Real estate tokenization: what you should know

 

Tokenizing any kind of physical asset offers an irresistible value proposition. So it doesn't take a genius to understand that the trillion-dollar real estate sector offers gigantic profit potential by offering real estate "chunks."

But let's start from the beginning and remember some basic concepts.

Tokenization means that digital files are issued via a blockchain. These files certify ownership of real assets, which brings benefits such as immutability, traceability, and uniqueness. The latter also means that it is neither possible to copy these certificates nor to hand them over twice - so there are no double sales.

What are the benefits of tokenizing real assets?

Tokens replace paper certificates

An asset can be divided into fragments

Unique title deeds

Easy sales opportunities for the investor

Easily distribute and acquire the tokens representing the security

Liquid Assets

Easy transfer on secondary markets

The benefits of using tokens clearly outweigh them. That's why the future of investments in real assets lies in tokenization, I have no doubt about that.

But let's get to our central topic: real estate tokenization.

Real estate tokenization: is it possible?

Real estate is generally understood to mean various investments. It can be an apartment, an office building, a commercial property, a square meter of industrial land or a piece of land.

It is said very often that “real estate is tokenized”, but is it really true? The answer is: no.

I'm not aware of any real estate project that only uses a token as a title deed.

The reason for this is obvious: In most countries there is a land register in which it is legally recorded that the property exists and who owns it.

To date, the jurisprudence for such registers does not accept tokens as a valid means of representing ownership. An example: We issue an NFT (Non-Fungible Token - ideal for representing a real estate asset) that represents an apartment with the associated title deeds. We record these documents in the form of metadata as NFT . This is how we create a second proof of the existence of this property. The owner of the NFT would then be the legal owner of this property from the moment of minting. We could even prove this information in the land register of the resident place.

Now the owner of the property transfers the token to a buyer who is technically the new owner of that property. However, this transfer does not affect the entry in the land register where the original NFT owner still appears as the owner.

It is therefore a double entry. This circumstance inevitably leads to legal uncertainties for the new owner of the NFT, since the legally strongest proof of ownership of a property is currently the land register.

So let's say a bona fide prospect buys the NFT and a transfer of ownership occurs. Suddenly the new owner of the NFT finds out that his house has been confiscated by the tax authorities, for example, because the previous owner has outstanding debts. Now, the buyer could go to court and prove ownership of the NFT, but who wants to take that risk?

So companies with advertising slogans like “We tokenize real estate” or “Florida’s first apartment as an NFT” are not telling the truth.

But then what does such a token represent? Basically it's two things:

The shares or shares of a company that owns real estate

And debts associated with a property

So, should you invest in tokenized real estate?

A property, by definition, generates rental income and/or profits (or not) from capital gains. Real estate tokenization allows you to own economic rights (interest, dividends) to the profits of the property, but not the property itself.

So the property is not tokenized, even though many companies in this sector claim such things.

And regardless of whether our tokens represent equity or debt, the characteristics of an investment differ significantly from the characteristics of a property investment. When we own shares in a company, we also share the operational risk. In this case also every risk in connection with the property (which exists in any case). We also have to accept the fact that we are minority shareholders and are therefore at the mercy of management and general meeting decisions. In the case of debt, the risk is clear: default.

Therefore, anyone interested in real estate tokens should know that these tokens merely represent real estate companies and not the real estate itself. Comprehensive research before investing is fundamental. Unfortunately, there are quite a number of investors who don't really understand how they invest their money. By that I mean not only tokens, but also stocks, NFTs, investment funds, cryptocurrencies or stamps, to name just a few examples.

There are other ways to invest in real estate company shares, such as through crowdfunding platforms, more traditional real estate funds, or listed real estate investment companies. 

Real estate crowdfunding is complemented by a token on the blockchain , providing additional features that improve crowdfunding. I have no doubt that crowdfunding and real estate tokenization will see more acceptance with proper legislation.

Listed real estate investment companies or real estate funds, which are more traditional ways of investing in real estate, do not offer these functions. Some say these investments are safer and more liquid, but then why invest in tokens?

Tokenization and traditional investments in comparison

Listed real estate investment companies are, as the name suggests, listed on a regulated market. Your share price depends, among other things, on the value and rents of the properties in the portfolio. In return for certain obligations, these companies receive significant tax benefits. For example, their obligations include renting out the majority of the assets, maintaining a minimum capital, and the like.

However, there is also a significant advantage of tokenization over buying shares. The new investment opportunity brings with it a new concept of autonomous management of one's wealth. With the help of digital tools such as tokens and wallets, we no longer need intermediaries, but regulate everything important with smart contracts. Interest or profits are automatically distributed in the form of stablecoins and the tokens can be traded on highly liquid markets within a very short time. There are already excellent projects like Centrifuge or RealT, where the community not only shares investments, but also values.

Additionally, real estate tokenization allows you to invest in a specific business, property, street or city. The affinity with the investment and the developer is much stronger than investing in an opaque listed real estate investment company.

It's difficult to feel part of a community when investing in real estate investment companies. Because with such companies you know just as little about their activities or investments as you do with banks. Yes, maybe we know what the managers and directors earn. I have even read the annual reports and appraisal reports of several companies. But if we believe these documents to be reliable, we have learned nothing from the September 2008 events.

If you think that these real estate investment companies have lower risk than real estate token investments, you could also say that Banco Popular or Bankia have lower risk than a crowdlending platform because of their guarantees. I would like to remind you that the shares of the largest real estate investment companies in Spain have fallen by 50% in 2020. Many investors have almost certainly suffered heavy losses. I have not seen any articles in the press warning of the serious risks of investing in these companies.

Of course, I have no objection to the existence of these companies for a certain profile of traditional real estate investors either. However, the enormous tax advantages of these investment opportunities are very questionable compared to the tax regulations of small real estate developers and even more so with those of crypto investors.

There is a generation that no longer wants opaque investment packages from banks or real estate funds. This generation wants transparency in their investments. Real estate tokenization enables such investments. In addition, you can participate in the form of DAOs, Telegram or Discord channels and feel part of a community.

It goes without saying that any responsible token investor needs to do a good analysis of the relationship between return, risk and liquidity. Appropriate diversification criteria (product, geographical, company, etc.) are also essential to limit potential losses.

So the risk question is no longer which real estate investment offer you want to get into, whether with tokens or without tokens. The question is whether you understand the business with its returns and all the risks and whether you are able to make a rational decision after an independent analysis.

Tokens can represent both a good and a bad real estate deal. However, introducing the benefits of blockchain will definitely improve the way we invest.

Real estate tokenization is still in its infancy, but it's an unstoppable trend. Real estate investment is undergoing a democratic revolution with more transparency and liquidity.

Disclaimer

All information contained on our website has been researched to the best of our knowledge and belief. The journalistic contributions are for general information purposes only. Any action taken by the reader based on the information found on our website is entirely at their own risk.

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