“The best investment on earth… It’s the earth itself!” This is a classic punchline used by a lot of real estate advertising experts since times immemorial. Real estate advertising might have embraced technology, and it might not be surprising to see advertisements even for commercial real estate properties and investments on websites and applications.
The process of registering and recording the ownership of real estate assets, however, has always been confined to its archaic avatar. It is not surprising and it cannot be denied that there is no digital record-keeping that is as immutable, unreasonable, and reliable as the good old paper!
Real Estate & Blockchain
The above statement might have been through today if not for the revolutionary new digital ledger called the blockchain. Blockchain, as the name implies, is a chain of blocks. These blocks are interconnected using a cryptic code called the hash. Each computing system connected to this chain is called a node. Every node participating in the blockchain should have identical copies of data, and new blocks or new data can be added upon receiving a consensus from all the parties involved.
These attributes make the blockchain an ideal candidate for replacing the centuries-old paper-based record-keeping of real estate properties. Blockchain presents all the qualities that are required for keeping sensitive and high-value records like real estate ownership. All the records on the blockchain are immutable and secure. At the same time, they are also transparent, so it can be ‘accessed’ but not easily ‘edited.’
The promising nature of the possibilities with the blockchain technology in real estate has been aptly recognized by key people in the industry, leading to the creation of the Foundation for International Blockchain and Real Estate Expertise (FIBREE).
The introduction of a technology like blockchain into a traditionally rooted industry like real estate has created another marvel called tokenization. To understand the advantages that real estate tokenization brings, it is important to understand the challenges that high value and commercial real estate face with respect to investments.
High-value and commercial real estate properties are, without question, bound to increase in value with every passing day. This does not, however, guarantee the saleability of the same exit. This means that the asset is rendered illiquid. An investor who owns the asset can sell that property only upon finding a potential buyer who can invest so much of the money required to acquire the property.
One of the biggest factors contributing to the absence of liquidity is the magnitude of unaffordability. Commercial real estate has always been beyond the reach of a common investor. This heavily limits their participation in high-value real estate trade.
Let us assume that a perfect buyer was found! They would probably have the money that was needed to buy the property that was put up for sale. However, would any investor want to put all their money into a single property? One of the most evergreen advice is given in the world of investments is not to put all your eggs in a single basket! No investor would dare invest all their capital in a single real estate property, however lucrative the deal is.
Another challenge that existed with real estate trading was either you sell the entire property or you don’t! This would mean that if an investor processed a property worth about $6 million and they had a financial emergency of about $1 million, they did not have an option but to sell the entire property. This meant that they lost control of about $5 million that they need not have!
Tokenization – The Silver Bullet
Tokenization is designed to put an end to all the woes mentioned above. A token is nothing more than a representative unit that could constitute either share in the profit, or partial ownership, or even voting rights on the ownership of a property. In the context of tokenization, it is the science of breaking down a real estate property into smaller, affordable, and tangible units that represent a part of the property without any compromise in value.
The tokenization of real estate assets presents a plethora of advantages.
Advantages of Tokenization:
- The advantages brought by this simple concept cascade down with a ripple effect, one advantage plays a big role in factoring the next.
- The first and foremost advantage that delights investors and property owners when you talk about a real estate asset is the fractionalization. The real estate property is divided into smaller chunks with an intention to have them sold. These ‘chunks’ are nothing more than tokens that reside on the blockchain. The property owner can choose to sell all the tokens, or a part of them using a Security Token Offering (STO). This opens up possibilities for partial ownership, which enable property owners to raise sufficient capital without compromising on the control they have on their prized property.
- Since the asset is broken down into smaller chunks, the real estate property that was once considered unsaleable has now become extremely sellable. This directly increases the magnitude of liquidity. In the classical realm of investing, liberty is defined as the ease with which an asset can be converted to cash. In the context of real estate, it denotes the saleability of a property. Real estate was once considered a paradoxical avenue of investment. Itit is one of the most lucrative and most promising, but at the same time, one of the most illiquid investments! The jinx of illiquidity has been shattered to smithereens because of real estate tokenization.
- These tokens are made to reside on a blockchain. It is quite possible that these tokens sell like hotcakes. Earlier, real estate transactions were marred with a lot of intermediaries, and it translated into expensive transactions. The transactions include brokerage fees, lender charges, closing costs, appraisals, inspections, and legal fees. However, all these aspects are taken care of by a small self-executing program that resides within the blockchain called the smart contract.
- The smart contract not only makes the entire process cost-effective but also efficient. Since they are designed to execute all by themselves upon fulfillment of certain conditions, the entire process of verification, underwriting, escrow, compliance, and legal processes are completely automated. The absence of human intervention also minimizes the possibilities of error, resulting in indirect savings.
- Another innate property of the blockchain that comes into play at this juncture is transparency. In a deal of such magnitude, transparency is of crucial importance. The entire transaction is completely verifiable and at the same time, can be retrieved at any point of time in the future without any fear of tampering or compromise. The immutability, which was one of the first attributes that we discussed, comes into play here!
Real estate tokenization is all set to be the procedure for real estate ownership and transfer in the future. With countries like Australia, Malta, Gibraltar, and the United States of Embracing the reliability of blockchain technology, it will just be a matter of time before it becomes mainstream.
If you would like to be a part of this revolution and invest in creating a real estate tokenization platform, all you need to do is to get in touch with a blockchain app development company. They will take care of your requirements and create the manifestation of technology to bring your business idea into reality!