Real estate investing has always been popular. The managed real estate market reached $ 10.5 trillion in 2020. Many investors want to make money on commercial or residential real estate, but not everyone has that opportunity. Real estate investments require significant capital and the return on such investments is relatively long. Asset tokenization is already used in many areas and may be the best solution for simplifying and democratizing real estate investments. Want to know how real estate tokenization works? Read the explanation from Stobox below.
Real estate tokenization involves issuing tokens with information about objects and placing them on a blockchain. The property is divided into fractions, which opens the way for private investors. Any property can be tokenized. It can be, for example, an office building, an apartment or a luxury resort.
Stobox analysts expect that most properties will be tokenized and transferred to a blockchain in 10-15 years. So far, this process is developing at a slow pace, as not all developers understand how real estate tokenization and partial ownership work. However, it is clear that tokenisation will gradually increase as market participants become accustomed to innovative technologies.
A real estate investment trust (REIT) is a legal entity that allows you to make partial investments in real estate. REITs operate under a special tax regime compared to other companies, so investing through such companies is profitable. REITs pay dividends of up to 90%. However, this payment scheme limits the possibility of acquiring new real estate.
REITs also have a certain risk limit. For example, such organizations cannot use too much leverage. Stobox recommends real estate tokening not through REIT, because real estate tokens will also provide liquidity through decentralized finances while having fewer restrictions, so you can get higher returns.
Digital asset tokenization has many benefits, but two key ones are worth considering today. The first is that the minimum investment threshold is significantly reduced. The investor is not allowed to buy the whole property, but only a certain part of it. For example, tokenization allows you to divide an item worth $ 1,000,000 into shares (tokens). Each will cost $ 10,000. Every investor can buy a certain property and get a corresponding profit.
The second key advantage is better liquidity and, as a result, secondary trading. If the investor is no longer interested in receiving dividends and the value of the property has increased, he can simply get rid of his tokens by selling them. There are currently two options for selling tokens:
P2P transactions. These are private transactions between two parties, the buyer and the seller. They can find themselves through bulletin boards and make a deal.
Decentralized secondary trading. This is a safer way with liquidity pools. In this case, the transactions are regulated by smart contracts, which means that the fraud rate is minimal. One such solution is DS Swap from Stobox.
From the point of view of the property owner who wants to token the property, the main advantage is that more investors will be interested in the offer. The limit is lower, the conditions simpler, which means that more investors will be ready to invest in your property. Accordingly, you will get the resources you need faster.
Basic model of real estate tokenization
Let's first examine the basic model of real estate tokenization. The token itself does not give ownership of the asset. If this were the case, investors would have to obtain the relevant real estate documents. As a result, flexibility and easy exchange capability may be lost. Every transaction in any state requires registration in the real estate cadastre, so direct ownership of real estate is inefficient.
Asset tokenization is not performed directly. In fact, you get the tokenized shares of the company that owns this or that property (it's called a Special Purpose Vehicle). This option is more flexible because some countries allow securities to be deposited on a blockchain. In this case, you do not have to report every transaction to the regulators, which allows thousands of investors to participate and an active secondary market opens.
It is important to understand that not only assets located in jurisdictions that allow securities to be deposited on a blockchain can be tokenized. In Switzerland, Liechtenstein, or any other progressive country, you can create a holding company that owns real estate in the desired country, or owns a company that owns real estate in the desired country. There may be different forms depending on local laws and regulations. Stobox helps with the selection of the optimal model and jurisdiction in consultations for companies that are considering real estate tokenization.
Security tokens are legally considered securities. Accordingly, they are subject to all national law in force regarding securities. In addition, a special token purchase agreement is concluded when purchasing tokens. Please note that the Stobox tokenization infrastructure includes a token purchase phase. This document provides additional legal protection.
The owner of the property is always a legal entity. And it also provides additional protection. If the company has all the documents in order, no legal problems arise, then the rights of investors are also protected. These companies are required to distribute real estate profits among token holders. If the organization does not fulfill its obligations, investors can go to 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 them.
Model increase and then purchase
One of the main problems reported by Stobox customers is the transfer of real estate from a natural person to the company's balance sheet. This is a relatively expensive process and can cost € 30,000, making tokenization a more complex task. One solution is to pass these costs on to investors. However, you must first raise funds and then buy real estate using the proceeds from the sale of digital assets.
It is important to focus on two aspects - obtaining guarantees for the purchase of real estate and financial attractiveness. The first aspect is solved by concluding a special reservation contract. The second nuance depends on the value of the property. If it is relatively low, then the $ 30,000 premium will be tangible for investors in terms of their profits. However, if we are talking about very expensive projects worth several million dollars, the amount of re-registration will have virtually no effect on profitability.
A separate portfolio avoids the need to create multiple companies for each asset. Only one legal entity is needed. As a result, costs can be significantly reduced. However, there are also certain risks, such as the ineffectiveness of any objects. If any of the properties does not generate a profit, the company will have to pay dividends on the efficient properties owned by other investors.
However, this problem can be solved by dividing the balance sheet. The balance in this case must be maintained separately for each type of property. With the help of tokenization, it is possible to issue separate securities for each individual real estate segment.
Real estate tokenization is one of the best ways to attract real estate investment. Property owners can attract investment faster and expand the circle of investors by lowering the entry limit. 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 to choose the best option. An experienced consulting company with successful tokenization cases can help you with this.