The term tokenisation is changing the game of the real estate sector by providing fractional ownership opportunities to small-scale investors. It was a perception that real estate investment is only affordable to wealthy people, institutions or companies. Owning or trading fragments of the property was inconceivable without incurring high transaction costs. But with the invention of tokenisation, small-scale investment is possible. Currently, this sector is composed of around 40% of digital securities.
The integration of real estate with blockchain has facilitated to increase the real estate ownership, opening up the space for individuals who were previously left out due to insufficient funds. It also supports combatting the challenges like lack of transparency and trust issues. It has the ability to address the problem of liquidity in the real estate sector.
What is the Tokenisation of the Real Estate Sector?
Real estate tokenisation is the process of transforming the value of real estate assets into digital tokens on blockchains to enable their digital transfer and ownership. The token represents legally binding property which holds all rights and legal value. This means that a person who owns the real estate token will benefit from profit and loss. Tokens can be used to depict
- Ownership of the whole property
- Ownership of part of a property
- Equity interest in an entity controlling a property
- Interest in debt secured by a property
- Right to share in the profits of a property
The blockchain-based real estate tokenisation allows the rapid synchronisation of real estate assets ownership and transaction of data which brings many benefits in terms of optimisation and efficiency. Moreover, data available to the public has increased transparency in the sector. Hence, blockchain-based tokenisation can make real estate investing much less timely and costly for everyone.
Components of Tokenisation
Smart Contracts
The Blockchain-based token owners can benefit from leveraging programmable smart contracts, which automatically perform the certain task specified in the code once a predefined condition is fulfilled. It reduces the need for human intervention and reduces the burden in the real estate transaction process. For example, smart contracts can be used to automatically transfer the land registry upon getting successful transactions of tokens (Polymesh, 2023).
Security Token Offering
The real estate tokens are sold and issued during a security token offering (STO), also called a tokenised asset offering or tokenised security offering. The STO can be run in a way that asset owners choose and sell tokens on their own or make crowdfunding. STO rely on fungible security tokens. On the other hand, non-fungible tokens (NFT) can be used to digitally represent real estate asset ownership. Because of its intrinsic quality, each NFT will have one owner, fractional ownership of NFT is possible. NFTs can be or cannot be securities according to the regularity framework, so investors interested in real estate NFTs should be cautious before purchasing them.
Decentralised Autonomous Organisations (DAO)
Blockchain-based tokens can benefit from using fundamentally- democratic, decentralised autonomous organizations (DAO) instead of traditional ones. This allows the token holder to vote via an automated governance system enforced on the blockchain. The decentralised, immutable network also offers complete transparency to the DAO’s self-management.
Merits of Real Estate Tokenisation
Tokenisation can benefit the real estate sector in a different way and introduce several phenomenal changes, such as
More Transparent and Efficient Transaction
The blockchain process has made the transaction immutable and transparent but making the procedure more complex. Automated smart contracts eliminate any human role in conducting a transaction, thus eliminating any unfair deals. The blockchain-based system has a unique attribute feature as there is no paperwork and time cost to waiting for the complete transaction process. This results in prompt action and quick transactions.
Better Liquidity
In the conventional system, before the emergence of the digital system, the liquidity problem plagued this sector. The investors were reluctant to invest because of problems related to liquidity. The tokenisation of assets will increase the value of any assets and combat the lack of liquidity issues. When a property is fractionalised because of tokenisation, its liquidity improves. Despite selling the whole property in a single go, the owner of tokenised pieces can sell their tokens quickly, leading to a swift change of ownership.
Opportunity for Small Scale Investor
Real estate is considered an investment option for the high-income group of people. However, the idea of tokenisation has made it easier for small-scale investors to invest in the real estate sector. The high-price investment options force the investor to avoid investing in risky portfolios. Tokenisation makes it easier for the investor to invest in the form of fractions. Because of tokenisation, large assets are turned into small fractions, making them affordable and accessible to small investors.
Fewer Barriers
The centralised financial system is highly regulated and creates hurdles for the free flow of the market. Tokenisation introduces a decentralised financial system which is independent of all biases. The bit of controlling power lies with each stakeholder, and they make a collective decision. The elimination of unreasonable hindrances will help the market to streamline the market and provide equal chances to grow to all stakeholders.
Demerit of Real Estate Tokenisation
Like any other technology, tokenisation assets have their own set of problems.
Smart Contract Security Loopholes
Blockchain is considered a security technology. The smart contracts have some limitations that need to be plugged in. Hackers are trying to sneak into the code of smart contracts and steal money. Unless the smart contract does not diligently audit, the money will not be secured.
Complex Licensing Requirements
The tokenisation of the real estate sector requires licensed platforms where the management and operation of STO (Security Token Offerings) can be regulated. However, the process of getting the license is complex. Before reaching the final point of achieving a license, it will go through various steps and trials.
Regulatory Issues
Most of the people working in the real estate sector are unaware of the hurdles and issues of how to fix the problems of blockchain. This misinformation leads to a poor regulatory environment, creating hurdles for all stakeholders.
Tax Complexities
Generally, cryptocurrency is undefined in tax regulations and creates problems for the stakeholders. The full benefit of tokenisation can be achieved fully by enforcing a composed and efficient taxation system. The lack of a unified taxation system creates doubts in the mind of everyone.
Conclusion
Tokenisation has made it easier for small-scale investors to invest. It opens up new market avenues that provide liquidity and diversification. The regulatory framework is improving with time, and crypto has become part of the investment. Despite its hurdle, blockchain in the real estate sector has increased and increased the margin of investments.
This article is written by Sehrish Irfan. Sehrish is a Research Analyst at the Iqbal Institute of Policy Studies (IIPS).
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