Real Estate Tokenization: Factors to Consider

In this article, we look at what tokenization a property entails and who this innovative service offering is primarily aimed at as well as the precautions investors should take.

1. For what type of investor is tokenization focused?

It would be very easy to explain the advantages of tokenized real estate only from the perspective of the retail investor. A better inclusion of small investors in the real estate market can have its appeal and satisfy idealistic concepts.

Instead, it will be mainly existing real estate funds and larger projects that will start to be tokenized. First of all, both the market and the regulation must grow from their infancy to a maturity where everyone can tokenize a piece of their property and trade it on a stock exchange. Theoretically this is possible but impractical today.

Real estate business

With great probability the existing players in the real estate business such as real estate funds listed on the stock exchange or REITS (Real Estate Investments Trusts). Will be the first to make the leap to tokenization in this first phase. These tax-optimized investment vehicles actively manage large real estate portfolios. Around US$3 trillion of real estate capital is tied up in these REITs — a fraction of the entire US$280 billion real estate market.

These investment structures could benefit from smart contracts by reducing administration costs while offering better accessibility to all types of investors through tokens. A more individual design facilitated by a programmable token can create real estate products that are not only cheaper but also more in line with the needs of the investor. The main goal is therefore to tokenize existing portfolios and investments and optimize them.

These optimizations are not limited to the design of smart contracts in the security token but extend to real estate management. Of course, in the end investors have little to do with how maintenance costs are settled on an apartment or insurance fees.

But also in these cases Blockchain technology can generate significant savings thanks to the reduction of costs. Administrative costs which ultimately translates into a better performance of real estate funds or stocks. Currently there are already start-ups that are working on Blockchain solutions to implement these optimizations.

Therefore, in real estate there are two predominant use cases:

On the one hand, the more efficient management of real estate and a better design of real estate investments and financial products (for example, REITS) through tokenization and smart contracts respectively.

On the other hand there is a new and better way of financing and trading, as described in the previous article.

Both use cases in turn lead to reduced costs and increased accessibility. Therefore the already attractive real estate market should attract even more capital thanks to rising yields and investment opportunities. Both small investors and real estate companies and funds worth billions can benefit from the new opportunities and improved framework conditions.

2. What precautions should investors take?

It is not surprising that there are already countless Blockchain companies that are working with more or less success on the tokenization of real estate. Of course watch out for black sheep that promise unbelievable returns without offering a substantial service and solid investment proposition.

One of the problems is the still low supply of tokenized real estate. The market is still at a very early stage as a differentiated offer has not emerged. The regulatory system in most jurisdictions also makes offering tokenized real estate projects expensive and time consuming.

However this scenario is quite common at the beginning of an innovation in the financial sector. It is only a matter of time before it becomes easier to offer projects that can convince real estate companies investors and authorities alike.

Token in Real Estate

Token offerings in real estate can be very different in nature. While some providers only offer a marketplace for tokens others may specialize in the tokenization process or offer crypto currency payments. Investors should be clear in advance what types of investment or services they are interested in.

Today many of those services remain limited to the regional level. Imbrex’s Blockchain real estate market for example, currently only offers real estate in the United States. However rationality should not be confused with regional access restrictions.

After all this is exactly where crypto economics comes into play. For a Spaniard, for example it should be as easy to acquire shares in an apartment in Japan as in Spain. Therefore in these real estate projects. The question arises as to whether the offer is available in the jurisdiction itself or is compatible with other jurisdictions.

Tokenization Company Focused on Real Estate

For example a German tokenization company focused on real estate is Brickblock. The company has already tokenized a residential property in Wiesbaden for which real estate shares. With a total volume of two million euros were issued. Acquisition or ownership of the token entitles investors to receive dividends from rental income as well as interest and principal distributions.

However only accredited investors were able to participate in this offer. Due to regulatory obstacles intended to protect consumption. The most complex or especially risky assets are only available to institutional or accredited investors. This will also change with the increase in token adaptation and regulatory practices.

Even if certain real estate investments are only initially available to some investors. Small investors can often invest in the tokens of real estate development companies. Brickblock for example offers a classic ERC20 Ethereum token that can be purchased on exchanges.

Blockchain real estate platform

A Blockchain real estate platform with a broader real estate offering is Propy. The Silicon Valley startup handles all online real estate transactions through smart contracts. Which largely automate the buying and selling process. It is also possible to pay with crypto currencies such as ETH or BTC. Also it has its own token which is linked to the platform. This token can also be purchased normally on the corresponding exchanges.

Smartlands is based on the stellar blockchain platform and currently offers a student residence in Nottingham (UK). Payments can also be processed here with your own token.

Companies and Tokens

In addition to the companies and tokens mentioned above there are other real estate projects that allow participation through tokens. However, anyone who invests in these tokens should be aware of the risks involved. The danger of fake projects and some tokens completely losing their value is real.

For example Crowdlitoken is currently conducting an STO to raise capital for real estate investments in Western Northern and Eastern Europe. The security tokens are structured as bonds and guaranteed by the properties themselves. They are therefore asset-backed security tokens.

The Swiss platform Token estate on the other hand, sees itself more as a platform for real estate managers. And developers who can access their real estate portfolio through the platform and offer it for trading. Security tokens and an STO will also be used. However the project is still in its infancy.

In the field of tokenization technology service providers, we can highlight  Block square , which offers an integrated platform where you can issue a public offer for the sale of tokens with integrated KYC and later. Exchange those tokens on your exchange and distribute the income in a way automated through  smart contracts . They have already successfully launched a pilot project in Ljubljana (Slovenia) consisting of a parking space, whose ERC20 tokens can now be freely exchanged.

Incredible Financial Innovation

The above examples show us that we are still at the beginning of this incredible financial innovation.

You should only invest in unregulated real estate projects outside your region if you are sure of the seriousness of the offer. Some small-cap ERC-20 tokens that are already exchangeable do not meet these criteria.

Investors should also pay more attention to regulatory standards: security tokens approved by financial regulators offer greater protection to investors. Investors with only limited real estate experience in particular should carefully examine what the investment offer is about.

As discussed, there are many different ways to get involved in the real estate market. In addition, security tokens should also be purchasable with fiat currencies and not just other crypto currencies. Most of the real estate projects mentioned above offer this possibility or at least it falls within their plans.

Tokenized real estate projects

One thing is clear: this year there will be an endless number of tokenized real estate projects. The projects mentioned above only represent a small selection of promising projects.

Well-structured real estate projects should benefit from a bit of publicity in the coming months and years. After all, very few investors are aware of the possibilities offered by tokenized real estate platforms. Whoever bets on the right projects early enough will benefit from high demand and above-average profitability.

The entire Blockchain market will benefit from the convergence between the tokenized economy and the real estate industry. The stronger the tokenized real estate sector is established, the more attractive crypto currencies like Bitcoin, Ethereum, etc. will become.