Real Estate and Tokenization on a Distributed Ledger
Let’s start high level: real estate is the largest asset class in the world; tokenization is the process by which an asset is converted into a digital token or tokens that can be traded on a distributed ledger platform.
In real estate, this means the digital securitization of property deeds, real estate funds, revenue streams, governance rights, and a variety of other assets. Tokenization optimizes fractional ownership of those assets, which leads to greater liquidity for investment or acquisition and, as a result, expanded access to potential sources of funding. For example, rather than having to sell a property in its entirety to one investor or pre-determined syndicate of investors in order to raise capital, owners can now tokenize that real asset and sell tranches of tokens representing a percentage of ownership to multiple investors for a single transaction.
This has opened up a whole new world of investment opportunities for individuals, companies, and institutions. Access to broader investor pools as the result of ownership fractionalization via a distributed ledger also reduces costs, allowing issuers to decrease minimum investment amounts and increase their reach to a wider pool of potential investors, expanding secondary market opportunities and improving liquidity.
A corollary to this wider base of potential investors can be found in the subscription or timeshare marketplaces for real estate ownership. New models of subscription ownership that hospitality companies like Pacaso and Inspirato offer have opened up opportunities for investors that may not have the means or interest in committing a large investment towards a 2nd home or rental property but can now participate in fractional ownership at a lower investment level. The same model can apply to investors interested in participating in commercial real estate transactions via tokenized pools of investment funds.
Companies such as Propy are already successfully facilitating purchases of residential and commercial real estate in a tokenized environment via a distributed ledger, without any need for title companies (where allowed by U.S. state law) and other rent-takers that have controlled the marketplace while adding minimal value. Smart contracts on a distributed ledger do the work that these middlemen were traditionally relied on to do for a fraction of the cost, increased levels of security, and automated payment processing.
Tokenization also replaces paper deeds and other contracts with true digital assets allowing deal participants to track all changes on an immutable ledger that acts as a secure, shared source of truth for documents exchanged between multiple parties and organizations. DLTs enable transaction and property ownership records to be more accessible— facilitating more and better transactions and increasing investor confidence.
As with any new business model, gaining traction among investors and sellers for tokenized assets for real estate will require new methods of attracting investors’ attention and interest. For most transactions, the traditional broker/dealer model with middlemen taking fees is no longer relevant or necessary, which again reduces upfront costs, eliminates artificial sources of potential friction and confusion, and empowers investors in making funding decisions. Developing direct marketing solutions will be a huge growth area for the tokenized real estate marketplace and the providers that can optimize that channel will have a huge first mover advantage over firms with legacy go to market models.