A Beginners Guide to Tokenised Real Estate: Tradeable Security Tokens
The concept of tokenised real estate is fairly new to the property world. However some people believe it could be the next big thing in property. Here’s our simple beginners guide to tokenised real estate.
What Exactly is Tokenised Real Estate?
Real estate is, as the name suggests, real property. It exists in real life. While that is one of its advantages it is also a disadvantage. It is not that easy nor that quick to buy, sell or trade real property.
Real estate tokenisation is a way of representing a piece of real estate as tradeable digital security tokens. These tradeable digital tokens are secured by blockchain technology.
Blockchain is a way of securely storing data in separate blocks that are securely linked together and impossible to tamper with.
Real estate tokenisation involves creating tokens via blockchain and then assigning them to real estate properties that already exist or that are under construction.
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What Are the Advantages of Real Estate Tokenisation?
Advocates of real estate tokenisation suggest a number of possible advantages of the concept:
- Tokenisation digitises the ownership of real estate. Other assets can be owned digitally, so why not property?
- Tokenisation reduces one of the barriers to buying, selling or owning real estate ie. that it is illiquid. Tokenisation makes real estate less illiquid as it can be more easily bought and sold via tokens. It holds the potential to make property a very liquid asset.
- Tokenisation makes fractional ownership of property (where a number of people own a part of the property) possible and relatively easy. In some ways, real estate tokenisation is a form of digital fractional ownership.
- Tokenisation makes ownership of a piece of real estate available to anyone anywhere in the world. Wherever the tokens can be sold the real estate can be sold. The market is not just restricted to those who are physically located in the same country or within the same legal system.
- Real estate tokens are underpinned by a real physical asset compared to other kinds of tokenised products, such as cryptocurrencies, which may not be. They should, in theory at least, offer a higher degree of security and confidence.
Tokenisation makes real estate ownership accessible to smaller buyers and investors. Those who cannot buy an entire piece of real estate can buy a number of shares in it. It opens up the ownership of real estate to a much wider and more diverse market, which potentially could benefit the market as well as the owners.
It is said that real estate tokenisation is a form of democratisation within the property market.
Tokenisation offers an opportunity for developers and builders to raise funds for a project more easily by selling the tokens to several or indeed many investors or funders. A single piece of tokenised real estate can be owned by thousands of investors. This is something that is difficult if not impossible via conventional ownership methods.
Real estate tokens can be an alternative way of raising capital for development from amongst a large numbers of investors. And potentially raising much more money in the process.
Real estate tokens are (or should be) easier to buy and sell than real estate itself. To buy or sell the real estate you can buy and sell the tokens. There should be less bureaucracy and administration.
Sales and purchases can be concluded quickly, in a matter of minutes. This is unlike the conventional system by which a sale and purchase of real estate can take many weeks or months.
Sales and purchases can be completed digitally, via a trading platform and perhaps an app., by the buyer or investor themselves. The involvement of real estate agents and other intermediaries (and their fees and commissions) is eliminated.
- Tokenisation should make it cheaper to buy and sell real estate tokens than real estate itself. There should be fewer fees and charges and it may also save on transfer taxes.
- Real estate ownership should be highly secure with tokenisation, since it is secured by blockchain. There should be no potential for fraud or theft during or after the transaction.
- The price of real estate tokens should reflect the underlaying value of the asset more accurately. It theoretically makes real time pricing of real estate possible. It can be assumed that the value of a piece of real estate is the price at which tokens are changing hands at that particular point in time.
Real estate tokens can be used for a variety of purposes in the real estate world. Tokens can be issued in different versions, to suit different purposes. For example there can be tokens which entitle owners to a share in the value of the property, or entitle them to receive rent, or both.
As well as buying and selling for either own occupation or investment they can be used as security/collateral to raise a loan, for equity release or for sale and leaseback.
Real estate tokens can be attached to all kinds of property. They can be used for a single property, all the property in a building (eg. apartments) and entire development plots. They can be used for residential property, commercial property, for land and for any other kind of real estate.
Their uses are theoretically unlimited potentially opening up new ways of buying, selling or investing in real estate which are not known as yet.
- Tokenisation allows property investors to diversify their investments more easily. Rather than purchasing a share in just one building for example, investors can purchase tokens in many different buildings in many different countries and of many different types of real estate. Investors can sell all or just part of an investment more quickly and easily via tokenisation.
What Are the Disadvantages of Real Estate Tokenisation?
Not all countries have a legal framework to allow real estate tokenisation or even make it possible.
The legal status of tokenised assets may be unclear in many places.
Even when tokenised real estate has a legal status processes such as legal transfer or conveyancing and land registry procedures are still likely to be non-digital. So while tokens can be transferred digitally a property still cannot be.
There is no accepted model for what a tokenised real estate investment should consist of, nor for a security token offering (known as an STO).
Tokenised real estate investments are generally made not in the ownership of a property itself but in an SPV (special purpose vehicle) which owns the property. This may be a company located in a jurisdiction other than that which the property is located.
There is no established system for whether tokens may be bought, sold or redeemed in conventional currencies (and which ones) or cryptocurrencies (or both) for example.
- Tokenisation of real estate requires a suitable tokenisation provider to issue and manage the tokens. This business is still very much in its infancy too.
Real estate tokenisation is not widely known about or understood as yet. There are currently a small number of knowledgeable potential investors. This could be a barrier to selling tokenised investments, and also a barrier to reselling investments on a resale market or secondary market.
Volumes of real estate sold this way have been small, so there is no track record of performance to go by.
Real estate tokenised investments could be considered a risky kind of investment by many people, perhaps in the same way that cryptocurrencies are (although they are not cryptocurrencies as they are backed by real property.) This could be a barrier to them becoming more established.
Values of tokens can fall below the price at which they were purchased in just the same way as the value of property can.
- Tokenised real estate investments are more likely to appeal to more forward-thinking groups such as cryptocurrency investors, or millennial investors. Although growing these groups are relatively small and niche at the moment, tokens are likely still a small and niche market too.
- There could, and is likely to be, opposition and/or resistance towards real estate tokenisation from organisations that have a vested interest in the current system of real estate ownership.
In summary, in an increasingly digital world it’s more than likely that the concept of tokenised real estate will gain more traction into the future. But it is as well to remember that it is still very much a new and innovative concept. It is very much a case of ‘watch this space’ to see if and how real estate tokenisation develops in the coming years.