If a fortune-teller were to tell you today that you will own an apartment in downtown Manhattan, it would be hard for most people to believe – at least for the people who belong to the middle class. However, in the near future, and to a certain extent, even today, it might not be entirely impossible to own an apartment in New York – well… Not literally but almost!
Challenges in Real Estate Investment:
To understand the benefits brought about by technology, we need to find out the challenges that the real estate ecosystems are facing before the introduction of this technology. Buying an apartment in Manhattan was always an option but you need an exorbitant amount of money to be able to offer them. Even if you had that kind of cash in hand, you might want to think twice about investing entirely into a single property. Investment gurus have always stressed on the importance of not putting all your eggs in a single basket.
The same scenario can be extended for a lot of high-value assets like collectables, fine art, and even ownership in sports teams.
As it is inferred, the biggest deterrent for most investors and the common people when it comes to investing in these high-value assets was the sheer cost and the associated attenuation in liquidity.
Is there a way to break down the asset into smaller units without compromising on the value? Turns out we have already figured out the answer! We can talk about securitization but even before securitization, the currency that we use daily is a great example of asset value being broken down into smaller units.
Blockchain, as we all do, is the digital, decentralized, and immutable ledger technology that can act as a medium of storage and a platform for transactions. Combining both these actions present a lucrative option when it comes to a lot of processes involving finance.
Demystifying Of Asset Tokenization
The process of digitizing an asset, breaking down the asset into tangible units and storing them on the blockchain is called tokenization. Property tokenization brings lots of advantages when it comes to the world of investments – the implications have been so profitably profound that tokenization has been considered a silver bullet by many investors.
Since the asset represented by the token is, in essence, security, the tickets are also called security tokens. The security token is a cryptocurrency that has an inherent value, and is programmed to pay dividends, and can also invest in projects with the expectations of profit – all these qualities make it pass the Howey Test.
Since these tokens are investment contracts by definition, they come under the scrutiny of regulatory bodies like the securities and exchange commission (SEC). The involvement of regulatory bodies takes care to protect the interest of the investors. It also reduces the possibility of malicious practices that might lead to the tarnishing of the image as it happened with Initial Coin Offerings (ICO).
The Advantages of Real Estate Tokenization
- Tokenization brings about a lot of advantages both for the asset owner and the investor. The biggest common advantage that both investors and asset owners have as an effect of tokenization is in liquidity.
- A person might have a property worth $100,000 but might be in a dire need of $10,000. The property owner had no other option than to sell the entire property. This presents two challenges-one of them is that it might not be easy to find potential buyers who might want to invest that big amount. The other is that they are losing out on an asset that they have just because they want a 10th of its total value.
- With real estate tokenization, the entire property can be tokenized and each token can be made worth, for example, $5000. They can retain 18 tokens and just sell two tokens to potential buyers. The advantage on the other side is that there might be a lot of investors who will be able to afford $5000 or $10,000.
- The asset owner has retained the maximum rights of the property, and at the same time, they were able to get the desired amount. Investors who did not have any chance of investing in such a lucrative property have now acquired shares in that asset – thanks to the tokenization of real estate.
- Another advantage that asset owners get to experience is the fairness in pricing. Some assets are considered extremely lucrative but at the same time, extremely illiquid. Therefore, investors need to be incentivized with incentives such as liquidity discounts. This results in the prices being lowered, resulting in losses. Since tokenization brings in liquidity, the owner of the asset does not have to offer discounts.
- Transferring the ownership of assets requires cumbersome paperwork. It also mandates that lawyers and secretaries need to be involved in handling the transaction. This involves both time and money. Bringing in tokenization will ensure that a major part of the process is automated resulting in a considerable saving, both in terms of time and money.
- A direct consequence of reduced liquidity is its inversely proportional lock-up period. This means that the invested money does not have a way to be realized as returns in time. This imposes a restriction on selling the asset. However, with the tokenization, lock-up periods become extremely shorter, resulting in greater flexibility with investment.
- Blockchain is innately transparent. Transparency is one of the most important properties that ensure fairness in the transaction. Investors are often oblivious and consequentially skeptical when it comes to investing in high-value assets because owners have been known only to present the brighter side of investing. However, with blockchain, the immutable records will ensure that it gives the complete picture of the asset and its value.
- The involvement of the blockchain separates the real-world identity of the investor from their identity on the blockchain. The ownership details are stored within the blockchain and the investors’ credentials – the public and the private key – become a part of the digital signature on the blockchain. This results in one of the most ironic yet preferred combinations – the transactions are transparent, and at the same time extremely secure.
It is quite evident that the tokenization of real estate assets is the order of the future. Considering the fact that the entire world is moving towards digitization of processes and even big names are embracing the new technology, it might not be long before all the assets find their presence on the blockchain. This transformation also presents a lucrative opportunity for businesses to capitalize on this wave by creating a white label real estate tokenization platform.
|VanessaJane is a Blockchain Consultant, been in the Software Development Industry for the last 4+ years.
She has a great knowledge of Technology, Blockchain, real estate tokenization, Tour and Travels, Fashion, Education, etc also she likes to write about the tips, procedures and everything related to the growth of Business.