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Tokenizing Real Estate

October 8th 2019

As old as the real estate business itself is the question of how to make the acquisition of real estate the easiest to be funded and thus the easiest to access for the largest number of people possible. Answering those questions, stakeholders sometimes had been extremely creative. It could be a nation that subsidized the purchase of real estate through tax credits. This happened e. g. with East-German real estate after the reunification of Germany.  25 years later, with the emerging fin-tech boom and acceptance, crowd-funding was born. It did not take long and the first real estate acquisition was funded by a crowdfunding concept. 

Has this made worthless real estate more valuable? Hardly likely. But it has significantly attracted an increasing number of interested investors, but also their problems with those investments. Is it fair to place the development around tokenized assets in a row with the aforementioned inaccuracies? no. Tokenizing real estate not only serves the objective to expand the group of investors by dressing up a low-quality real estate in a crypto-wrap.

Tokenizing real estate is about making assets tradable that have not been before - providing security where previously there was no security- designing processes efficiently, where so far many participants needed a lot of time and thus increased the additional costs of real estate acquisition.

Finally: All of the above points apply to Third World countries as well as developed countries, leading to the conclusion: Tokenizing real estate deserves a fair analysis. 

The real estate market is very complex: multiple stakeholders, large amounts of money, different people that specialize in different areas, and regulations such as tax created by regional jurisdiction.

However, the complexities alone wouldn’t be such a huge issue, but the fact is that they create many different dysfunctions while the market keeps on growing. This is why a large number of companies, startups, individuals, and even government institutions are turning to new solutions, one of them being blockchain tokenization.

What is tokenized real-estate? Jovan Ilic explains that in his Blog extremely well: “Real estate tokenization allows property owners to issue tokens through blockchain platforms. These tokens represent a certain amount of shares for some real estate asset. Other investors can purchase these tokens, and by doing that, they become partial owners of that asset, which further allows them to be involved in cash flows and asset appreciation.”

As indicated in the intro to that article, the 3 general benefits are

  1. Blockchain immutability proves ownership.
  2. Programmability allows automation, improves transactions, and share management for all stakeholders in such a process, and there are many: depending on local regulation, up to 30 stakeholders are involved. Image, all could rely on an easy, standardized, secure and realtime technology. Investor Management for sure will be easier then. That finally should lead to the third Point:
  3. Improved liquidity by higher acceptance, options of fractional ownerships and lowering the barriers. 

No downside? Well, there are clearly challenges and pitfalls. Jovan Ilic summarizes those: 

“Even though tokenization has lots of potentials when it comes to improving real estate investments it is a complex structure that comes with a lot of practical and legal issues that need to be tackled. … The first thing that is obvious for any project in this direction is compliance. All token issuers need to comply with Know Your Customer and Anti Money Laundering regulations and laws, no matter where their tokens are offered. The general need at the moment is for governments to get involved and work with private companies to establish better infrastructural solutions that will improve payment capabilities, reduce settlement risks, and improve operational efficiency.”

Estimating the ancillary costs of real estate acquisition to about 10% of a transaction, it shows us the huge potential of a technology that would make the whole process more efficient. This is why I conclude with my introducing statement: Tokenizing real estate deserves a fair analysis and strong support by all of us.

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Tokenizing Real Estate
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