How Real Estate Tokenization is Disrupting Traditional Investment
May 4, 2022

How Real Estate Tokenization is Disrupting Traditional Investment

Real estate is the world's largest asset class, representing $326.5 trillion [1] globally, in 2020.

With so much money in the balance, you would assume that the real estate market would have constantly undergone innovation, but that hasn't been the case. Real estate transactions have remained some of the most expensive and complex, making them a relatively low liquidity investment. However, real estate tokenization is quickly changing that narrative. 

 

In this article, we'll be explaining just how tokenization is disrupting and improving the real estate market for investors. Continue reading to learn about:

  • What real estate tokenization is
  • The benefits of real estate tokenization

What is Real Estate Tokenization?

Tokenization is the process of converting an asset into a digital token that is usable on the blockchain. In the case of real estate tokenization, that asset is, of course, real estate. 

Tokenization of real estate makes transactions much more straightforward by allowing them to occur digitally on the blockchain using tokens. This is a big improvement from the traditional paper based method where you have to use lawyers and brokers as middlemen to get the ownership and the payment transferred (which can be quite expensive and time-consuming). 

It's important to note that real estate tokenization is flexible, in fact, almost all properties can be tokenized; from single-family homes, to residential and commercial highrise buildings, and everything in between. Tokens can also be used to represent more than just the ownership of a tangible real estate asset. The following examples can also be tokenized:

  • An equity interest in a legal entity that owns a real estate asset
  • An interest in debt secured by a real estate asset
  • A right to share in profits arising from the use of an asset

In addition, the tokenization of real estate allows for fractional ownership of a real estate asset. Tokens are fully divisible, allowing the tokenized asset to be split into multiple parts. Think of it in terms of cryptocurrency ––you can purchase as little as 0.00001 bitcoin (BTC) or as much as a full BTC. The same goes for tokenized assets like real estate; you can invest in the minimum amount outlined in the smart contract for a small fraction of the token ownership or purchase it in full. This enables investors to invest flexibly - purchasing a fraction of a real estate asset instead of the full property.

Tokenization and the Real Estate Market

Tokenization is becoming increasingly popular ––An Industry Report by DigiShares shows that, in 2017 there were a mere 5 security token offerings (STO’s), and two years later, the amount of STO’s increased significantly to 55. According to the same report, that number is expected to continue to grow at a compound rate of 59% which could help drive up the valuation of the STO market to $2 trillion by the year 2030. 

Asset backed security tokens (ABST) such as tokens representing real estate assets (the world's largest asset class) are expected to be the main driver of that growth. By the year 2030 STOlabs predicts that the ABS market will be valued at $1.9 trillion.

The Benefits of Real Estate Tokenization

Tokenization has the ability to revolutionize the way people invest in real estate. With a variety of user benefits, it promises to transform the antiquated investment process and enable more investors to enter the market.

Fractional ownership

As mentioned prior, tokenization of real estate allows for fractional ownership ––this is a significant benefit for investors, as it gives them the ability to invest in a broader range of properties that they would otherwise not have access to. Tokenization provides investors with the opportunity to have fractional ownership in more sizable, higher-quality real estate developments that often provide larger returns.

The fractional ownership made possible by tokenization also allows for more diversification. Now investors can invest in many different developments instead of sinking all their investment capital into a single real estate asset.


Increased Liquidity

Liquidity refers to how quickly an asset can be bought or sold in the market for a price that reflects its value at the time of the transaction. The ability to purchase or sell an asset defines its liquidity. 

One of the main issues that plagues traditional real estate investing is its illiquidity ––these transactions can be time-consuming, difficult, and the pool of potential investors is often limited. Tokenization can help solve this problem in a few different ways:

Increasing the investment pool

An expanded pool of investors improves the liquidity by making real estate assets available to a much larger audience. There are a few different ways that tokenization helps to create a larger investment pool:

  • Globalization: Tokenization of real estate increases the pool of investors by making access to the investments global. You can participate in tokenized real-estate investments from anywhere in the world, as long as you have an internet connection and the right amount of capital to do so.
  • Reduced cost of entry: The fractional ownership of real estate that is made possible by tokenization also increases the investor pool by reducing the cost of entry. It allows smaller investors to take part in larger, better-performing real estate assets they otherwise may not have been able to.

Standardizing transactions

Real estate transactions can be difficult, expensive, and time consuming ––because of this they are often subject to an illiquidity discount that negatively affects the sale price. Tokenization can help to counteract this ––it increases liquidity by simplifying transactions all at a fraction of the cost. It allows tokens to be bought and sold directly on the blockchain without the need to sign a stack of documents or pay steep commissions to a middleman.

Quick, Easy, Inexpensive Transactions

As mentioned above, another benefit that tokenization provides is its ability to bypass the intermediaries needed for real estate transactions and asset management. Blockchain technology allows real estate tokens to be purchased and sold much simpler than the traditional paper method. This improvement is achieved by using self-executing contracts written directly into the lines of code called smart contracts. These smart contracts control the execution of the transactions, track and record them, and ensure that they are irreversible. This gives parties the ability to make transactions directly with one another without a go-between. This streamlines the process, significantly improving processing times and reducing the costs associated with these transactions.

Transparency 

Real estate tokens live on the blockchain, which offers users a great deal of transparency. The blockchain is an open ledger that can record all transactions. This allows users to track the ownership and transaction history easily –– this, along with the blockchain's immutability, helps to guarantee the authenticity of each token. This can help prevent fraudulent transactions by ensuring that the person selling you the token owns it or is not attempting to sell the same thing more than once.

More About Parvis

Parvis is building the next generation of real estate investing. Our digital platform democratizes access by bringing quality real estate opportunities to more individuals. Through exclusive access to diverse, high quality investment projects on the North American market and a user-focused, state-of-the-art platform, Parvis is becoming the go-to marketplace for real estate investing. We are bridging the gap between traditional and digital finance by offering a marketplace that streamlines the investment process, providing in-depth analytics.

Need more information? Are you interested in a demo? Reach out via email at info@parvisinvest.com or contact us here.

[1] https://www.savills.com/impacts/market-trends/the-total-value-of-global-real-estate.html