Tokenization is becoming an increasingly popular tool in the real estate market. This is largely due to the many benefits tokenization can offer property owners and investors.
Back in 2019, the Massachusetts Institute of Technology's Digital Currency Initiative published
a study entitled "Tokenized Securities and Commercial Real Estate" that outlined the key benefits of tokenizing real estate. The benefits include:
Affordability. Even a small amount can be invested.
Increased liquidity. Due to availability.
Ease of use. Real estate can be purchased in another city or another country.
Tokenization of real estate is a relatively new process, but numerous organizations are already offering solutions with significant benefits for investors and token holders.
A token is a blockchain-based digital interest in an asset
. Almost any asset can be tokenized. In real estate tokenization, the underlying asset of the token is a property. Most often, the purpose of tokenization is to sell, invest in a completed property, or invest in a property under construction. What the token is used for determines the rights its owner receives.
Let’s say a property owner has decided to sell his property using tokenization. He selects a suitable tokenization platform and submits an application with his personal data and a description of his property’s most important characteristics. The property must undergo an audit and an independent appraisal of its value. Once the property is tokenized, the owner determines how many virtual parts of the property should be divided and how much each part should be worth. The tokens are offered for sale on the platform. Investors buy the tokens and become co-owners of the sold property. Only an identifiable person can own tokens.
This is how a €6.5-million luxury building in the Paris area found buyers
. SAPEB AnnA, a public company, issued one million Anna tokens worth €6.50 each. Since a token has all the characteristics of a security under the French Monetary and Financial Code, the Anna token is subject to the provisions of the law. Each token entitles its holder to dividends, participation rights, voting rights at general meetings, and access to financial reports.
The most popular reasons for using tokenization are to raise cash so a property owner can renovate or refurbish a property or allow investors to generate income from a property with a minimal investment.
The process is broadly similar to when an owner decides to sell a tokenized property. The difference is that the token doesn’t transfer ownership of the asset but entitles the owner to a portion of the asset’s rental income or fixed dividend payments. However, only the owner has the right to dispose of the building.
That’s exactly what the owners of a building in Detroit, Michigan, did, using tokenization
to attract investment for renovation. The required investment was $692,622, which was divided into 13,800 tokens at $50.19 each. At the same time, investors who bought the tokens received rental income.
Tokenization makes it possible to invest not only in completed properties but also in properties under construction. For example, the IndustriTech warehouse project in the heart of Israel, which comprises 11,000 m² of modern multifunctional logistics complexes of various sizes, has taken this form.
An important factor in tokenization is jurisdiction. Many countries have different securities laws and their own AML/KYC
policies. Therefore, token issuers must consider the requirements of all the jurisdictions where they offer tokens to potential investors. A token offering that complies with European Union law may not comply with U.S. law, and vice versa. There may be situations where one country treats a token as a security while another country takes a completely different approach. Investors in several countries may not have access to tokenized assets at all.
Tokenization is still a relatively vulnerable process due to weak regulation and lack of jurisdiction. However, tokenization is significantly changing both how we currently invest and the real estate market. Real estate investment is no longer something reserved for a group of wealthy people. Tokenization brings transparency, inclusiveness, and accessibility, all of which will be growth drivers for the property market.