It’s fairly known that tokenization will revolutionize real estate investing, but what's not talked about as often are its potential impacts on communities, the environment, and future generations.
For the real estate industry, no other topic is as prevalent as blockchain-based tokenization. Currently valued at $300 trillion – four times the size of the stock market – real estate is the largest asset class in the world. Tokenization will tap into liquidity and new investment opportunities, making its already-immense market value skyrocket further.
It’s fairly well-known that tokenization will revolutionize the real estate industry through increased efficiency and transparency, optimization reducing both cost and time, and improved liquidity through fractionalization and wider investor bases.
What’s not talked about as often are the potential impacts of real estate tokenization for market participants, communities, the environment, and future generations.
Here are 10 lesser-known ways real estate tokenization is predicted to transform the industry and the world of investing as we know it.
The wider market accessibility created by tokenization brings the need for issuers to manage larger numbers of diverse investors. Historically a challenge, this is made possible with blockchain, which can automate much of the compliance and distribution process. Meanwhile, tokenization platforms can be leveraged to maintain investor communications at scale. Ultimately, the demand for more effective management of investor bases will drive the development of digital platforms with novel approaches to communications.
The effective maintenance of investor bases will take on new importance in light of investor loyalty. Given the ease at which investors may trade tokens, issuers and property owners will have to work hard to maintain relationships with investors and cement their loyalty. It will be necessary to create incentives and experiment with new mechanisms to reward investors, such as rewards for early purchase, that can contribute to the growth of their investor base.
However, issuers won’t need to do all of the work to attract capital; high-performing investments will speak for themselves as blockchain brings transparency to a token’s track record. Further, real estate tokenization platforms will naturally provide marketing of their clients’ real estate projects, exposing them to larger numbers of investors than would be possible without tokenization.
Fractional ownership through tokenization removes limitations preventing retail participation in real estate investing, most blatantly by eliminating the requirement for investors to purchase an entire property.
Fractional ownership isn’t a new concept, but for large assets such as commercial real estate it’s been too much of a headache to implement in current legacy systems. Tokenization is the technology that makes fractionalization truly possible by leveraging blockchain and smart contracts to automate much of the process.
Ultimately, fractionalization will lower the barrier to entry for retail investors and widen access to the market’s largest asset class. Investors will be able to participate in real estate investing – and take advantage of its returns – with smaller amounts of capital. Meanwhile, effortlessly tradeable tokens will make it easier to enter and exit the market, unlocking more liquidity. At the same time, the global nature of the technology and the new affordability of assets will provide issuers with a wider pool of investors.
Combined, this brings expanded investment opportunities and liquidity that benefits both issuers and investors alike. The result is more democratization of real estate investing, increased portfolio diversification for investors, and new potential purchasers for property asset owners.
While blockchain can bring efficiency eliminating much reliance on central intermediaries, real estate tokenization isn’t going to put them out of business. Intermediaries will still be central to the real estate industry because real estate is a highly fragmented asset class which requires local market knowledge to determine property values and underpin investor confidence.
One major benefit of tokenization is the option to invest in nearly any kind of property, anywhere in the world. With this immensity of the market, reliable local experts will only be more important. Real estate intermediaries – banks, real estate agents, brokers, appraisers, and so on – will find themselves needed for the expertise they bring to the market, only in a transformed role.
Tokenization platforms might work with brokers to find new real estate to tokenize, while agents might turn to advising on token sales instead of pitching property. Likewise, property finance professionals and lawyers who move with the times might find themselves clearing up third-party interests for expanded customer bases as debt flexibility increases.
Blockchain can bring transparency and better tracking of environmental, social, and governance (ESG) factors embedded into real estate assets, such as the energy consumption and carbon footprint of buildings or the supply chains of brick and mortar businesses. Investors can then leverage this data to make decisions that best reduce global warming or create sustainability value, such as by placing premium investments on assets with better ESG ratings.
Similarly, shared ownership structures can allow for more sustainable and responsible ownership and management of real estate properties, as well as community-driven decision-making.
Finally, smart contracts and decentralized voting systems will enable greater participation in real estate asset governance and help to democratize decision-making among owners of shared property.
One of the greatest benefits of tokenized real estate is the decentralization and ownership of an asset by a community– including its titles and rights.
Today’s real estate market is characterized by many siloed and independent networks. These centralized networks have little trust between them and are one reason the sector remains relatively illiquid; the organizational structure just isn’t transparent or connected enough.
Decentralized Autonomous Organizations (DAOs) can resolve these issues by transforming the way real estate property is purchased, held, and sold. DAOs essentially function like blockchain-based LLCs, with the obvious differentiation that DAOs are decentralized.
The rules of the DAO will be established by the core community of the organization, then implemented in smart contracts on the blockchain. Next, funding and governance mechanisms are developed, typically through token issuance that gives token holders voting rights and generates profits for the DAO treasury.
Real estate DAOs can benefit market participants by making organizations and their activities publicly verifiable and auditable. Moreover, smart contracts ensure that rules are only updated upon consensus in DAO member voting.
Even senior investors can supposedly buy only ten properties in their lifetime owing to the large capital required. But with tokenization, both high-net worth individuals and those from underrepresented populations or low-income communities can participate.
Fractionalization and crowdfunding can be vehicles for collective ownership by community members of the properties in which they live. Community ownership models will have a positive social impact by increasing community members’ connection to their property or neighborhood, as well as the desire to improve it. This creates a positive feedback loop, with community bonds continuously strengthening through members’ direct interest in the well-being of their community and their relationship to other members.
Examples of community-driven real estate projects that may see an increase thanks to tokenization include affordable housing developments and sustainable building projects.
Tokenized real estate gives an upgrade to fractional ownership, a property ownership model whereby multiple co-owners have the rights to use the asset or share in yielded income.
With fractional ownership, investors can own a property otherwise out of reach, actually use the properties partly owned, and benefit economically from the asset’s rise in value. However, fractional ownership has historically been expensive; mortgage loans for the ownership model are hard to come by, making the minimum cost involved often higher than the down payment on an individually owned property. Further, consensus on decision-making about the property, its management, and the sales of shares can be increasingly onerous as the number of co-owners grows.
Tokenization has the potential to reduce these problems. First, it can fractionalize real estate into smaller amounts than is currently possible in manual-intensive legacy systems, lowering the minimum expense and enabling investors greater flexibility in their investment size. Meanwhile, smart contracts can automate and execute some of the asset management process, easing the labor burden associated with owning property. Finally, decentralized governance models can facilitate easier decision-making and enable larger numbers of co-owners to reach consensus faster while the transparency of on-chain voting guarantees less misconduct in the execution of its results.
Relatedly, tokenization can facilitate better resolution of ownership issues such as partnership dissolution or the division of an estate among heirs.
For rental properties, tokenization enables investors to be rewarded with rental payments monthly or even daily in proportion to their initial investment. Moreover, new models for property organization might let investors enjoy the benefits of owning rental properties – the rental income – without the hassle. The necessity to refurbish and manage the property, find tenants, and collect rent could instead be passed on to the tokenization platform, eliminating the largest burdens to property ownership as well as the loss in income that results from hiring a property manager to ease them.
As a result, real estate investing – one of the most celebrated forms of passive income – could become even more passive.
A high cost of living and widening wealth inequality leaves today’s youth troubled by their future prospects of owning a home. Dubbed “the roommate generation” because of their grim possibilities of home ownership, millennials are increasingly choosing to live with parents or friends, while “I’ll never own a home” has become a guiding behavioral principle for many Gen-Z.
Youth participation in real estate is important not only for their future quality of life, but also for the future of the market. After all, if economic realities prevent youth from purchasing real estate for themselves, how can they be expected to purchase investment properties?
Luckily, blockchain technology can be leveraged to enable youth to enter the real estate market as investors and entrepreneurs, providing youth with on-ramps to property ownership. The benefits of this are two-fold: youth have the opportunity to increase their income enough through real estate investing to a point where home ownership is viable, while fractionalization offers new models for shared property ownership that lower the barrier to entry.
Metaverse and virtual reality integrations will enable investors to virtually tour properties or their locations at any time, making real estate investing truly global. These integrations can augment the way intermediaries provide local market knowledge and support for transactions.
What’s even more fun to think about are the opportunities tokenization might bring to real estate in the metaverse itself, with owners of virtual land leveraging blockchain technology to fractionalize their digital property to sell pieces of it without forfeiting the whole asset.