- Insights
- Cryptocurrencies
- Stocks
- White Papers
- Industry
- Geography
The global real estate market is one of the most promising areas for a new technology known as tokenization. With tokenization, real estate assets can be converted into digital tokens similar to cryptocurrencies and hosted on a blockchain, allowing for fractional ownership and the peer-to-peer trading of these shares.
As of February 2022, the nascent market for real estate tokens was valued at around $200 million, according to a report by Atlas One. The market is being fueled by the rise of real estate tokenization platforms such as RealT, MetaRealEstate, Fraxtor and Kasa, which provide a market for the peer-to-peer trading of fractional real estate assets.
The concept of real estate tokenization is a simple one. A luxury apartment can be split into, say, 10,000 shares, with each one represented by a digital token on the blockchain. Whoever owns one of these tokens owns a small fraction of the property it's linked to. Assuming it's a rental property, the owner of that token is entitled to receive dividends arising from the rental income it generates.
Probably the biggest advantage of real estate tokenization is it increases accessibility through fractional ownership, allowing small investors to acquire small shares of high-end properties. The use of smart contracts to facilitate the sale of real estate tokens eliminates the need for third-party intermediaries, meaning they can be bought and sold in seconds. What's more, every transaction is recorded publicly on the blockchain, meaning greater traceability and regulatory efficiency.
There are some challenges posed by real estate tokenization, however. For instance, the global real estate market lacks a consistent regulatory framework, with each country implementing its own rules and regulations regarding the sale of property. In addition, some jurisdictions are less open to the concept of digital assets, creating confusion and uncertainty. The tokenized real estate market also lacks any kind of centralized reporting system that allows authorities to easily track digital asset ownership, despite the transparency of blockchain.
Real Estate Investment Trusts or REITs arose to improve accessibility to this market, enabling smaller investors to invest in a fraction of real estate assets. However, unlike with tokenized real estate, investors in REITs aren't actually buying a small fraction of a property. Rather, they're investing in the REIT itself, which is the company that owns a portfolio of different assets.
REITs control a sizable portion of global real estate markets. For instance, Statista values the U.S. real estate market at $1.3 trillion, while data from Nareit shows that the largest REIT in that country commands a market capitalization of $117.2 billion. However it's important to understand the difference between REITs and real estate tokens.
REITs and real estate tokens are distinct approaches to real estate investment. Whereas investors in REITs become shareholders of the company that owns a portfolio of real estate, investors in tokens became the actual part owners of a specific property. It means they have greater freedom to build a real estate portfolio spanning multiple kinds of assets.
Because the shares of REITs can easily be bought and sold via the stock exchange, they often provide better liquidity for real estate properties. Enhanced liquidity is also possible through tokenization, but this is dependent on the existence of a functional secondary market to trade these tokens.
The method through which capital gains are realized differs between REITs and real estate tokenization. Because REIT investors don't have direct ownership of the properties, they do not partake directly in the capital gains those assets realize. Instead, the capital gains are determined by the REITs executives and board members. On the other hand, real estate token holders are entitled to receive a portion of the rental income directly, though they must also make a proportional contribution to the property's upkeep and management.
REITs are subject to the rules and regulations of the jurisdiction they operate in. However, in tokenization, regulatory frameworks are still evolving or do not exist yet, creating uncertainty in some markets.
Although real estate tokenization is still a new concept, the market is being fueled by a number of promising platforms that are working to democratize access to real estate ownership.
The ambitious Metatime project, which runs the MetaChain project, has created a MetaRealEstate marketplace that anyone can participate in. Real estate owners and developers who are looking for investment can submit their assets to the platform and undergo a tokenization process, allowing them to reach out to investors across the world. MetaRealEstate primarily targets luxury hotels and rental properties, enabling anyone to become a fractional owner in these properties and earn a passive income from their rent.
The great advantage for investors is that they can invest as little, or as much as they wish in any property on its marketplace, with rental dividends being paid out on a monthly or annual basis.
In the U.S., one of the biggest tokenized real estate markets is RealT, which launched in 2019 to simplify global access to U.S.-based properties. It's focused on residential properties in the city of Detroit, Michigan, and has ambitions to extend into other U.S. cities later. RealT's platform runs on the Ethereum blockchain and provides a legally compliant way for property owners to tokenize those assets and sell them.
Asia is also getting in on the real estate tokenization game. One of the most established players is Singapore's Fraxtor, which is an MAS-regulated investment platform that allows anyone to invest in Singaporean real estate with as little as $20,000.
Finally in South Korea, the market leader is Kasa, which also holds an MAS license to operate in Singapore. Kasa offers a way to tokenize real estate securities, and investment opportunities can be had for less than $20,000 via its platform.
Real estate tokenization is one of the most promising areas of the wider tokenization economy, which also covers assets such as loans, financial derivatives such as account receivables and treasury bonds, and precious metals. Real estate tokens are similar to REITs in many ways, connecting the virtual world to real-world properties in a way that wasn't possible before. They make real estate assets far more accessible, efficient and liquid, paving the way for retail investors to enter an industry that was once exclusively only available to high-net-worth individuals.
