Investing in real estate has always been popular. The managed real estate market hit $10.5 trillion in 2020. Many investors want to make money from commercial or residential real estate, but not everyone has such an opportunity. Real estate investments require significant capital, and the return on such an investment is quite long. Asset tokenization is already being used in many areas and can be the best solution to simplify and democratize real estate investments. Do you want to know how real estate tokenization works? Read Stobox’ statement below.
What is real estate tokenization?
Real estate tokenization involves issuing tokens with information about objects and their placement on the blockchain. A property is divided into fractions, which opens the way for private investors. Any property can be tokenized. For example, it can be an office building, an apartment or a luxury resort.
Stobox analysts expect that in 10-15 years most real estate will be tokenized and transferred to the blockchain. So far, this process is evolving in rather slow steps as not all developers understand how real estate tokenization and fractional ownership work. However, it is clear that tokenization will gradually gain momentum as market participants become accustomed to innovative technologies.
What are Real Estate Investment Trusts?
A real estate investment trust (REIT) is a legal entity that allows you to make fractional investments in real estate. REITs are subject to a special tax system compared to other companies, so investing through such companies is profitable. REITs pay dividends of up to 90%. However, this payment system limits the ability to purchase new real estate.
REITs also have a certain risk limit. For example, such organizations cannot exert too much influence. Stobox does not recommend tokenizing real estate through REITs, as real estate tokens also offer liquidity due to decentralized finance while being less constrained, allowing you to earn higher returns.
Why should you tokenize your property?
There are many benefits of tokenizing digital assets, but two important ones are worth considering today. First, the minimum threshold for investments will be significantly lowered. An investor cannot buy the entire property, but only a specific part of it. For example, tokenization allows an object worth $1,000,000 to be divided into shares (tokens). The price is $10,000 each. Each investor can purchase a specific plot of land and receive the corresponding profit.
The second key benefit is better liquidity and the resulting secondary trading. If an investor is not interested in further dividends and the property has increased in value, they can get rid of their tokens simply by selling them. There are currently two ways to sell tokens:
- P2P Transactions. These are private transactions between two parties, a buyer and a seller. They can find each other via bulletin boards and strike a deal.
- Decentralized secondary trading. This is a safe bet with liquidity pools. In this case, transactions are regulated by smart contracts, that is, the level of fraud is minimal. One such solution is Stobox’s DS Swap.
From the perspective of a property owner who wants to tokenize a property, the main advantage is that more investors will be interested in the offer. The threshold is lower, the terms are easier, which means more investors are willing to invest in your property. Accordingly, you will receive the necessary funds faster.
Basic real estate tokenization model
First, let’s explore the basic real estate tokenization model. The token alone does not confer ownership of any asset. In this case, investors would have to obtain the relevant documents for real estate. As a result, flexibility and interchangeability can be lost. Every transaction in every state requires registration with the real estate registry, so owning real estate directly is inefficient.
Asset tokenization is not performed directly. In fact, you get tokenized shares in the company that owns this or that property (it’s called a Special Purpose Vehicle). This option is more flexible as some countries allow securities to be stored on the blockchain. In this case, you do not need to report every transaction to the regulatory authorities, which allows the participation of thousands of investors, and an active secondary market opens.
It is important to understand that not only property located in jurisdictions that allow securities to be stored on the blockchain can be tokenized. In Switzerland, Liechtenstein or any other progressive country, you can form a holding company that owns real estate in the country you want or own a corporation that owns real estate in the country you want. There may be different forms depending on local laws and regulations. Stobox helps to select the optimal model and jurisdiction during consultations for companies considering real estate tokenization.
What investor protection is granted?
Security tokens are legally considered securities. Accordingly, they are subject to all legal standards governing securities in a given country. In addition, when purchasing tokens, a special token purchase contract is concluded. Please note that the Stobox tokenization infrastructure includes the stage of signing an agreement to purchase a token. This document provides additional legal protection.
The owner of the property is always a legal entity. And that offers additional protection. If the company has all the documents in order, there are no legal problems, then the rights of the investors are also protected. Such companies are obliged to distribute real estate profits among the token holders. If the organization does not meet its obligations, investors can sue in court.
Advanced real estate tokenization models
In addition to standard tokenization models, there are also advanced ones that can be even more interesting for investors. The following can be distinguished from this.
Raise-then-purchase model
One of the main issues reported by Stobox customers is the transfer of real estate from an individual to the company’s balance sheet. This is quite an expensive procedure and the price can reach 30,000 euros, which makes tokenization a more complicated task. One of the solutions is to pass these costs on to investors. However, you must first raise funds and then buy real estate with the income from the sale of digital assets.
It is important to focus on two aspects – obtaining real estate purchase guarantees and financial attractiveness. The first aspect is solved by entering into a special reservation agreement. The second nuance depends on the value of the property. When it is relatively small, the $30,000 bounty becomes tangible to investors in the form of their profit. However, when dealing with very expensive multi-million dollar projects, the amount of re-registration has practically no impact on profitability.
Business model with separate portfolio
A segregated portfolio avoids the need to set up multiple companies for each asset. Just one legal entity is enough. This can significantly reduce costs. However, there are also certain risks such as object inefficiencies. If one of the properties does not make a profit, the company has to pay dividends from efficient real estate properties owned by other investors.
However, this problem can be solved by splitting the balance sheet. In this case, the balance must be managed separately for each property type. Using tokenization, it is possible to issue separate securities for each individual real estate segment.
summary
Real estate tokenization is one of the best options to attract investment in real estate. Property owners can attract investment faster and expand the investor pool by lowering the entry threshold. There are several tokenization models and each company can choose the one that suits them best. All approaches have their advantages and disadvantages. It is important to study them in detail in order to choose the best option. An experienced consulting company with successful tokenization cases can help you with this.
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