Tokenization of Commercial Real Estate Asset
Tokenization of assets will revolutionize the status quo due to the transparency and immutable nature of the blockchain, especially the low liquid markets. The global real estate market is estimated at $217 trillion with a 25% contribution from commercial real-estate. The tokenization of real estate will increase liquidity and can be traded with ease.
Commercial Real Estate Tokenization is the process of divide the asset value into shares that can be sold to investors. In simple terms, a tokenized real estate asset represents fragmented ownership of a predefined real estate asset through blockchain-based tokens, often known as “security tokens.”
The tokenization of real-world assets can unlock the most unresolved issues i.e. the liquidity issue. The popularity of security tokens is majorly driven by the need to tokenize illiquid assets. Every asset from house to equities can be securitized, however, the confusion between different regulatory arms across the world has created a frenzy for creating a tokenized platform. Issuance and trading of security tokens have been a hurdle due to the different compliances across countries.
As predicted, the commercial real estate is the first to enter the 🛡️security token industry.
If the tokenization occurs on a blockchain network the following things will happen.
- The method of payments occurs in both directions.
- The concept of ownership of the assets will evolve
- Increased demand for Governance Protocol
- Reduced barriers to entry to the investors
- Security & Transparency
Why Is Tokenization an Ideal Solution for CRE (Commercial Real Estate)?
The primary market characteristics of CRE include significant upfront investments, the involvement of management costs, short term low liquidity, etc., which inhibits small-time investors from investing directly in commercial real estate property. Also, the CRE transaction and settlement process happens at a very slow pace and involves a great deal of intermediary involvement such as agents, sellers, buyers, financiers, insurers, etc. This results in redundant verification, information, and makes the process further complicated.
Tokenization, on the other hand, eradicates all of these complexities. Blockchain-based tokenized platforms bring in more efficiency and security. It speeds up the process by directly allowing customers to engage and exchange within themselves through the blockchain platform from anywhere around the world. It eliminates the involvement from third parties, and the need for paperwork, hence assures a risk-free, hassle-free experience. These attributes make tokenization attractive to users. Let’s discuss some of the benefits further in detail.
The two primary vehicles through which retail investors can access commercial real estate properties are public-listed REITS and crowd-funding platforms. However, both of them have notable shortcomings when it comes to the access they provide to retail investors. Tokenization is highly beneficial in mitigating them.
Blockchain-based tokenization platforms allow fractional ownership, which means the property value can be divided into small shares of tokens. The digital tokens are available to purchase/trade for potential investors all around the world, which paves the way for small-time investors to be a part of a substantial investment.
Liquidity is the most crucial factor for real estate assets. A liquidity framework involves,
- Tightness – The narrow the bid-ask spread, more the liquidity
- Depth – The larger the size of the trade affects asset price, the more depth it has in the market
- Resilience – Amount of time the asset prices take to return to balance, after going through fluctuation
- Rapidity – How quickly an asset value can be converted into cash.
The real estate class is usually broadly illiquid. This creates major difficulty for the users to gain exposure in the real estate market. Tokenization platforms eliminate these hurdles by providing enhanced liquidity, more flexibility, and cost-efficiency to the users. Tokenization also brings in possibilities for investors to a pool of properties that were previously inaccessible.
Transparency is also a key factor, especially for wide industries like real estate. Transparency is what will determine the accessibility or reliability of real estate asset information. Lack of transparency in the traditional real estate brings in unnecessary tension and security issues or malpractices with documentation, etc., for the investors.
Whereas a blockchain-based tokenization platform operates on a globally distributed network, in every step of the transaction and the information is transparent all over the network, to the involved investors.
Future Potential for Tokenized Real Estate Assets
In 2020, real estate emerges as the biggest asset class with a volume of $217 trillion. Experts have predicted that most real estate platforms will leverage tokenization by the year 2021, making the traditional system less appealing. Tokenization is changing the pace of not only commercial but the real estate sector on the whole. Blockchain-based tokenization assures a promising and profitable future for real estate investors around the world.
In addition to the features, there are a few factors we need to keep in mind while tokenizing.
- Type of real estate (income-generating, development space, investment properties, etc.)
- Type of Structure (Fund/Special Purpose Vehicle (SPC) or a hybrid)
- Ratio of Tokenization
- Liabilities on the Property
- Appropriate Smart Contract for automation
- Federal & State Regulatory and Tax requirements
- Keeping Track of the records of token holders
- Reporting Obligations including Re-sales
- AML/KYC & Investor Accreditation requirements
The tokenization of real estate asset is highly complicated and requires cutting-edge technology such as blockchain and smart contracts. Currently, Real Estate Investment Trusts (REITs) are publicly listed and provide liquidity to the fund, but they are expensive for retail investors. Some REITs have a minimum entry for investors at $25,000 or higher. However, tokenizing might give retail investors to hold $10 worth of tokens of top buildings like the Empire State Building.
In addition to real estate, we could see many other illiquid assets that are too costly to trade become liquid through tokenization. Blockchain App Factory is at the forefront of Security Token Development, equity token offering, Tokenized asset offering, STO Marketing and Tokenization of any illiquid asset.