Real Estate Tokenization: The Future of Real Estate Assets
Julian Kwan
CEO and Co-founder InvestaX and IX Swap. Host of the Infinity and Beyond Podcast.

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The Basics of Real Estate Tokenization

We are in the golden age of blockchain technology, and it’s bringing in countless innovations that disrupt, change, and replace age-old status quos all over the world.

In the global financial industry, the effect of blockchain technology can be felt in virtually all aspects - from the institutional level of banks gradually accepting cryptocurrencies right down to the unbanked population who can now access basic financial services.

In between the paradigm shifts that defined these institutional acceptance and inclusive accessibility, the topic of tokenization comes into the picture, with real estate among the traditional assets poised for exponential growth once tokenized. 

So what is real estate tokenization and why is it important? What is its significance to investors and how does it work?

Tokenization Explained

In a nutshell, tokenization is the process of bringing real-world assets and securities on the blockchain and breaking it down into smaller units by issuing digital security tokens on its behalf, with each token representing fractional ownership, rights, or equity to the asset depending on each situation. 

By tokenizing assets such as real estate, we are essentially converting a real-world asset into several digital security tokens that can be made available to everyone anywhere in the world – and anyone who buys the token will get to own a fraction of the underlying asset in proportion to the number of tokens they bought.

Asset tokenization is made possible today because of blockchain technology, which allows an issuer to issue tokens representing their asset on the blockchain using smart contracts. From this point forward, the issued tokens work like your typical cryptocurrency that people can buy, sell, and trade on secondary markets and exchanges - and in the case of real estate assets, this is nothing short of revolutionary.

Note: In a study published in 2019 entitled "Tokenized Securities and Commercial Real Estate", the Massachusetts Institute of Technology's Digital Currency Initiative distinguished security tokens from tokenized securities by defining security tokens as blockchain-native tokens representing securities that do not exist out of blockchain. Meanwhile, they defined tokenized securities (such as tokenized real estate) as blockchain-embedded representations of real-world securities.

Tokenization of Real Estate

Real estate tokenization has been a particular topic of interest for a lot of investors in the blockchain and TradFi space because of its massive potential for growth and in addressing the systemic liquidity problem that has plagued the real estate industry for years.

Since these tokens are backed by physical assets, their value will depend on the performance of the said underlying asset, just like how traditional real estate investments work. However, tokenized real estate has the added flexibility and convenience that blockchain technology provides, especially when it comes to the storage and transfer of these tokens.

Through tokenization, real estate ownership is fractionalized into tokens, which opens a range of possibilities that has never been possible before, including enhanced flexibility, more efficient processes, more inclusive accessibility, and above all, deeper liquidity.

How Real Estate Is Tokenized

As an asset owner looking into tokenizing your real estate, it is important to understand first what the token you will issue will represent, and that includes whether it’s:

  • fractional ownership to your asset
  • equity interest in a legal entity that controls your asset
  • an interest in a debt secured by your asset
  • a right to share in the revenue or profits generated by your asset, or
  • any other variation that you’ve determined prior to tokenizing your asset.

This part is very crucial because the nature of the right or interest being tokenized determines which regulation will apply to the tokens you will issue. 

Once this part is sorted, you move on to the actual process of tokenization, which from a high-level perspective includes the following: 

  1. Choosing the platform - The real estate owner taps a platform like InvestaX that will allow them to tokenize their asset.
  2. Tokenizing the asset - The platform will create the smart contract that will govern the tokenization of the asset, such as how many units will be issued and what interest will be vested, and deploy it on a blockchain.
  3. Primary issuance - Once the smart contract is deployed, the asset owner issues the tokens to interested investors.
  4. Secondary trading - Interested buyers and investors who bought the token during the primary issuance can buy, sell, and trade the tokens on secondary markets.

The Advantages of Real Estate Tokenization

One of the more obvious reasons to tokenize a real estate property is to raise funds for its development, just like how a company would issue shares to the company in order to raise the needed capital to expand their operations.

On a macro level, there are several advantages to tokenizing real estate and these include:

  1. Enhanced Liquidity - The greater access made possible by tokenized real estate welcomes more market participants and ensures better liquidity of the investment.
  2. Lower Barrier to Entry - Investors don’t have to buy the whole property in order to invest in it. Tokenizing a real estate into multiple tokens provides investors with a more affordable option to invest in the property by allowing them to purchase the number of tokens that their budget would allow.
  3. Faster Processes and Lower Transaction Cost - By tokenizing real estate, processes are digital, happen on-chain, and generally executed by the governing smart contract, thus there are no time-consuming and resource-intensive processes or costly human intermediaries involved.
  4. Greater Accessibility - Tokenized assets are available on secondary marketplaces and exchanges that investors, regardless of where they are in the world, can access 365 days a year, 24/7.
  5. Passive Income - Tokenized ownership allows you to earn passive income from the property without having to worry about anything else other than holding on to your tokens.
  6. Raise Funds Without Divesting Ownership - As an asset owner, you can raise the funds that you need by tokenizing only a portion of your asset so you don’t have to sell the whole property.

Key Takeaway

State Street, one of the world's largest asset management companies, said on their blog that in the long run, all financial markets will have to digitize their processes and tokenize their assets to remain relevant. That couldn’t be more true for the real estate industry, which stands to benefit from a myriad of advantages that comes with tokenization. 

As the world transitions to Web3, traditional financial markets like real estate will have to leverage the technological solutions available today to equip themselves with the right capacity to confront the future where tokenization plays a crucial role.

At InvestaX, we offer the leading Singapore Licensed Tokenization Service-as-a-Software (SaaS) platform for Real World Asset Tokens (RWA) and Security Token Offerings (STO). We provide a one stop shop for tokenized assets for global investors, including real estate, private equity, venture, ESG, startup, private credit/debt and more. We also provide IX Swap, the first legal and compliant Automated Market Maker (AMM) for RWA and STO.

If you are interested to learn more about how you can build your business on top of our infrastructure and what we can offer you as your tokenization partner, then contact us here. Thank you.