Disruption With DeFi

According to a recent study by the international advisory and accountancy network Moore Global, “. . . even if just 0.5% of the total global property market were to be tokenized in the next five years, it would be on track to become a $1.4 trillion market.”

Real estate tokenization has the potential to revolutionize the way people invest in real estate. In Tokenization will significantly increase the pool of investors who have access to real estate investments. Using distributed ledger technology and fractionalization, tokenized real estate reduces costs and encourages diversification.

Real Estate Assets Are Illiquid

One of the most significant issues with investing and selling real estate is the liquidity of the asset. In the normal course of a transaction, there are many different parties involved, especially with the legal transfer of the asset. Tokenization could potentially mitigate this issue in specific situations. Rather than the normal transfer of ownership process that takes place when selling a share of ownership in a real estate investment, tokenization could cut out the middleman and allow ownership to be transferred directly from investor to investor. This could be accomplished as easily as it is to buy and sell various cryptocurrencies in a cryptocurrency exchange.

Disputed Ownership Claims

In traditional real estate legal ownership is usually displayed through various legal documents that show the sale of the asset and the ownership rights of the new investor. Tokenization utilizes a distributed ledger system, where the records are consensually shared and synchronized across multiple nodes and accessible by anyone. Any changes or additions made to the ledger are reflected and copied to all participants in a matter of seconds. This feature of distributed ledger technology mitigates any issue arising from various ownership claims because the network could validate each transaction and show the rightful owner of the asset at a particular point in time.

Improving Transparency and Market Security

Utilizing token that are stored on the distributed ledger system not only helps mitigate the issue with undisputable proof of ownership, it will also helps improve overall transparency and security in the real estate market. Considering that every transaction will be processed and approved by other users on-chain, each transaction will be transparent to the public.

High Investment Amount Required

Real estate investment typically requires a large upfront investment amount to be eligible to participate. Of course, investors can already buy and sell real estate investment trusts (REITs), but these often have high minimum investments and represent a large portfolio of companies rather than a single property or new development. The illiquid nature of these instruments also result in a trading discount to its intrinsic price. Through tokenization, assets can now be divided into smaller amounts of ownership with prices that are more affordable to ordinary investors. The result is a lower barrier to entry to smaller investors and with more investors will come improved market liquidity.

Localization Versus Globalization

Real estate investment is currently constrained by the local factors attached to the property such as the documents filed at local land registry. However, since the tokenized property transactions take place in a virtual environment, it makes it easier for new investors to start investing in real estate globally according to their risk reward appetite. Property tokenization removes the limitations related to the location or the property.

With tokenization, the pool of potential investors is truly global. Anyone with sufficient capital and an internet connection can easily participate in buying, holding, and selling tokens for real estate located anywhere in the world.

Complex Process Requiring Professionals

Until now real estate investment has required professional such as lawyers, property surveyors and others to assist the investor in their purchase. Now that investors can trade their property ownership token on an exchange without the need for legal documents to transfer ownership, someone with little to no experience can make a purchase online. This gives far more people the ability to invest in real estate without going through the daunting legal process of transferring ownership, with which many beginner investors may not be familiar with.

Reducing The High Transaction Costs

Using distributed ledger technology, platforms for exchanging tokens will have the potential to greatly lower transaction costs associated with the change in ownership. Tokens allow investors to buy and sell real estate without incurring the traditional closing costs on real estate, which lead to significantly lower transaction costs.

Counterparty Risk

With atomic transactions, tokenized real estate transactions eliminate the middle-man, allowing only peer-to-peer transactions to proceed. This significantly lowers counter-party risk and boosts the confidence of small-scale investors.