Tokenization of Real Estate: A Case Study
Asset tokenization is an area of explosive growth in blockchain and many industries are starting to embrace the great potential of the token economy, not only because of its efficiency-gains but also because of the advantages of having access to a global base of investors.
We are convinced this will be the future of capital markets, so we have created this Case Study, showing one of the industries with the biggest development potential thanks to tokenization and DLT.
Current Real Estate Industry
By nature, some asset classes have suffered from limited liquidity and prohibitively high economic buy-ins. That is the case of real estate, one of the largest asset classes worldwide, with acquisitions of income-producing commercial assets achieving $963.7 billion in 2018 ( Real Capital Analytics).
With a total estimated value of $217 trillion and a settled volume of transaction of $1,4 trillion ( N. Axford, 2017), the real estate market has positioned as one of the most complex and important elements within the capitalist system.
Due to the complexity of the structure of participants, it has high and increasing transactional costs that hinder entry opportunities. On average, a transaction for the purchase and sale of the property takes at least 15 days ( Kalyuzhnova, 2018), and given the complex system of interrelations between the participants, there is a high share of the transaction costs in the price of real estate. Meaning that, in the end, it goes all to the same vicious cycle that increases the prices given the existent inefficiencies.
Thanks to the Distributed Ledger Technology (DLT), all these costs can be reduced. This technology is a decentralized and, as stated by its name, distributed peer-to-peer registry. Supported by a network of electronic devices, there is no hierarchy and all the transactions are managed by the different computers acting as the ledger.
With this technology, many of the interrelations between participants can take place within minutes through the decentralized network. Like so, the transactional costs -in time and in money- can be reduced, supported in the distributed architecture that allows for automated processes while preventing all of the information stored from being compromised at the same time.
Moreover, given that the blockchain (DLT) does not have a central authority and request for consensus algorithms, the system is hardly hackable. Thus, many of the corruption risks coming from the complex system of participants in the traditional real estate market does not exist.
It opens the door to the possibility of democratizing asset classes through blockchain technology and peer-to-peer investment, creating a highly liquid decentralized market for property investment that is open to all.
What is “Tokenization”?
Tokenization of existing assets refers to the process of assigning digital value to a physical object, an intellectual work or a financial asset. It simple words, through decentralized technology, one can convert property rights into a digital token. Hence, tokenization offers earlier liquidity, a broader fundraising base and far lower issuing costs than traditional systems.
Given that physical indivisible assets can be represented by multiple Security Tokens*, one property can have fractional ownership. Though the fractional ownership resulting from the tokenization process, issuers can automate many of the middlemen functions and bring more liquidity.
Overall, tokenization brings liquidity, transparency and peer-to-peer investment in major commercial assets without the need for expensive and time-consuming intermediaries.
*Security Tokens represent a legally secure and controlled instrument, able to be used as a credible digital asset. They are the digital representation of traditional securities, which can represent an equity and debt stake in the underlying asset.
Tokenization: Real Estate
The tokenization of real estate lowers the entry barriers by providing access to investors without geographic restrictions or the size of capital. Thus, tokenization opens the real estate market to new pools of investors. New capital can be added, coming from those interested in purchasing tokens representing fractional ownership of a piece of real estate, which appreciate in line with the increasing market value.
Likewise, from the investor perspective, these tokens could, in turn, raise sufficient funds for a down payment on a home a few years later. Thanks to DLT, the equity stake given to the investors is completely liquid, transparent and backed up as a security, following the appropriate financial regulations.
In order to do so, it is necessary to ensure a secure investment micobo offers a compliant investor onboarding, that allows to whitelist the capitalist, following the Know-Your-Client procedure from the Anti Money Laundry Directive. In this manner, the legal requirements for the capital markets are observed, allowing the token economy to expand to its full potential.
Furthermore, the legal processes of the real estate market are now compatible with the blockchain, due to the capabilities of Smart Contracts, that are supported by compliant standards. The Smart Contracts* are the core elements of the tokenization process, since they allow to programmatically grant conditional rights to the tokens issued on the blockchain.Thanks to them, it is possible to code the desired specifications of the transactions, including legal procedures, trade conditions, and asset descriptions.
Hence, when an asset is tokenized, the Whitelisted investors are authorized to send and receive (trade) the Security Tokens that they are entitled to, in a secure and compliant manner, given that the whitelist can only be modified by the administrator of the Smart Contracts. This allowance is open for both primary and secondary markets, making the potential of tokenizing real estate even greater.
The transformation of the real estate industry is already afoot as many of the world’s most desirable properties are being positioned through crypto asset and security token investment possibilities. Thanks to all the benefits that it brings, global players are taking the growth opportunity.
*A smart contract is a computer protocol intended to digitally execute certain tasks if pre-defined conditions are met, thus allowing to digitally facilitate, verify or enforce the negotiation or performance of a contract. With this, Smart contracts allow the performance of credible transactions without third parties.
Buildings LLC wants to tokenize a $300,000 apartment, converting it into 300,000 Security Tokens (the number is totally arbitrary, we can issue as many tokens as we want). Thus, each token represents a 0.0005% share of the underlying asset.
As explained, the tokenization process means that the apartment‘s economical rights will be represented in a digital format that can be easily distributed to stakeholders and to which smart contract provisions can be attached in order to guarantee the automatic execution of certain provisions which are key to the incentives.
Therefore, when an investor (future stakeholder) buys a Security Token of this apartment, it is buying 0.0005% of the ownership in the asset.
If one investor buys 150,000 tokens and you own 50% of the assets. If one person buys all 300,000 tokens it will be 100% owner of the asset. However, this person is not becoming the legal owner of the property.
Thanks to our White Label Solutions, this process is completely transparent and decentralized while taking into consideration our client needs: the amount of Security Tokens they want to issue, the jurisdiction for the offering, the special provisions required for the smart contracts and sofort.
Moreover, our Solutions are creating using highly sophisticated standards and immutable Blockchain technology, we can ensure that once someone buys tokens, nobody can “erase” the ownership even if it is not registered in a government-run registry. However, our clients will have the opportunity of managing the Security Tokens properly, being able to give different roles to the stakeholders.
From the legal perspective, the ownership of this Security Tokens is guaranteed thanks to a Special Purpose Vehicle (SPV) that we establish for each of our clients. The Security Tokens issued are an economic right to share the profits of the SPV. The apartment and the SPV remain always in public hands while ensuring the tenancy of the legal ownership now shared by the stakeholders.
That is why, when you chose us, you can significantly reduce the time your project needs on technical issues, because we will take care of them. As FinTech experts with several successfully tokenized projects, we can deliver excellent results responding to your needs.
Using our compliant and sophisticated approach on creating your own tokens allows for a fast deployment and an easy customization.
If you are interested in knowing more and how you can seize this once in a lifetime opportunity, get in touch!
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