Tokenization is the inevitable future of real estate

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Elizabeth Sample and Brenda Powers of Sotheby’s International Realty in NYC told me in an interview: “The global real estate market was valued at approximately $379.7 trillion in 2022. This makes it one of the largest markets in the world.” And they continued:

“We are all familiar with the world of residential or commercial real estate, owning or renting, etc. We are connected through. By using blockchain technology to create digital tokens of property rights, the buying, selling and transfer of real estate can be automated. “This approach allows investors to invest in real estate more efficiently and increases liquidity in this huge asset class.”

Already, there is a rapidly growing market for tokenized real-world assets with a potential market size that represents one of the largest market opportunities in the blockchain industry, according to a joint study by 21.co, BCG and ADDX. Between $10 trillion and $16 trillion by 2030. According to Statista, real estate is predicted to account for nearly a third of the tokenized asset market by 2030, making it the most prevalent category.

Adding fuel to this growth is the US Federal Reserve’s ongoing efforts to contain inflation through higher interest rates, and many experts believe this will continue for some time. This is causing investors to increase their allocations in collateral-based cash flows backed by real estate assets that offer an attractive risk-adjusted return, serving as a stabilizing source of income in an investor’s diversified portfolio.

Historically, real estate has been a reliable hedge against inflation, allowing investors to invest in traditional real estate investment trusts, or REITs, and perhaps even real estate tokens. Recent reports indicate that pro-digital asset President-elect real estate mogul Donald Trump and his son Donald Trump Jr. are developing a new real estate token project, tentatively called “World Liberty,” to integrate real estate investments with decentralized finance using blockchain technology. .

Botto – Fog on Mechanized Monoliths, Artificial Intelligence Art at Sotheby’s Auction House NYC, Collection: Synthetic Histories; Origin Round: 142 How can blockchain be used in real estate transactions?

Blockchain technology can serve as a transparent, reliable record-keeping system for real estate ownership and transfers at the city registry level. Smart contracts, which are programs that run on the blockchain, can be integrated with existing legal processes regulating property ownership; this can automate and record these transfers and changes of ownership while the basic legal processes for property ownership remain in place. This can reduce transaction costs by eliminating dependence on intermediaries and automating many steps.

For example, the City Register uses a software system called ACRIS to record and maintain New York City real estate and certain personal property transfer records, such as mortgage documents for properties in the Bronx, Brooklyn, Manhattan, and Queens. However, ACRIS is not a blockchain system; It is a software platform that is not designed to run on a decentralized blockchain network, but is primarily used to manage and automate regulatory compliance processes.

Blockchain technology can also be used to tokenize real estate assets to digitally represent a form of proof of partial ownership of these assets, governing transferability and providing a medium of exchange. Designed by the UDPN team, the Digital Asset Tokenization System “simplifies the investment process by creating virtual tokens that represent rights to assets and providing comprehensive lifecycle services from ideation to trading and asset services,” explains Tim Bailey, vice president of global business and operations. Red Date Technology.

Key services offered by an asset tokenization platform include the creation and management of digital tokens that represent ownership of physical assets. Other services include token creation tools, storage wallet, and exchange and payment gateway.

With tokenization, a real estate asset/investment can be represented by 1,000 or more tokens minted on a blockchain platform, each representing a portion of the overall real estate asset/investment.

A real estate token can represent a variety of different partial real estate interests, from a portion of a real estate deed that may be in the form of a chicken coop or condo, or a freestanding home or office building built on land. a long-term lease, etc.; an equity interest in a legal entity (such as an LLC or Trust, as in REITs); or ownership of collateralized debt, which may be located in different geographic locations or subject to a variety of different laws and taxes.

A token for real estate may be the equivalent of a non-fungible token (a specific unique identifier). However, it can also be considered a fungible token or a security token.

Through smart contracts (computer code that automatically executes and enforces agreements on a blockchain), these tokens can be programmed to make rent distributions to token holders. Additionally, lease provisions include one-year lock-in periods etc. They can also be programmed to enforce legal compliance requirements, such as:

Other benefits of tokenizing real estate property on a blockchain ledger may include faster transaction times for token purchases and sales transactions, which can be verified and recorded almost instantly without the need for lengthy manual back-office processes.

While tokenizing real estate does not directly change the legal concept of property ownership or make it cheaper to invest in real estate, it can make real estate more accessible to a wider range of investors, thereby increasing liquidity in the real estate market by fragmenting property ownership. Transforming into tradable tokens opens the door to a broader pool of participants to participate in property ownership, including small-scale, young retail investors facing record high home prices, inventory shortages, inflation and high debt that pose formidable barriers to homeownership around the world .

In the United States, owner-occupied partial-equity residential real estate tokenization has already occurred. As Scott Thiel, CEO and founder of Tokinvest, explains:

“The home was purchased in Longmont, Colorado for $740,000 and was financed with third-party investors directly providing 97% of the purchase capital as alternative financing to the mortgage loan. This housing tokenization project represented tradable investment securities backed by owner-occupied homes, the largest and most stable asset class in the world. Real estate token investors will have the option to buy, trade and sell small, passive house positions as an alternative to active, whole house investing. At Tokinvest we tokenize commercial and residential; Current and planned global real estate projects.”

EstateX co-founder Bart de Bruijn is building a private RWA blockchain real estate tokenization platform in the Netherlands, which is expected to launch in Q3 2025. He believes that PROPX security tokens can revolutionize the global real estate industry by transforming the traditionally global real estate industry. It transforms an illiquid and privileged asset class into an accessible, flexible and liquid class, allowing investors worldwide to own small stakes in certain real estate properties, invest with minimal capital and easily trade these tokenized assets. a secondary change. Since EstateX will operate on the RWA blockchain, transactions (such as buying or selling tokens) will be subject to gas fees in the range of 20-35%, which are paid through the token ESX as the platform’s primary intermediary for transactions, governance and staking. will cover the computational cost of processing transactions.

Comparison of real estate tokens and REITs

The expected high interest rate environment will likely make REITs a desirable investment product; Real estate tokens can pave the way for a more dynamic, accessible and investor-friendly future. For your information, here is a comparison of how real estate tokens stand out compared to REITs.

REAL ESTATE TOKEN REVENUESLIQUIDITYTokens are frequently traded on secondary digital asset exchanges based on digital asset market valuations. REIT shares are traded on major exchanges based on stock market valuations. DIVERSIFICATIONTokenization lowers barriers to entry into investment and makes real estate investing accessible to everyone by allowing fractional investments. in various properties in different regions and sectors. REITs often require investors to invest significant capital in commercial properties. &CONTROLTokens provide investors with greater transparency and a sense of control over their investments by providing direct partial ownership of real estate properties. REIT shares represent ownership in the trust that holds real estate assets or real estate debt rather than real estate; Control over property management decisions. REGULATIONS AND TAXTokens are subject to a more dynamic and evolving regulatory and tax environment around the world. In the US, absent specific guidance from the SEC, real estate tokens are generally considered securities subject to registration with the SEC. REITs benefit from well-established regulatory and tax-efficient frameworks that provide stability and robust investor protection. For example, offshore LP structures available at some private REITs can help clients significantly reduce their tax burden by offering investors a 20% tax deduction on the income they receive, thus increasing after-tax returns. TRANSACTION COSTS AND DIVIDENDTokens, 20-35% of revenue generated is in the form of blockchain gas fees, which reduces returns. However, it can be structured to pay daily dividends and swap fees on an otherwise illiquid asset class. REITs provide quarterly dividend distributions, as detailed in the investment offering document, and may carry management and transaction fees that reduce returns. REAL ESTATE TOKENIZATION PLATFORMTokens were issued on a real estate platform. Technology risks and cybersecurity concerns associated with the platform must be taken into account to ensure asset security. REITs are not issued on a blockchain platform.

Due to the complexity and evolving nature of real estate tokenization, it is wise to consult with an experienced securities attorney, tax attorney, and blockchain expert before proceeding with a real estate token investment.