Why Blockchain is the backbone behind the high liquidity in Real estate Tokenization?
Currently, the real estate industry is facing lots of challenges in the form of low liquidity, lack of interest from institutional investors, tectonic market shifts, and the economic downturn. Real estate tokenization is a solution to the crisis as it removes intermediaries such as brokers, agents and underwriters from the process, promotes more transparency and reduces the fees involved by creating a fair ecosystem benefitting all the participants equally.
The significance of Real estate Tokenization
It helps in streamlining the process of transfer of property between two different parties by eliminating the cumbersome role played by middlemen in the form of lawyers, brokers, financial institutions, and asset managers. By reducing the time and various costs involved, it ensures lesser chances of friction and better trust.
It sorts out the illiquidity issue in commercial real estate by eliminating procedural hurdles. By facilitating the trading of digital assets, it uses the power of distributed ledger technology to lift liquidity and reduce the cost of associated payments.
By using real estate tokens, liquidity and ownership relations can be made more efficient in the real world. Details regarding terms and conditions mentioned in the deed, land records, rental payments from tenants to owners, and maintenance can be dematerialized using blockchain technology.
By enabling partial ownership of assets, it reduces the different direct and indirect costs such as transfer tax, brokerage, and legal costs. Even non-fungible properties can be easily converted into tradable digital securities.
The tokens can be fairly traded on the leading international secondary markets and realistic market value would be fetched without any liquidity discounts or premiums on the property.
Third-party custody solutions can be rendered for both institutional and retail investors to store their private keys and tokens safely by meeting the regulatory standards and technical requirements.
Transactions and property deals can be done swiftly in a matter of a few minutes with minimum bureaucracy, a high degree of automation, concurrent execution, and low transaction fees.
Transparency can be ensured by making the ownership and transaction data available without any restriction to all the participants on the network by storing it in the distributed ledger. This ensures more control of information and better confidence in conducting transactions successfully. Information symmetry can be created within the primary as well as the secondary market. Investors can get details of past deals and figure out if the asking price charged by property developers is realistic or not eliminating any attempts of underpaying or overpaying.
A higher level of personalization is ensured as property owners, asset managers and investors will all be brought on the same page. Customized lot sizes and risk strategies will enable investors to move easily from top-down portfolio-based strategies towards profitable direct investment opportunities.
Benefits rendered by Real estate Tokenization
It improves the process of asset management through the use of smart contracts. With less paperwork and no presence of middlemen, it simplifies the part of the execution. Tokens can be traded smoothly in the market depending on the region of the property, the history of the buyer, and the type of asset.
Real estate tokenization reduces the chances of fraud to take place by ensuring high immutability. Stakeholders and investors can easily prove their ownership beyond any doubt. Users cannot sell someone else’s tokens as access cannot be granted without entering the correct private key. The exact history of ownership stored in the blockchain technology makes it impossible to falsify transactions and trick investors.
The barriers to entry are significantly reduced through Real estate Tokenization making it an affordable investment alternative to the common man and not just the rich class. A few hundred dollars invested will make an investor as a fractional owner.
Challenges to the growth of Real estate Tokenization
Since the concept of security tokens is not uniformly regulated across the globe, a proper regulatory compliance structure is needed for optimizing the massive potential of tokenization.
More licenced platforms are needed for managing Security token offerings smoothly. It is a complex process and multiple trial and error mechanisms need to be worked out before becoming fully functional.
Details of custody solutions and security for digital tokens need to be finalized. In case the tokens happen to be stolen or hacked, the consequences would be costly and severe.
The tax laws regarding cryptocurrencies have not yet been defined in some countries. This leads to ambiguity as the tax structure would be different in various jurisdictions confusing investors.
Not many investors are aware of the concept of blockchain technology and security tokens. A lot of concerns are prevailing regarding the scalability of the technology.
The future in store for Real estate Tokenization
Since the real estate sector is slow to adopt emerging technologies, it will take some time for full-blown tokenization to take place. They have to comply with different government regulations and guidelines issued by regulatory authorities. KYC (Know Your Customer) and AML (Anti Money Laundering) verification mechanism need to be followed. A common international framework needs to be formulated for recognizing tokens and distinguishing it from the concept of securities. By providing more access to capital, the participation of broader investor groups, real-time investment, and instant tracking of ownership, it will undoubtedly bring a positive impact on the sector as a whole. Increasing adoption of blockchain technology coupled up with tokenization would streamline the entire real estate market without completely turning on its head. With more support from the various stakeholders involved in the system, tokenization can transform the sector making it more innovative, transparent and market-friendly.
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