Main Takeaway: Despite being a new technology, the tokenization of physical assets on the blockchain has the potential to disrupt how we buy and sell real estate assets. Tokenization can have the ability to increase liquidity in the market, improve transparency, reduce fraud, reduce costs and eliminate intermediaries.
Story: In 2018, the St. Regis Aspen Resort in Colorado became the first major real estate asset to sell security tokens. The sale of Aspen Coins raised a total of $18 million for its owners and similar to the advent of REITs, helped make real estate investing more accessible to the public.
Since then, the trend to digitally tokenize real estate on the blockchain has gained momentum, and multifamily investors and owners should be paying attention. As the Commercial Observer puts it eloquently:
The process of tokenizing property involves the act of representing property rights in the blockchain ledger via a crypto-token (or, digital assets that are built on another crypto-currency’s blockchain). It allows investors to break assets into smaller units of ownership, thereby paving the way for small to midsize investors to purchase part of a property and diversify their holdings rather than tie up their assets in a single property.
And the market is growing, significantly. According to estimates, the real estate tokenization market more than tripled in 2021, and will continue to grow in the coming years.
Today we explore some of the key developments related to the tokenization of real estate assets, starting with the perceived benefits.
- Increase liquidity — If a real estate asset can be tokenized, then it is much more easily transacted upon, similar to an investor’s ability to buy and sell REITs on the open market. This gives owners and investors greater access to liquidity and capital than before.
- Improve transparency — Because a blockchain is a public ledger, all transactions and ownership are publicly available and searchable.
- Reduce fraud — Given the backbone of the tokenization process is a non-fungible blockchain, the risks of fraud or other criminal activity are significantly reduced.
- Reduce costs — A digital ‘sale’ of a token is much more efficient and cost-effective than a traditional real estate closing transaction, which can cost tens of thousands of dollars.
- Eliminate intermediaries — A tokenized real estate transaction removes the need for many intermediaries such as lawyers and brokers. It allows transactions to occur directly between buyers and sellers.
Here is a standard breakdown of the current real estate tokenization market in the U.S.
Tokenization in Multifamily
According to media reports, a 250-unit multifamily apartment complex in Dallas recently offered tokenized options for investors. The development company raised $6.5 million from investors for this $47 million project. The owner of the project explained the benefits of tokenization:
One is paperwork. Rather than maintaining records in traditional fashions and generating quarterly statements and ACH transfers, by using tokens and putting them on an exchange platform—tZERO—much of the work can be automated.
In this specific case, the owner noted that following a 12-month period, investors were able to sell ownership on a secondary marketplace. According to the owner, this gave investors more confidence in the deal knowing they could be more liquid should they choose to exit the deal.
Further, marketplaces are beginning to develop around the tokenization of real estate assets including RealT, Vesta Equity, Vave, LEX Markets, and DigiShares, among others.
Tokenized real estate: Expert take
“The blockchain platform will not only be used to transact multifamily and other types of real estate but also to house many other aspects of real estate. Some of the utilities the blockchain will encompass will include, “smart” contracts, due diligence, transaction history, title documents, permits, property management, leasing and more. It will serve as an immutable digital paper trail.” — Mark Ventre of Stepp Commercial
“Fractionalized, tokenized real estate interests trading in deep liquid markets across the world and open to investors, regardless of their accreditation status, would indeed be revolutionary. It would fundamentally change the game for real estate entrepreneurs and investors alike.” — Nick Halaris, founder and President of Metros Capital.