Real Estate Tokenization

Real estate has always been considered a safe investment compared to the stock market. However, it is also more expensive and illiquid. Though real estate is the largest asset class with a global value of $228 trillion, many retail investors are precluded from investing in this asset class, particularly commercial real estate. Barriers to entry include large upfront investment, very low short-term liquidity, management costs, among others. Therefore, how to make investing in real estate more affordable and accessible to retail investors has become an urgent matter.

In recent decades, a process known as securitization of real assets has reduced the frictions and costs associated with accessing real estate exposure for such retail investors. Among financial instruments that provide indirect investment via securitization of real assets, the most common are public and private real estate investment trust (REIT), real estate investment fund, Real Estate Exchange Traded Funds (ETFs), and real estate crowdfunding. Though investors can already buy and sell real estate investment trusts (REIT), but these often have high minimum investments and represent a large portfolio of companies rather than a single property or new development.

To work around the issues, a new form of securitization known as tokenization of real estate has emerged and is gaining popularity. Tokenization helps asset or fund owners raise capital more efficiently, and gives investors unprecedented access to private real estate investments, transparency, and liquidity.

Tokenization is a way to securitize real assets by dividing them into shares that can be sold to investors. It involves representing ownership of an interest in real estate with virtual tokens that exist on a blockchain which is known as security tokens. These tokens are created using blockchain technology, and once created can be traded on digital exchanges or Alternative Trading Systems (ATS).

An actual tokenization use case happened in Paris recently. The property is known as AnnA Villa, which is valued at € 6.5 million. The Villa became the first-ever property in France that was sold via a blockchain transaction. The transaction took place in three steps. First, the ownership of the building was transferred to a joint-stock company called “SAPEB AnnA.” Next, the ownership of the company was divided into 10 Ethereum-powered tokens which were distributed among the new owners. In the final step, each of these tokens was then further broken down into 100,000 units, meaning each token has a face value of € 6.50. Therefore, you can invest as little € 6.50 in the villa.

Advantages of Tokenization

The main advantage of real estate tokenization is improved liquidity. Liquidity means the ease with which an asset can be bought or sold as the cost of entry will be reduced. Tokenization allows a real asset to be subdivided into smaller units and sold as security tokens to potential investors. For example, a 5000 sqft property that costs $1,000,000 can be divided into 100,000 tokens, and each token sold at $10, a price much more affordable to retail investors.

In addition, tokenization will widen the market reach by creating a global investment pool that can extend the real estate market to buyers and sellers from around the globe. Anyone with sufficient capital and an internet connection can easily participate in buying and selling real estate located anywhere in the world.

Other advantages include the following:

  • Transparency: Blockchain is a public distributed ledger so every transaction of the security tokens can be tracked and accessible to anyone.
  • Security: Blockchain is a distributed ledger that is encrypted using advanced cryptography. Every transaction is encrypted into a hash which is not hackable.
  • Immutable: Once a transaction has been submitted to the blockchain and subsequently confirmed, the data cannot be altered. This means no one can falsify the transactions and hence frauds can be prevented.
  • Improved Operational Efficiency: Smart contracts can automate processes such as compliance checks, investor whitelisting, and post-issuance matters including dividend distribution, thereby reducing cost and settlement time.

Implementation

Implementation of a real estate tokenization project involves the following matters that must be dealt with:

  • White Paper-we need to prepare a whitepaper to describe the tokenonomics, the business model, the technological requirements, legal compliance, and more.
  • Type of Tokenization- We need to decide what interest to tokenize, the real asset itself, the equity of a real estate, a mortgage of the property, or others.
  • Asset Information-Type of asset, whether residential or commercial, the property owner, location of the property, etc.
  • Tokenization Ratio-Whether to tokenize part or entire property
  • Smart Contract-The smart contract must address the questions like the total supply of tokens, the amount of tokens to be distributed to holders, do the holders receive dividends, and so forth. Besides that, you must decide the token standard, usually, we adopt ERC20. In addition, the smart contract must be audited by a certified auditing firm.
  • Securities Regulation-Real estate tokens are securities therefore must be registered with regulatory bodies like SEC.
  • Tax-The earnings from the tokens may be subjected to taxes such as property gain tax etc, must engage tax experts to work out the tax structure and strategy.
  • KYC/AML– Real estate token issuers must comply with AML and KYC laws and regulations. 

Tokenization Process

Basically, real estate tokenization involves the following steps:

  1. Asset Identification—identification of the real estate asset, whether it is commercial or residential, and its location. Besides that, it may involve the acquisition, financing, and appraisal of its value.
  2. Smart Contract Generation—Taking compliance with securities laws into consideration in the creation of the smart contract;
  3. Token Creation—determination of the total supply and type of tokens.
  4. Marketing and Distribution—advertising of the offering, confirmation of investor accreditation and listing of tokens on the exchange through a security token offering (STO); and
  5. Post-Listing Support—ongoing support for investors and distributing dividends or other rights to payment.

Example Real Estate Tokenization: Aspen Coin


A good example of a real estate tokenization project is Aspen Coin. A real estate asset management and advisory firm by the name of Elevated Returns LLC issued a token that represents ownership of Aspen Digital Inc, a Maryland corporation formed with the sole purpose of owning the St. Regis Aspen Resort. Tokenization was handled by the token issuer platform known as Securitize (digital security issuance platform). In addition, Templum, a registered broker-dealer and alternative trading system managed the primary distribution, and Computershare (shareholder services) provided custodianship. Marketing was also supported by Indiegogo, a crowdfunding platform. The project successfully raised $18 million.

The tokenized securities were exempt from registration via Regulation D, and therefore were offered and sold only to accredited investors by means of a private placement memorandum. The minimum investment was set at $10,000. Besides that, dividends are to be distributed on-chain to the token holder wallet using Ether. Secondary trading
is provided by Templum to whitelisted investors, and whitelisting is also provided by Templum.

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