Why is the Real World Assets Tokenization Necessary

According to the Credit Suisse Research Institute, the total value of real-world assets hit $280 trillion in 2017, of which real estate accounted for more than $200 trillion. Despite this staggering number of real estate markets, there are a number of issues that are clogging this particular real-world asset from reaching its full potential.

For instance, take a look at the local real estate market. It is widely reported that the salary hike being employees these days can never catch up with the gradual increase in property in Malaysia. Does this imply that those who are freshly graduated or situated within the lower purchasing power group can never own their own property?

This issue does not only occur in respect of the real estate market, but also in commodities markets such as gold amongst the artwork market where there is often low trading volume due to their higher barrier of entry.

With the multiple issues being faced by the real-world asset market these days, asset tokenization may provide a different vantage in solving these problems.

What is Tokenization?

The worldwide business community is currently striving to migrate to a digital system that is going to expedite transactions and ensure opportunities to invest for potential investors are more welcoming than ever, hence tokenization is born.

Tokenization refers to the technology of converting the ownership or rights of an asset into a digital token, which is tradeable on a blockchain. Good thing is, that the ownership of a particular asset can further be fractionalized into smaller fractions which are represented by multiple digital tokens.

You perhaps will be asking, what is the purpose of real-world asset tokenization? For example, a hotel owner may be difficult in looking for a buyer to take over the entire hotel as a whole. Instead, the hotel owner wants to find a simple way to divide the ownership of the hotel and dispose of it in pieces of ownership. The potential buyers, on the other hand, who wants to own only a little portion of the hotel business would be able to purchase it. Tokenization of assets and democratisation of ownership are the exact solutions to these problems.

Finnax, being the leading property platform in South East Asia, is here to provide a revolutionary solution by introducing innovative fractionalized real estate to both assets owner and potential investors. Wonder how  Finnax can help revolutionize the existing pain points that the market share right now? Let us uncover them for you.

Benefits of Tokenization

Tokenized assets actively improve the assets in a variety of ways, in particular, provide a clear path toward making a variety of assets more valuable and accessible to all stakeholders in the relevant market and transactions.

       i.          Accessibility

Due to earlier mentioned reasons and also higher price points, many of the real estate are out of reach for ordinary investors. Consider how to fund a property: the down-payment, as well as the risk of a production crew going over budget, pricing out all but the wealthiest financiers.

This is where fractionalized property ownership comes into play by converting the ownership of a single property into multiple digital tokens, in which tokens represent their respective underlying value and ownership being attached to the property. Anyone can make a small investment and become a partial property owner where the capital required to own a property has significantly reduced. The token holder can also sell these tokens on secondary markets for a higher price. The property owner can use token issuance to sell sections of their holdings. Real estate tokenization is a better crowdfunding option since it gives the user immediate digital ownership. When the user needs to sell the token, he or she can do it here.

      ii.          Do away with Intermediary Transactional Costs

Needless to say, real estate is only going to be more valuable over time but an illiquid asset. It enjoys the so-called "liquidity premium" – the assumption that low-liquidity assets give better profits over time due to their scarcity.

Developers or real estate owners who want to dispose of their projects or real estates on hand are frequently put at a disadvantage because there may or may not be a vibrant market of purchasers due to higher entry prices.

As a result, the real estate market includes an entire sub-industry of middlemen, such as agents or even bulk purchases to facilitate the process of disposal. This results in much higher transaction costs being incurred by real estate owners as well as having to compromise with a lower profit margin.

Asset tokenization in respect of property allows assets to profit from low liquidity while avoiding transactional costs. An asset can be represented as millions or even billions of tokens through tokenization, resulting in fractional ownership that can then be listed on a variety of widely available and accessible, Finnax without the involvement of middlemen at all. Because the tokens are still attached to a unique asset, this reduces the need for costly transactional intermediaries and extends the possible buyer pool while keeping the liquidity premium.

Conclusion

As you can see, real-world assets tokenization becomes increasingly important and where fractionalized ownership of real-world assets forms an integral part of transactions across different industries.

Real-world assets can be tokenized in a variety of ways, but the fundamental concepts remain the same: cost-efficient, liquidity, and the ease of accessing these real-world assets have been greatly enhanced.

That being said, this is only the beginning of this revolutionary technology. This budding trend will soon be normalized as soon as more stakeholders are aware of its benefits, hence fractionalized ownership will no longer be an option but is necessary in times to come.

Visuals courtesy of PIXABAY & UNSPLASH