Digitizing Assets With Real Estate Tokenization

Real estate is considered the most liquid asset that requires more demanding and long transaction processes along with capital commitments undergone significantly. Suppose you talk about global commercial real estate investment. In that case, you will know that these investments subjected to real estate hit an unprecedented and unmatched height of about US $800 billion this year (2022). The question revolving around everyone’s mind is, “how do we keep the real estate tokenization companies safe for development processes if it continues to occur digitally?” However, with the digitization of real estate assets, things are easier to manage. The term we use for it is “Real Estate Tokenization.” 

Moreover, tokenization has been gaining much attention in the real estate sector in recent years.

However, many of you might be familiar with the word “tokenization,” and some may still be unaware of tokenization and how it works. Tokenization of real estate proves to be an area in the financial industry that is overgrowing, allowing investment in digital tokens backed up by real-world assets and various other securities.

 Let’s take an overview of real estate tokenization and how it plays a vital role in this industry.

Topics To Be Covered

  • Real estate Tokenization: The meaning
  • What is Blockchain?
  • Real Estate Tokenization— Types
  • Problems that can be solved by tokenization of real estate
  • Working of Real Estate Tokenization
  • Processes involved in tokenizing real estate
  • Advantages of tokenizing Real estate
  • What’s in future?
  • Final Words

Real Estate Tokenization: The Meaning

Things you should know about Real estate Tokenization

Defining tokenization in simple words would be—the process in which real estate assets are transformed into numerous virtual (digital) tokens is known as Real Estate Tokenization. However, if you sell these virtual tokens over an online marketplace, then a portion of the asset is owned by that purchaser.

In the tokenization of real estate, every token represents direct ownership of an asset that can be shared within a company winning real estate. Hence, with tokenization, property purchasers can undergo transactions digitally by using tokens instead of the traditional paper documentation.

On the other hand, if talking about Property investments, you may conclude that it has been regarded as an opportunity reserved for a particular set of wealthy individuals from the past. It has also been outdated in automation, liquidity, and regulation. However, Blockchain and tokenization of real estate, including all other related challenges, are being conquered with ease.

Also, you can now sell the token to investors. This real estate tokenization can be considered as company stock. Furthermore, as discussed earlier, the process can be regarded as almost the same as crowdfunding, but the only difference here is that you have tokens involved. Moreover, all of these are undergone using Blockchain methods.

What Is Blockchain?

A clear description of Blockchain is that it is a technology of recording information electronically (digital format) so that no one can hack or cheat the data stored over there. Blockchain is said to be a distributed database, as data within it is being shared among the nodes of a computer network.

By taking an example of cryptocurrency, we already know that it’s a bitcoin that is being revolved throughout the cycle, and hence the trading process takes place. So here, with the help of Blockchain technology, transaction records can be maintained in a very secure and decentralized manner. 

Blockchain step by step working

Working

  • Transaction request made by user
  • On creation of transaction a block is represented 
  • Block broadcasted to all nodes of the networks 
  • Nodes validating blocks and transactions 
  • Block is added to the chain 
  • Transaction gets executed after verification

As it is known that tokenization of real estate works based on blockchain technology only, so this ensures the proper safety and security of your tokens for a particular asset.

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Real Estate Tokenization—Types

  • Residential Tokenization–This process is when tokenizing fractional ownership of residential real estate takes place for various asset owners, investors, institutions, and numerous developers. 
  • Commercial TokenizationCommercial Tokenization is a process of tokenizing ownership of various types of commercial properties with legal compliant protocols.
  • Trophy Tokenization– Here, real estate assets are usually known as iconic buildings in prime locations and substantial real estate underpinnings.

So, now let us understand the need for Tokenization for an asset and the problems that can be unraveled by opting for Tokenization in Real estate.

Problems That Can Be Solved By Tokenization Of Real Estate

Need to opt Real Estate Tokenization

1. Proof of Ownership

It is known that Legal ownership can only be applicable until and unless a person has legal documents subjected to it. Otherwise, no one can claim the ownership of that particular asset. However, in the case of tokenization, a well-distributed collection of financial accounts proves to be an agreement that is being shared and coordinated across multiple portals. Many people can access these agreements, and any changes in the ledger (collection of financial account) are copied to all participants existing with that particular asset. In general, each transaction is sent and validated correctly to mitigate any issue arising within a wide range of ownership claims.

2. Increased Transparency

Transparency is said to be the most crucial aspect of almost every work. In Tokenization, every data undergoes programming into a secured, digital token from contract sections providing almost all transaction details, including preference details, interest due dates, etc. However, a blockchain is responsible for recording all those transactions involving the virtual tokens and cryptocurrencies that operate on it. You will achieve total security with high transparency as your asset will be fully digitized, ensuring no hack or cheat. Undoubtedly, blockchain is a proven technology projected protection; hence, complete transparency exists between the seller and investor.

3. Decreasing Transaction Cost

With Blockchain technology, the Tokenization processes became a lot more significant and are responsible for lowering the transaction costs for exchanging tokens.

 Transactional cost are quite less

However, these tokens facilitate investors to buy and sell the property without acquiring any closing costs incurred in traditional times. Although real estate investments trust (REIT) provides a similar value plan as it involves upfront fees and necessitates a high minimum investment.

4. Operational Efficiency

With the introduction of Tokenization, purchasing and selling properties became so easy or simplified. However, Tokenization is more affordable and is a lot more efficient. The only reason behind this is that it acquires blockchain technology that readily automates procedures and eliminates the need for mediators. In addition to this, the tokenization process doesn’t involve any agents and brokers acting as a middleman for real estate transactions. Therefore, real estate tokens are less expensive because they don’t include additional expenditures related to lengthy document reviews and layered communication; hence, they are operationally efficient.

5. Easy Settlement

While transacting with tokenized real estate products, there is a need for these transactions to get settled right away, as soon as they are opposed to typical financial or real estate transactions. Besides, unlike all other traditional exchanges, those are confined to more localized investors. These tokens can be accessed and exchanged across borders at any time. This procedure ensures that the settlements are easy and simplified with the introduction of real estate tokens.

6. High Liquidity

If we talk about the real estate industry, we may know that there’s always been some of the most expensive and complex, rendering real estate by itself. Its liquidity is why there is a need for capital lock-in for an extended period. However, with tokenization, shares existing in real estate can become more liquid and, as a result, can create access to global capital. With the arrival of tokenization, several shares in real estate started subsequent trading and provided additional liquidity for majority-share developers and owners.

7. Low Barriers To Entry

By making smaller assets of extensive properties, Tokenization responsibly mitigates entry barriers and results in more affordable access for everyone, especially for small-scale investors. Taking an example, we may conclude that when you are about to invest in a property with the traditional investing methods, the amount of your investment is average with this innovation making it a low barrier to entry for newcomers.

Working of Real Estate Tokenization

Tokenizing Real Estate

You need to understand the foremost question: “What does a token represent?” So the answer to this would be that a token is simply a digitized share of a particular asset having the same economic rights as any other share. Moreover, the token can only represent ownership of a fair play interest in a legal entity, a portion of the deed, or any other form of asset subjected to real estate. The initial real estate tokenization process is quite similar to crowdfunded real estate deals; the only difference is that the transaction is digitized.

Processes Involved In Tokenizing Real Estate

Process for Real Estate Tokenization

In general, tokenizing real estate processes follow these major phases.

1. Structuring The Deal

While you are in original deal structuring stage there is a need for you to take Critical decisions about the terms and conditions of the security token. In the phase of deal structure, almost all those asset owners need to determine which assets they wish to digitize. Along with this there is a need of legal structure that protects the individual securitized properties with the help of an investment deal.

Apart from the technology used, deal structuring is considered to be an essential component of every securities offering. Moreover, Tokenization is not intended to evade compliance with existing legal and regulatory standards; rather, the use of technology is designed to fundamentally enhance operational procedures in order to allow innovative financial solutions.

2. Digitization

During digitization, information that was said to be saved on paper or in a document is taken out and uploaded over the Blockchain platform.  However, these are now programmed in smart contracts, and as a result, security tokens are created.

3. Selection of Technology

Once you are done with the making of a deal structure or legal structure, it’s time to take a few technology decisions that are going to help you a lot for your business future. The four major decisions you have to make are as follows:

  • KYC/AML
  • Secondary/ Primary Marketplace
  • Token/ Blockchain selection
  •  Custody

4. Distribution And Marketing

Marketing and distribution is a phase of tokenizing real estate that revolves around the creation and distribution of tokens. In order to buy digital tokens, different payment methods are accepted such as stable coins, cryptocurrencies, fiat currencies, etc. Moreover, these digitized tokens can be sold to investors by conducting a live sale test. The image below defines the exact way of distribution and marketing real estate.

Assets marketing and Distribution

5. Post Support

Investors are provided with additional support such as regular tracking of all activities of the token holders, dealing with legal matters, and even the corporate code formulation.

Advantages of Tokenizing Real Estate

 Pros of Tokenization of real estate

Operational Efficiency

In recent times, numerous parties are involved in the legal transfer of assets, yet with Tokenization, selling and purchasing properties became much more accessible and superficial. Moreover, Tokenization is a lot more affordable and efficient since blockchain technology is responsible for automating various procedures and eliminates the need for mediators. As a result, real estate tokens are less expensive because there is no place for any costs subjected to lengthy document reviews and layered communication.

Flexibility

One of the most significant benefits of tokenizing real estate is that everyone can spend a specific amount over here and become the holder of a particular asset. They will profit from their revenues, and these holders may sell their respective tokens at more incredible prices on the secondary market. Tokenization proves to be a much more flexible option for the real estate industry.

Fraud Reduction

As we know that all transactions are recorded digitally over blockchain technology and this cannot be distorted by anyone. This clearly states that tokenization provides more trust and confidence in the minds of real estate investors.

Security

Distributed ledger technology is the one on which the Blockchain mechanism is based. However, these ledgers prove to consent to simulated, synchronized, and shared digital data spread across multiple institutions, sites, and even countries. Although, unlike all other standard distributed databases, there is no single person and no central administration, group, or entity under the control of the ledger. Hence proper security with the liberty of particular assets is assured within the Blockchain.

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Automation  

Here the Processing work is handled well digitally with real-time capitalization table management and automatic governance and distributions.  However, the digitizing processes ensure a massive increase in settlement speed for investors.  In contrast, a decrease in organizational costs for firms simultaneously provides well-structured automation of all the transactional processes.

What’s In The Future?

Tokenization—the future of Real Estate

Tokenization creates excellent flexibility for property owners, investors, and stakeholders. It also reduces the traditional illiquidity of real estate, consisting of the potential to dramatically streamline the way real estate projects are developed, invested, and managed.

  • Tokenizing real estate proves to be a proficient option for other fundraising alternatives, namely private equity, and venture capital.
  • With the help of real-time token swapping, new possibilities for ambitious and creative real estate ventures are opened up.
  • Tokenization of real estate enhances the conventional real estate industry by ensuring better market transparency.
  • By interpreting more opportunities for liquidity, reliability of ownership tracking and enabling real-time investing processes are also rejuvenated.

Even though real estate tokenization stands out as a brand-new and innovative way for these property-based businesses. 

However, another most important aspect is that many top companies worldwide are investing heavily in this idea and gaining huge profits from their business.

Companies opting tokenization rapidly

Final Words

Apart from real estate, tokenization represents itself as a go-to tool for several other industries that can be seen as in need of change and disruption. It will set a new path in this world and enable much-desired and long-awaited improvements and efficiencies in their workflows.

About author
RanjitPal Singh
Ranjitpal Singh is the CEO and founder of RichestSoft, an interactive mobile and web Development Company. He is a technology geek, constantly willing to learn about and convey his perspectives on cutting-edge technological solutions. He is here assisting entrepreneurs and existing businesses in optimizing their standard operating procedures through user-friendly and profitable mobile applications. He has excellent expertise in decision-making and problem-solving because of his professional experience of more than ten years in the IT industry.

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