28 Mar Will this trend transform Real Estate investing?
This post is also available in: Español
Property tokenization is an emerging trend in the Real Estate industry and it represents one of the most promising use cases of blockchain technology. Before we deep dive into why tokenization could make Real Estate investment more efficient, let’s have a look at what tokenization is all about.
Tokenization is the process of digitizing a “real world” asset or security. The asset or security is represented digitally in the form of a token which is linked to a blockchain. These tokens hold the investor’s rights (in smart contracts) and can be integrated into secondary markets on a global scale, enhancing liquidity. A variety of financial instruments can be digitized through tokenization, such as equity, debt and fractional ownership interest. When it comes to Real Estate, tokenization makes shared ownership easier to manage, more efficient and trustless.
A variety of interests can be tokenized when it comes to Real Estate, such as (partial) ownership of a property, an interest in the debt secured by the real estate, equity in a legal structure that owns the property or a cash flow stream that comes from the asset.
So, why should we tokenize Real Estate?
Now that you know what tokenization is all about, let’s have a look at the benefits it can bring to Real Estate. One of the major advantages of tokenization is the enhancement of liquidity. Real Estate is one of the largest asset classes worldwide, however, the investments in properties tend to be quite illiquid and often represent a mid- or long term commitment from investors. Tokenization makes it a lot easier and faster to transfer ownership rights digitally, in a secure way. The investor’s rights are programmed in the smart contracts of the tokens. As soon as a token gets transferred, the investor’s rights also come along.
Next to that, liquidity is enhanced drastically because the “security tokens” (the digital assets representing the property) can be integrated into secondary markets, meaning investors can sell their digitized assets 24/7 on a global scale. This means that investors can, at any moment, easily sell their participation in properties (as long as there is demand, of course). Digital assets and securities mark a difference in its valuation, as it becomes real-time and market driven when integrated with secondary markets.
Another benefit of Real Estate tokenization is that it makes shared ownership more efficient, as tasks such as the payment of interests and / or dividends can be automated.
Broader fundraising is possible with tokenization, as an issuance can be directed to a global market taking away geographical limitations, and the issuer can fractionate the property as he or she desires, in as many or as little shares he considers oportunitate.
Democratizing Real Estate Investment
The possibility of fractionating the ownership of property also leads to democratization of Real Estate investment, as smaller amounts can be invested during the issuance phase and, on secondary markets, investors can buy as many or as little tokens as they’d like to, giving the opportunity to smaller investors to participate in larger Real Estate projects.
You may argue Real Estate Investment Trust (REIT) funds also increase financial inclusion. However, REIT funds often come with minimum investments, high upfront and brokerage fees and represent a large portfolio of companies rather than a single property. When it comes to security tokens, during the issuance, the owner can decide to put in place a minimum investment, however, as soon as the tokens get integrated into secondary markets, there are virtually no minimum investments and transaction costs are significantly lower.
How to tokenize Real Estate
Now that you know the benefits of property tokenization, it’s time to take a closer look at how to digitize assets / tokenize Real Estate. Firstly, it’s important to decide what interests you’d like to tokenize, this can be the ownership of a property, an interest in the debt secured by the real estate, equity in a legal structure that owns the property or a cash flow stream that comes from the asset. At Icofunding, we have experience with several forms of (Real Estate) tokenization, and we help our clients identify what form of tokenization suits their project bests.
Once the financial instrument to be issued has been defined, an investment memorandum has to be written. This document has a similar structure to a prospectus and should contain relevant, objective information so that an investor can decide whether to invest or not. This memorandum doesn’t have to be approved by a financial authority (in Spain, the CNMV), as the issuance of digitized assets (security tokens) are classified as private placements. However, a licensed entity has to oversee the memorandum to make sure all information provided by the company is objective, relevant and complete, so that investors can make a well considered decision on whether to invest or no.
Once the legal structure is in order, it’s time to develop the smart contracts that represent the token. As of today, most security tokens are being developed on the Ethereum blockchain.
Once the token has been developed, the initial sale can start. Investors have to pass a KYC/AML check before they’re allowed to invest, something that is integrated into Icofunding’s platform. As soon as the STO (the initial sale of the tokens) has finished, the tokens can be listed on digital exchanges and investors can trade their participation on a global basis.
If you’re interested in Real Estate tokenization, contact us for a call to discuss opportunities.