Any new technology will go through different phases just like how a kid crosses from their childhood to adolescence to proper adulthood! When a new technology is introduced, people will go gaga over the craze that it brings along, and then, it will face its share of hurdles because it does not comply with a lot of things that made the traditional concept dependable and trustworthy in the first place.
Then there will come a time when the advocates of the new technology will start working on creating a fine point between the advantages of the technology and the values of traditional methods with a few compromises here and there. This stage can be considered the holy grail both for the technology and the traditional method because it gives the best of both worlds.
The same can be said about blockchain-based investment options. The initial coin offerings or the ICOs were the harbingers of blockchain technology and investments but the lack of regulation meant that there were quite a lot of fraudulent ICOs. The best possible option is to deem these investments as securities, directly bringing them under the purview of a regulatory body like the SEC, and thus were born security tokens and the security token offerings or STOs.
The confluence of a distributed ledger technology like the blockchain and the retention of traditional values of a security with the regulation of a body like the SEC can mean that any like it can be securitized or tokenized.
Although tokenization can be extended to any asset, it has been found to be quite perfectly suited for certain pockets of assets, and the first of those is, without question, real estate. Real estate is probably the biggest chunk of investment for an average American – their family home. The world economic forum has predicted that by 2025, 10% of the Global GDP will be stored on blockchains. A lot of countries and jurisdictions have already amended their laws and regulations towards accommodating blockchain-oriented finances and storage of records.
Real estate tokens have already established a proper footing in their credibility and dependability. The most recognized real estate STO is the St. Regis Aspen Resort STO that raised a staggering $18 million for the resort.
Benefits of Real Estate Tokenization
No new technology can find its relevance if not for its practical advantages, and real estate tokenization is not an exception.
- Real estate owners can access additional capital through tokenization. By fractionalizing a property through a blockchain-based system, they can attract a broader and more diverse base of investors who might have thought of real estate as being an inaccessible segment for investing.
- Real estate tokenization enhances liquidity which means that real estate owners do not have to give liquidity discounts and liquidity premiums… At least not as much as it used to be! This presents a direct and clear advantage over real estate investment vehicles like REITs which trade at up to 20% premium. Tokenization also broadens the variety of assets traded on a secondary market, and this indirectly brings the executable price of the asset as close as it can be to its true value.
- Since a digital secondary market enables real-time pricing information, real estate tokenization enhances price discovery possibilities. This is another marked advantage that tokenization provides over paper-based systems which not only are cumbersome to handle but also present possibilities of price asymmetry.
- Transparency, which is an innate advantage of blockchain as a technology, is brought into real estate because of tokenization. Blockchain enables programming of rights, restrictions, and all the data associated with the underlying asset into the tokenized digital asset. Transparency also gets enhanced as there is automation in the processing of cap table management and other governance-related activities. This also reduces the administrative costs and enhances the speed of settlement.
Related: How to Tokenize Real Estate Assets?
Digitization of real estate assets involves three important phases:
- Structuring the Deal
- Technology selection
- Token creation & distribution
Structuring the deal
It has to be remembered that an investment, in essence, is nothing more than a deal! Just like any other classical deal, there are a lot of elements like jurisdiction, asset type, shareholder type, and the regulations that come into play in structuring the deal.
- There is also the legal structure that needs to be finalized – it needs to be decided if the legal wrapper around the properties to be securitized is a special purpose vehicle, or a real estate fund, or a project finance, or real estate investment trust. It is only based on this particular structure that the token will get created.
- In addition, the deal also has to include details on the rights of the shareholders. This has to be clearly outlined because it determines if the investors have rights to dividends or governance. You can also choose different tokens for different rights – one token can represent preferred equity in the property with a liquidation preference and another can represent just a common equity.
- You will also need to decide the type of investors to whom the deal is made available. It also has to be taken into consideration that the investors might reside in a completely different jurisdiction and they might have laws that might restrict them from participating in the offering.
- Since real estate tokens are, in essence, security tokens, the execution regulation in line with the location of the property or the SPV should be complied with. The regulation determines the tax treatment of the tokens and the solicitation restrictions.
Selecting the Technology
One of the biggest key areas where the real estate tokenization process differs drastically from its traditional counterpart is in the involvement of technology. However, it is one of the easiest and most straightforward phases in tokenizing real estate.
- You should choose the perfect blockchain on which you will create the token and also decide on the data and transfer restrictions to be included in the token.
- You should decide on a physical custody solution that is suitable to store real estate tokens. The custody solution also applies to investors.
- You will need to choose a reliable KYC/AML vendor that will seamlessly integrate with the issuance platform and the digitized security infrastructure.
- You need to determine where these tokens will be offered and the exchanges on which the tokens will be traded.
Creation and Distribution of Tokens
Once you have concluded on the deal and the technologies involved, the next step is to launch and distribute the tokens to the investors. You will need to take into consideration a few key aspects before you delve into this territory.
- You will need to decide whether you will accept all kinds of currencies including crypto and fiat. The versatility in your acceptance of currency will determine the ease of investors in investing in/buying your tokens.
- The launch of the token should be handled by a web application and it should be easy to launch your token with a simple process like a click of a button. The supply of tokens is created through a process called ‘mining.’
- Even the investors will have to go through KYC/AML formalities before being onboarded. This will ensure that your tokens do not slip into malicious hands and at this time, it might be mandatory for the investor to link their digital wallet to the KYC/AML provider.
- You will need to determine the distribution mechanism for the tokens. Irrespective of taking an advance payment or conducting a live sale of tokens, you will have to send the tokens either to the accounts of the investors or list the digitized real estate on a primary issuance platform.
Real estate tokenization might be the order of the future when it comes to investing in real estate without compromising on the ‘security’ aspect of it but it cannot be denied that the entire process is still in its infancy. However, it is a race where you have to start ahead to finish first and finish grand.
If you would like to be a pioneer in the field of real estate tokenization, all you need to do is get in touch with a blockchain development company that specializes in securities and security tokens. They will take care to create a completely compliant real estate token and also set up a platform to market it and sell it effectively.