U.S. President Franklin D. Roosevelt once said: “real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.” This view still holds strong with property ownership being the single, greatest store-of-value vehicle and wealth creator throughout human history. Although many individuals and institutions see real estate as an attractive investment, the initial capital required to achieve this investment creates a significant barrier to entry for the average investor.
Apart from the high cost, inefficient manual and labor intensive processes, liquidity due to limited participation adds friction and inefficiencies also adds to overall costs. To make real estate investments accessible to a wider investor base would require improving the inefficiencies. This would significantly bring down the cost of investment in the initial stages.
Real estate investing has evolved considerably over time. Most notably with the introduction of Real Estate Investment Trust (REIT). This provides retail investors with exposure to the asset class for the very first time. The next generation of real estate investments is already happening as we speak. Issuing real estate tokens on the blockchain and creating a marketplace for property owners, investors and other stakeholders is the solution to take the real estate market further.
Tokenization is the process of creating tokens to represent fractional ownership of an asset, or a real estate in this case. A token is very versatile in nature as it could represent an equity interest in an incorporated entity that owns the real estate, or an outright fractional ownership of a particular real estate amongst many other potential representations that the real estate industry has to offer.
Fractionalizing a title deed into tokens would potentially allow many investors to begin participating in a single property. This solution immediately solves the issue of high barriers to entry. A $5m property, once an unachievable investment for most, can be fractionalized into 5,000 tokens with each priced at only $1,000. These tokens are backed by the value of the property and can potentially offer rental dividends yield as well. The rental dividend can be done on a smart contract for a periodic payment like on a monthly or quarterly basis. This rental income could be distributed directly to the investors digital wallet. Owning an investment property can essentially be as simple as holding a digital token. This type of fractionalization allows smaller investors a low-risk and low-cost way to participate in the market, and have exposure to a real estate investment. This would eventually open new possibilities once unattainable.
REITs success could be down to its liquidity. Investing in REITs is a viable option to have some form of general exposure to commercial real estate but the selection of property is not at the discretion of the investor. However, if the intention is to own individual private property or a small collection of private properties, only crowdfunding offers an alternative solution, until now.
Tokens can be tradeable on secondary markets, such as ECXX.co. The process of tokenization combines the best of both investment subsegments, a REITs liquidity model and option to participate in a single private property investment.
Tokenization and digital securities represent the next wave of technology. It gives investors unique opportunities to rethink real estate investment from an age-old system that has high entry barriers to anyone with some spare cash and an internet connection.
Sources: RENX, Nasdaq