Property Tokenization: The Digital Future of Real Estate Investment

Property tokenization will enhance liquidity and improve the efficiency of global real estate markets. The first projects in the U.S. and Europe have already proven the economic and technological feasibility.

Enhanced liquidity, lower transaction costs, faster processes: The value proposition of asset tokenization has become particularly relevant in real estate markets, which is by far the largest asset class in terms of global asset value.

According to a report, the size of the professionally managed global real estate investment market grew from $7.4 trillion in 2016 to $8.5 trillion in 2017. A state of the market has revealed that by 2025, the global real estate market is expected to generate a revenue of $4,264 billion.

Leading the rank is the Asia Pacific region. For the past few years, it has been the biggest market in global real estate space when it comes to revenue generation and the number of housing units sold. A large population in the Asian countries, coupled with a rapid economic growth, can be seen as the driving force. That is followed by North America, Europe, Asia Pacific and Latin America.

Undeniably, home equity as a source of capital is a global trend. Even if subject to market volatility, it remains one of the safest places to place wealth. It’s not surprising that it is going digital.

Dan Salmons, Director for Mortgage Innovation at Royal Bank of Scotland (RBS), told Bloomberg, “Property is an industry that is ripe for [tokenization], where a complex, difficult process for customers could be made cheaper and more transparent.’’

RBS and Barclays have just recently joined a trial using blockchain technology to streamline real estate transactions. The trial involved 40 participants including the platform of Instant Property Network (IPN), which uses R3’s Corda platform.

Cheaper, faster, and more efficient transactions without minimum investments

Tokenizing real estate is a straightforward process. The issuer creates a digital duplicate of the property, storing all relevant information such as the property’s specifications and ownership documents on a blockchain. This digital version of the property will then be split in digital tokens. Hence, instead of selling a villa at a price tag of $1 million, the seller would sell, for example, 1 million tokens at face value of $1 each.

The tokens are being issued in a government-regulated Security Token Offering and sold to primary investors. In a subsequent phase, the issuer can list the tokens on a digital exchange for secondary trading. The buyer can benefit from the token’s price appreciation and the rights specified in its smart contract, for example, dividends from rent, interest payments, and principal distributions.

As a result of this process, investors who don’t have $1 million to buy a villa can still invest in the property, with the minimum investment being $1. Thus, tokenizing a property will significantly increase the issuer’s buyer base and funnel enormous amounts of liquidity into traditionally illiquid real estate markets.

John Stecher, Head of Group Innovation at Barclays, says “When a person wants to purchase a house, the process encompasses a whole host of different interactions with different businesses and governmental entities that can be uncomfortable and drawn out.”

They are not only “uncomfortable and drawn out,” but also expensive. Lawyers, banks, brokers, everyone demands their slice of the cake. Digital investments will cut out many of these middlemen, as investors will be able to buy tokens directly from the issuer or via digital exchanges. Thus, transactions will be cheaper, faster, and less bureaucratic.

First properties tokenized in the U.S. and Europe

What may sound like futuristic utopia to the civilian bystander is already becoming a reality today. In 2018, Propellr and Fluidity tokenized a property project worth $30 million in Manhattan, New York.

The listing broker on the deal  and best selling author Ryan Serhant explained the benefits of this venture:

“The market in New York is always strong, but it can take some time to sell for the right price in a new construction building.”

blockimmo, Elea Labs, and Swiss Crypto Tokens AG closed the first ever blockchain-based real estate transaction in Switzerland in March 2019, with a total token value of CHF 3 million, or 20% of the property value. Bastiaan Don, founder and Managing Director of blockimmo, explained that “traditional property investments and their issuing programmes have barely moved forward.” By using blockchain, they were able to provide a solution to a problem and offer a “platform [that] is the first secure blockchain product for both private and professional investors.”

Likewise, brickblock, a Germany-based blockchain startup, tokenized a property in Germany for the first time last month, at a total value of EUR 2 million. In a sale exclusive to eligible investors, this represents another step towards the transition from paper-based to digital processes.

Brickblock’s CEO Jakob Drzazga said:

“Once a property, real estate fund, or financial instrument is tokenised, the real advantages come into play: subsequent transactions are instant, nearly free of charge, and, if done properly, without counterparty risk. This is an absolute game-changer for the industry.”

With a total asset value of $228 trillion, global real estate is a more valuable asset class than stocks and bonds combined. As real estate is an illiquid asset class with high barriers to entry, property tokenization provides an enormous value proposition. The market is still nascent, and nobody likes to be early to a party. But once institutional investors have realized the potential of tokenizing properties, the token economy will propel to an entirely new level. And you don’t want to be late either!