Real estate has long been considered one of the largest early opportunities for blockchain to prove its worth because of the way the technology can easily be integrated to improve existing systems and processes, instead of turning the entire industry on its head.
As we enter 2022, it looks like this shift is occurring; we’re witnessing a huge wave of interest and emergence in real estate tokenization, with an especially large rise in dedicated tokenized real estate marketplaces.
What follows below is a deeper look into how blockchain technology can benefit real estate. We’ll begin by listing the benefits of blockchain for issuers, and then we’ll tie them together to paint a better picture of how they can change the industry.
Why put real estate assets on the blockchain?
When it comes to securities on the blockchain, there are many benefits and they occur on a variety of levels. Some are technological (e.g. it’s just easier with automation) while others concern industry potential (e.g. a bigger market from new types of financial products and a wider investor pool).
We’ve written about the benefits of security tokens extensively elsewhere (see here, here, and here for starters), and those arguments certainly apply here. Still, why make the switch for real estate securities specifically?
For issuers, it mostly concerns liquidity and efficiency.
Examples of how blockchain can increase liquidity include:
- Financial product innovation (e.g. capital distribution, cashflows, ownership structures)
- Integration into DeFi (e.g. DEX’s, borrowing + lending protocols)
- Easier access to secondary liquidity via ATSs and lower operational costs
Examples of efficiency improvements possible with blockchain can include:
- Having a single, immutable source of truth for reporting
- Instant atomic multi-legged settlement
- On-chain transfer manager and compliance functionality
Let’s now take a look at how the improved liquidity and increased efficiency from tokenization stand to transform the industry.
The most dramatic impact tokenization promises to bring to real estate investment is improved liquidity; it can widen both the global pool of investors and the types of investments possible in the market.
Traditionally, commercial real estate investment has primarily been the playground of the wealthy and experienced, with entry at a minimum of hundreds of thousands of dollars. For ordinary retail investors, investing in large development projects or commercial assets has been practically inconceivable.
Even private or non-listed real-estate investments and trusts of smaller scale have had virtually no liquidity owing to complex regulations, a fragmented marketplace, and inherent market inefficiencies.
With tokenization, however, the barrier to entry for investors is lowered. This in turn widens the global investor pool and improves liquidity in the secondary market.
Together with blockchain-enabled innovation (e.g. fractional or even hyper-fractional ownership), tokenization can allow for easier trading of investors’ holdings and for ownership exchange without liquidation of the real estate asset. This makes real estate a more attractive investment for a wider number of participants.
It also has huge potential to change the game for property ownership, since it increases accessibility to assets investors wouldn’t normally be exposed to (e.g. non-typical assets like shophouses or student accommodation) and enables investors wanting to invest only a few thousand dollars to participate.
Ultimately, tokenizing real estate investments can help to close the gap between what’s possible and what’s just a pipe dream. As a result, real estate investments – traditionally marked as illiquid assets – can shift to a more liquid part of an investor’s portfolio.
Facilitating the improvement in liquidity is one of the other major benefits of blockchain: improved efficiency.
Most real estate investments are burdened by laborious manual processes that make the process of exchanging capital complex, slow, and costly. This gate-keeps many investors out by making real estate investment a tricky and cumbersome option. There’s no doubt that automation and a transparent record would help simplify the process.
Luckily, blockchain provides just that! Blockchain eliminates the complexities and redundancy in manual trading processes, simplifies transactions by reducing settlement times, and ensures automatically enforced compliance and security with every transaction. It also provides one single, simple, irrefutable record of ownership, which brings major improvements to reporting and post-trade processes as well.
Together, these improvements can all help make real estate investments more accessible to investors. Making assets more immediately tradable and reducing settlement time can help to facilitate easier trading, thereby facilitating easier implementation for secondary trading on a digital securities exchange. Likewise, by embedding and automating regulations, blockchain can facilitate easier cross-border investments and expand the possible pool of participants in deals.
In the end, blockchain not only improves efficiency but also brings significant reductions in cost and new trade possibilities. It makes the process of real estate investing both easier and cheaper than in the traditional market while widening market options along the way.
Real estate tokenization might be in its infancy, but it’s picking up incredibly fast as the broader digital securities ecosystem expands.
Polymath has been involved in real estate tokenization from the beginning. In 2020, commercial real estate company marketplace RedSwan CRE Marketplace tokenized more than $2.2 billion USD worth of real estate using Polymath technology (with plans to tokenize $4 billion more).
RedSwan was an early demonstrator that real estate tokenization can work. We’ve since predicted that nothing could stop security tokens’ from marching into real estate– and we’re excited to see this happening!
It’s now well time to move past the traditional property ownership model and embrace tokenization on the blockchain.
Take a look at how in our case study.
Ready to work with us? Get in touch.