What it means to tokenize a property and to whom this offer of innovative services is mainly directed, as well as the precautions that investors should take.
- What Type Of Investor Is Tokenization Aimed At?
It would be very simple to explain the advantages of tokenized real estate only from the perspective of the retail investor. Better inclusion of small investors in the real estate market can have its appeal and satisfy idealistic concepts. But it won’t cause all small investors to suddenly invest in regional real estate projects, nor have their neighbors tokenize part of their townhouse, or at least not for years to come.
Instead, it will primarily be the existing real estate funds and larger projects that will start tokenize. First of all, both the market and regulation must grow from infancy to a maturity where everyone can tokenize a piece of their property and trade it on a stock exchange. Theoretically this is possible, but impractical today.
With great probability, the existing players in the real estate business, such as listed real estate funds or REITS (Real Estate Investments Trusts) will be the first to make the leap to tokenization in this first phase. These tax-optimized investment vehicles actively manage large real estate portfolios. About three trillion US dollars of real estate capital is tied up in these REITs – a fraction of the entire real estate market, which comprises about 280 trillion US dollars.
These investment structures could benefit from smart contracts by reducing administration costs and at the same time offering better accessibility to all types of investors through tokens. A more individual design facilitated by a programmable token can create real estate products that are not only cheaper but also more in line with the investor’s needs. The main objective is therefore to convert existing portfolios and investments into tokens and optimize them.
These optimizations are not limited to the design of smart contracts in the security token, but extend to the management of real estate. Of course, in the end the investors have little to do with the way in which the maintenance costs in an apartment or the insurance fees are settled, but also in these cases Block chain technology can generate significant savings thanks to the reduction of costs administrative, which ultimately translates into better performance of real estate funds or stocks. Currently there are already start-ups that are working on Block chain solutions to implement these optimizations. Now here you can see the best practices of real estate tokenization.
Therefore, in the real estate sector there are two predominant use cases:
On the one hand, the more efficient management of real estate and a better design of real estate investments and financial products (for example, REITS) through tokenization and smart contracts, respectively.
On the other hand, there is a new and better form of finance and trade, as described in the previous article.
Both use cases, in turn, lead to lower costs and greater accessibility. Therefore, the already attractive real estate market should attract even more capital thanks to increased returns and investment opportunities. Small investors, multi-billion dollar real estate companies and funds alike can benefit from new opportunities and improved framework conditions.
- What Precautions Should Investors Take?
It is not surprising that there are already countless Block chain companies that are working with more or less success in the tokenization of real estate. Of course, you have to be on the lookout for black sheep that promise dodgy returns without offering substantial service and a solid investment proposition.
One of the problems is the still low supply of tokenized real estate. The market is still in a very early stage as a differentiated offer has not emerged. The regulatory system in most jurisdictions also makes offering tokenized real estate projects expensive and time-consuming. However, this scenario is quite common at the beginning of an innovation in the financial sector. It is only a matter of time before it becomes increasingly easy to offer projects that can convince real estate companies, investors and authorities alike.
Token offerings in real estate can be very different in nature. While some providers only offer a market for tokens, others may specialize in the tokenization process or offer payments with crypto currencies. Investors should be clear in advance in what types of investment or services they are interested in.
Today, many of these services remain limited at the regional level. The Imbrex Block chain real estate market, for example, currently only offers real estate in the United States. However, regionality should not be confused with regional access restrictions. After all, this is exactly where the crypto economy comes into play. For a Spaniard, for example, it should be as easy to acquire shares in an apartment in Japan as it is in Spain. Consequently, in these real estate projects the question arises whether the offer is available in the own jurisdiction or is compatible with other jurisdictions.
For example, a German tokenization company focused on real estate is Brick block. The company has already tokenized a residential property in Wiesbaden, for which real estate shares with a total volume of two million euros were issued. Acquisition or ownership of the token entitles investors to receive dividends from rental income, as well as interest and equity distributions. However, only accredited investors were able to participate in this offering. Due to regulatory hurdles aimed at protecting consumption, more complex or especially risky assets are only available to institutional or accredited investors. This will also change with increasing adaptation of tokens and regulatory practices. However,
Even if certain real estate investments are initially only available to some investors, small investors can often invest in the tokens of real estate development companies. Brick block for example offers a classic Ethereum ERC20 token that can be purchased on exchanges.
A Block chain real estate platform with a broader real estate offering is Propy. The new Silicon Valley Company handles all real estate transactions online through smart contracts, which greatly automate the buying and selling process. It is also possible to pay with crypto currencies such as ETH or BTC. Also, it has its own token, which is linked to the platform. This token can also be purchased normally in the corresponding exchanges.
Smart lands are based on the stellar block chain platform and currently offers a student residence in Nottingham (UK). Payments can also be processed here with your own token.
In addition to the companies and tokens mentioned above, there are other real estate projects that allow participation through tokens. However, anyone investing in these tokens should be aware of the risks involved. The danger that these are fake projects and some tokens losing their value completely is real. Consequently, you should pay close attention to the seriousness of the offers and inform yourself in advance about the properties and the companies. In order to answer these concerns, many real estate projects opt for security tokens that can prove possession of a license from a financial market supervisory authority.
For example, Crowdlitoken is currently conducting an STO to raise capital for real estate investments in Western, Northern and Eastern Europe. Security tokens are structured as bonds and guaranteed by the properties themselves. They are therefore asset-backed security tokens.
The Swiss platform Token estate, on the other hand, is seen more as a platform for property managers and developers who can access their real estate portfolio through the platform and offer it for trading. Security tokens and an STO will also be used. However, the project is still in its infancy.
In the field of tokenization technology service providers, we can highlight Block square , which offers an integrated platform where you can issue a public offer for the sale of tokens with integrated KYC and then exchange those tokens on your exchange and distribute the income in a automated through smart contracts . They have already successfully launched a pilot project in Ljubljana (Slovenia) consisting of a parking space, whose ERC20 tokens can now be freely exchanged.
The examples above show us that we are still at the beginning of this incredible financial innovation. This year, not only will the first security tokens be put on sale, regulated not only for the classic financing of companies but also for participation in the real estate sector. You should only invest in unregulated real estate projects outside your region if you are sure of the seriousness of the offer. Some small-cap ERC-20 tokens that can already be traded on exchanges do not meet these criteria.
Investors should also pay more attention to regulatory standards – security tokens approved by financial regulators offer greater protection to investors. In particular, investors with only limited experience in real estate should carefully examine what the investment offering is about. As discussed, there are many different ways to participate in the real estate market. In addition, security tokens must also be able to be purchased with fiat currencies and not just other crypto currencies. Most of the real estate projects mentioned above offer this possibility or at least fall within their plans.
The potential tax advantages of tokenized real estate investment compared to classic real estate investments should not be lost sight of. From the outset, you can avoid paying the real estate tax (IBI) and the expenses related to the transfer of a property (registry, notary, etc.). However, it is difficult to do a detailed analysis since taxes are linked to many factors.
One thing is clear: this year there will be endless tokenized real estate projects. The aforementioned projects only represent a small selection of promising projects. These projects have yet to prove their worth but we can be sure that some will offer attractive investment opportunities for open-minded investors. Well-structured real estate projects should benefit from a bit of publicity in the months and years to come. After all, very few investors are aware of the possibilities offered by tokenized real estate platforms. Whoever commits to the right projects well in advance will benefit from high demand and higher than average profitability.
The entire Block chain market will benefit from the convergence between the tokenized economy and the real estate industry. The stronger the tokenized real estate sector is established, the more attractive crypto currencies like Bitcoin, Ethereum, etc. will be.
Real economic assets are increasingly merging with native Block chain assets. In the future, tokenized mutual funds may be offered that, for example, are 20 percent in Bitcoin, 10 percent in Ether, 20 percent in tokenized corporate bonds, and 50 percent in tokenized real estate projects. As long as the regulatory authorities give their approval, there are no limits to tokenization and the resulting investment opportunities.