You are probably still wondering why blockchain — and indeed tokenization — is relevant for real estate. There are several reasons. Real estate properties can be tokenized and it is typically done in two ways. Either the equity of the company owning the property is tokenized, or loans provided by investors to finance the property are tokenized. In the first case, each token refers to one share with regular dividend payouts. In the second case, each token refers to a loan note held by the investor that provided a fraction of the loan. The loan note entitles the investor to regular interest payouts. The digital share further entitles the investor to a share in a potential profit when the property is sold; a loan note often does not give that right.
The loan note entitles the investor to regular interest payouts. You are probably still wondering why blockchain – and indeed tokenization – is relevant for real estate. There are several reasons. Real estate properties can be tokenized and it is typically done in two ways. Either the equity of the company owning the property is tokenized, or loans provided by investors to finance the property are tokenized. In the first case, each token refers to one share with regular dividend payouts. In the second case, each token refers to a loan note held by the investor that provided a fraction of the loan.tial profit when the property is sold; a loan note often does not give that right.
Real estate represents the biggest single asset class that may be tokenized. Global real estate is around $228 trillion and only 7% of this is available to retail investors. Only 3% of the global population has invested in real estate, but more than 80% views real estate as a good investment. Efficient trading with real estate assets does not exist today and increased liquidity could potentially increase the existing market with a 20–25% liquidity premium.
The real estate industry is plagued by slow, expensive, cumbersome, and paper-based processes relating to the financing and management of projects. Financing is often done by a bank and a few trusted investors able to meet the EUR / USD 100,000 minimum ticket size. Investors are locked in for several years and there is no easy or inexpensive way to sell shares beforehand.
Tokenization of real estate assets solves all of the above problems. Most processes related to financing and ongoing management can be digitized and even automated. Due to the 100x more efficient processes, it becomes possible to manage thousands of investors in a single project and hence to reduce the minimum ticket size down to $1,000 or even $100. This gives the real estate developer access to new types of investors and new sources of capital. With the growth of the total amount of capital, the financing of real estate projects should become easier and less expensive.
Having real estate assets in a tokenized form allows for peer-to-peer trading with instant settlements. Real estate investors will be able to trade their digital shares or loan notes directly with each other in a safe and secure manner. Since the only way a security can exist in digital form outside a bank is as a token on the blockchain, this is the first time direct trading between individuals becomes possible. It only works with blockchain technology.
Last but not least, retail investors can obtain access to real estate investments. Real estate investors can now diversify their portfolios in a manner that is similar to the method wealthy investors have used for hundreds of years. This is also known as the democratization of real estate investments
Tokenization of real estate enables developers to reduce the cost of financing and ongoing management, to target new types of investors, to more easily finance new projects, and to increase the liquidity of assets.
This is slowly becoming reality in 2020. Some of the last barriers to adoption are being removed. Knowledge and comfort with crypto is becoming more widespread. Software platforms are becoming easier to use to the point where little knowledge of crypto is actually required. Platforms that are tailor-made for real estate tokenization such as the DigiShares white-label platform are becoming better. Pioneers among real estate developers are taking steps to become entrepreneurs in their local region or market segment. All of the different puzzle pieces in the new tokenization ecosystem are slowly falling into place.
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Claus Skaaning, CEO, DigiShares