Tokenisation: The Future of Real Estate Investments

Real estate is a large, and complex industry. The number of investors and the amount of money riding on the market is typically fairly very high. Since regulations vary from place to place, a variety of dysfunctions in the market present themselves to us. This has often been a cause for inefficiencies in the sector, and some of us had been beginning to feel like we ought to do something about it. As a solution, multiple startups, businesses and even governments have turned to Tokenisation to tackle the complexities such as the entry barrier and the illiquidity among other things. The advent of tokenisation has opened an unparalleled level of access and transparency to the private real estate market.

The Current State of Real Estate Market

Currently, the real estate market is characterised by extremely limited liquidity and high initial overlays. This leads to exclusivity in terms of participation with little to no transparency to the participants. Moreover, there are additional transactional costs which act as an additional entry barrier, further hindering the investors from getting into the market. However, the real estate market is one of the biggest and fastest-growing markets in the world, making it very important in the cogs of the capitalistic economies in the world. These complexities have compelled innovators to come up with ideas that will revolutionise the way people view the real estate markets. Tokenisation is the innovation that industry experts rely upon to address the shortcomings of the real estate markets.

What is Tokenisation?

Tokenisation is a method for securitising real assets. Here’s how it works:

• The owner of a property transfers the ownership to a digital platform, and divides it into small units called tokens and issues the tokens for sale to the investors.
• By purchasing these tokens, people can become partial owners of the asset it represents (in this case, a private asset in the real estate market).
• These people can then trade their part ownership, and enjoy their part of cash flows and asset value appreciation.

The tokens are created using the Blockchain technology and will have all the added benefits, like automation and security among other things.

I believe tokenisation will bring upon unachieved levels of liquidity, transparency and reduce the entry barriers that have traditionally defined the real estate market, allowing people to buy into the market without the scare of the high buy-ins.

The Advantages of Tokenisation

Apart from the ones that I just mentioned — liquidity, transparency and reduction of the entry barriers — tokenisation has several other benefits. Let’s dive deeper:

Immutability Proves Ownership

Blockchains are immutable and this characteristic transfers well to the real estate market. Tokenisation helps every stakeholder prove their ownership by keeping track of every single transaction made. This digital history of ownership also reduces the possibility of frauds occurring. It is impossible for frauds to falsify data and attempt to trick potential investors.

Automation and Share Management

Token transactions can be automated effectively by programming for the transaction to complete when a prerequisite set of rules and conditions have been met successfully. Tokenisation also helps manage the share data, keeping a digital record of the investors, along with the transaction history in a digital ledger.

Tokens Vs REITs

Real Estate Investment Trusts or REITs are organisations which own and manage income-producing real estates. REITs also allow investors to own a portion, or a “share” of real estate, seemingly similar to what tokenisation offers. While on the first glance they may seem similar, they are actually very different. Here’s how:

Geographical Limitations

REITs are limited by geography in the sense that the holdings of a REIT are constricted to specific geographic locations. This is not the same in case of tokenisation, as just about anyone can undergo the process, and trade in tokens, without having to worry about geography or identity.

Improved Autonomy

The investors can choose to purchase holdings of specific real estate investments according to their will, in case of tokenisation, as opposed to having to invest in the pre-established set of projects managed by the REITs.

Minimum Investment Barrier

The Minimum Investment limits of REITs are often very high, while tokens have very low (if any) minimum investment limits.

These are just some of the many advantages of tokenisation. As a proponent of the concept myself, I’m confident this is the next big, benevolent storm the real estate industry needed. The more we learn about it now, and adapt, the easier it will be for us to reap the dividends!