Tokenization as an alternative to REITs for Real estate investorsPublished by
Despite the proliferation of investment alternatives, real estate remains a stable alternative to the fluctuating stock market and dangerous private initiatives, not to mention a desirable asset to own and keep one's money in. However, until recently, only a select few had access to this market.
One method that smaller investors might get into real estate, which has traditionally been off-limits to them, is via real estate crowdfunding platforms or real estate investment trusts (REITs). As a result of advancements in Blockchain technology, "Tokenizing" real estate has given us the best of both worlds by incorporating all the benefits of a token (cryptocurrency), including worldwide liquidity, reduced middleman costs, and increased accessibility.
A real estate investment trust (REIT) is a firm that invests in and manages properties for the purpose of earning a profit. Real estate investment trusts (REITs) are large commercial property owners that own a wide variety of assets, including but not limited to office and apartment buildings, warehouses, hospitals, retail malls, hotels, and timberlands. Public real estate investment trusts (REITs) might be listed on a major stock market, unlisted, or private.
Crowdfunding initiatives in the real estate sector often aim to amass funds for either a single development or a collection of properties. Cash-generating assets are not required for this form of investing. Typically, it provides the opportunity to build a tailored real estate investment portfolio.
The concept of buying a piece of a property in a group isn't new. Real estate investment trusts (REITs) were created in the early 1960s in an effort to recruit investors and transform the industry's historically low liquidity. Unlike real estate investment trusts (REITs), tokenized properties welcome investors of all financial means. Whereas real estate investment trusts (REITs) enable investors to put their money into a pool of different real estate assets, real estate tokens provide them the option of putting their money into a single property. Similar to crowdfunding, tokenization divides the total value of a property into many smaller tokens. Tokens are created for every fraction of a property and encrypted with the information necessary to prove ownership. Tokenization seeks to address the problem that most retail investors lack access to the necessary funds for investing in real estate.
To a large extent, REITs and crowdfunding are constrained by issues of liquidity, accessibility, and expenses. When an investor wishes to cash out or transfer shares to another party, the process is complicated by a number of layers of intermediaries, regulations, and fees. Tokens, introduced by Blockchain Technology as a new kind of cryptocurrency, help establish credibility by decentralising the verification process, which eliminates the need for costly and time-consuming intermediaries.
These tokens now have value because of the underlying assets they represent, and may be used as a store of value or to make purchases elsewhere.
Since tokenization technology introduces tokens that can be traded, tracked, and made economically and securely, it will advance real estate investment beyond REITs and crowdfunding platforms.
There was a significant increase in real estate tokenization in 2017 and 2018, although this trend has since moderated, in part because of the involvement of regulators. While investors have become more wary of Initial Coin Offerings (ICOs), authorities have pushed the sector toward Security Token Offerings (STOs). An STO may be executed without having to register with the relevant authorities by using relevant offering. This stumbling block is not surprising given the prevalence of regulations. Issuers of tokens face a wide range of legal considerations, including smart contracts. Agreements between users may be enforced mechanically thanks to smart contracts, which are computer code stored on the blockchain. One of the many complicated aspects of launching a real estate token is subjecting smart contracts to stringent technical security assessments to discover any code weaknesses.
Tokenization may have advantages, one of which being the "democratisation" of the real estate asset class. Because of the low entrance barrier, a significantly larger pool of investors may participate in the token economy. From the viewpoint of investors, however, democratisation has drawbacks. Many tiny owners provide a token sponsor greater governance and control than a few large institutional investors. In a traditional real estate transaction, the lead investor has more influence and control over the terms of the agreement than they would with a tokenized asset. Token holders may have the power to cast a vote over the terms of a smart contract in the future. And it's quite improbable that a token's sponsor will give up any rights to a big group of people who may not understand the ramifications of holding tokens. Additionally, it may be difficult to enforce these rights in a heavily fractionalized ownership basis.
Most importantly, the infrastructure supporting real estate tokenization is still in its infancy. While the groundwork for a significant advancement in this field has been laid, we are still in the early stages. If you're a conventional real estate investor or developer, it might be difficult to see through all the hype surrounding NFTs and cryptocurrency right now.
REITs are an investment vehicle unique to the real estate industry that provides a stable and varied portfolio. Setting up and operating a real estate investment trust (REIT) requires substantial capital and management skills owing to the number of intermediaries involved and regulatory compliances. Because of this, REITs may not be a good option for generating money unless one already has substantial resources at their disposal.
On the other hand, tokenization is a way to convert assets that exist both on and off the blockchain into digital tokens (or other distributed ledger technologies). Tokens produced and recorded on the blockchain may be used for many different things, such as increasing supply chain efficiency via the usage of tokenized commercial documents or increasing financing through a security token offering (STO) or other coin offering variation (bills of lading etc.).
Each of these processes has independent utility, and increasingly hybrid models are being developed that use many mechanisms in concert. For instance, real estate investment trust (REIT) shares may be tokenized, utility tokens can be offered on a blockchain to facilitate crowdfunding campaigns based on rewards, and security tokens can be used to facilitate equity-based campaigns. Tokenization enables the trading of equities or REIT shares that were crowdfunded on digital markets.
Crowdfunding, tokenization, and real estate investment trusts (REITs) are all distinct mechanisms that entrepreneurs and investors can employ singly or in combination depending on the goal to be achieved, the type of technology used, and their risk appetite in a world where more and more things are expressed in 1s and 0s.