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Blockchain technology continues to evolve despite all the debate, prejudice, regulatory mandates and speculation. An existing application of blockchain technology, tokenization, has recently seen real-world use in the real estate industry.
Tokenization has been around for as long as blockchain has, and it has had a bright future since day one: McKinsey estimates that the volume of tokenized digital securities is expected to reach $5 trillion by 2030.
Real estate tokenization is poised to contribute significantly to this growth: a Boston Consulting Group report suggests that the real estate tokenization market could be worth $2.7 billion in 2022, with a growth trajectory that could reach $16 trillion by 2030.
Let’s take a look at real estate tokenization and identify what is driving this growth.
Tokenization of Real Estate
Tokenization refers to the digital representation of an asset on the blockchain. Any asset can be tokenized: investment instruments like bonds or stocks, physical assets like art or real estate, or intangible objects of value like identities or data.
Essentially, real estate is tokenized by dividing it into decimals and automating the operational process using smart contracts. The first step is to split the value of the property into smaller bits, depending on the property owner's choice. Then, through these tokens, many different investors or one person can buy the property in small increments.
Starting in Thailand and expanding globally, Sabai Ecoverse aims to democratize real estate investing to a wider audience who may not have access to significant capital.
When we reached out to Vadym Bukhkalov, co-founder of Sabai Ecoverse, for comment, he responded: “The digitization of real estate reduces market barriers, increases liquidity, fosters transparency and streamlines processes within the real estate sector. Blockchain technology enables greater liquidity, fractional ownership and enhanced security due to its immutability.”
Benefits of Real Estate Tokenization
One benefit of tokenizing real estate is that it opens up the real estate market to small investors, increasing movement and demand for all properties. For example, let's say I have a property worth $100,000. I can create 100 tokens worth $1,000 each. This makes selling a property a process similar to crowdsourcing. I don't have to wait for one big name investor to buy my property. Instead, 100 small investors can play their part.
This method increases liquidity and lowers the barriers to entry into the real estate market: the lower capital threshold allows smaller investors to enter, while properties liquidate faster.
Moreover, smart contracts handle the entire process of tokenization and on-chain sale, thus providing transparency, automation, and security. The role of costly intermediaries such as agents, banks, legal representatives, etc. is handled by smart contracts. Smart contracts can automatically sell tokens as soon as conditions are met, making it much faster, cheaper, and error-free than human intermediaries.
Finally, further benefits of blockchain technology also emerge in the tokenization of real estate: security and transparency. All sales and ownership processes are performed and recorded on-chain. This data is accessible to anyone and nearly impossible to tamper with. Thus, all transactions remain trustworthy.
The benefits of real estate tokenization are magnified when the technique is applied on a large scale, where dealing with real estate is part of everyday life.
Etherland CEO Alexis Brand highlighted this future while describing the project in an interview, saying: “We envision a future where blockchain-based virtual real estate is more than just a digital parcel: it streamlines real-world real estate processes. Technology like Etherland has the potential to reduce costs, increase security, and create entirely new opportunities for the industry.”
“We approach real estate tokenization from a different angle than most projects that focus solely on fractionalization. Improving efficiency in the real estate industry requires streamlined blockchain-based solutions. This solution is designed around the idea that blockchain-based document management is not hindered by the shortcomings faced by centralized solutions, such as tampering, data loss, and single-point-of-failure attacks,” Alexis added.
The risks of real estate tokenization
Outlining the challenges of the application, Andres Zunino, founder of Zircon Tech, told Forbes: “But real estate tokenization is not without its challenges. One of the main concerns is the lack of a consistent regulatory framework governing the market. Different jurisdictions have different rules and regulations surrounding digital assets, creating confusion and uncertainty for investors and issuers. Additionally, the absence of a centralized reporting system for tokenized real estate transactions reduces transparency and could make it difficult for regulators to monitor and enforce compliance.”
The biggest obstacle to real estate tokenization is the lack of knowledge about blockchain technology in the real estate sector. Property owners are hesitant to adopt this technique due to its complexity, and local legislators are hesitant to lay down the ground rules for such transactions. This regulatory uncertainty further impedes the growth of real estate tokenization. The lack of regulatory guidance creates further issues with proper licensing of real estate assets and tax obligations per token.
Another risk of real estate tokenization is the technical side regarding smart contracts. Although smart contracts are a relatively secure application, they are a new technology. There are concerns that bad actors may find loopholes or ways to circumvent the rules of smart contracts, which could lead to hacking. To prevent this, well-trained technical auditors must monitor the chain and perform regular diagnostics.
Despite its shortcomings, the real estate tokenization market is on a growth trajectory. In addition to digitization and on-chain storage, tokenization brings additional benefits to property owners. Blockchain technology improves real-world real estate transactions, streamlines documentation, enhances security, and merges the world of virtual real estate with the world of cryptocurrency. Blockchain technology is advancing rapidly. Once the technical issues are resolved and the regulatory gaps are filled, real estate tokenization could soon become a mainstream application for all property owners.