deposit and withdrawal of funds by the users, internal exchanges, transactions, and management of upper and lower limits.
- Apart from the trading platform, a payment system that includes both web and mobile wallets should be developed.
- All legal issues must be dealt with beforehand to avoid any unforeseen situation. The tax laws should be followed with due diligence according to the regulations of the particular jurisdiction.
The Current Scenario Concerning the Impact of Blockchain on the Real Estate Industry
- Tokens will spearhead the adoption of blockchain technology to the next level.
- Lack of proper regulatory mechanisms and ambiguous legislative framework is affecting the growth of Real Estate Tokenization.
- Adaption is hindered due to the low knowledge of blockchain technology and cryptocurrencies among retail investors.
- Tokenization in Real Estate can spread faster if there is better cooperation between blockchain development companies and Fintech companies.
- Digital payments via cryptocurrencies have accelerated during the Covid-19 pandemic as the use of cash has declined across the world.
- Countries like Sweden are experimenting with property ownership and digitization of land registries through blockchain technology.
- REIDAO is a popular real estate tokenization platform built on the Ethereum blockchain network operating in Singapore where token holders can quickly trade their tokens.
- FundPlaces allows investors to put their funds in various properties in Australia, the United Kingdom, and Germany starting from a minimum value of $1000. The token holders earn their returns through cash flow, interest, rent, and capital appreciation.
As seen above, Real Estate Tokenization leads to improved asset management and better market security. It will become the change for the future and investments in properties can be made democratically and with a higher level of liquidity.