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How good is the return on real estate tokens?

Blockchain can reshape the real estate market – and make it easier for investors to access the market. But what about the return on real estate tokens? There are already houses and apartments on the market that investors can invest in with a token purchase

Brave new real estate world on the blockchain: Bureaucratic hurdles such as brokers, appraisals, notary appointments, and land register entries have been eliminated. On-site appointments are no longer necessary. And the necessary documentation is already digitized and included in the tokens. Real estate investments can thus be concluded with various providers with just a few clicks – and with a low minimum capital investment.

Blockchain reorganizes real estate market

According to Prof. Dr. Michael Voigtländer of the Institut der Deutschen Wirtschaft, blockchain offers the opportunity to reorganize the real estate market. Until now, market access has been severely limited. Even a single-family home is beyond the budget of many investors. This is even more extreme in the case of office towers costing 100 million. An investment, says the expert for financial and real estate markets, requires a very large equity capital, especially for commercial real estate. “This is a market for only a few market participants – a few funds, a few insurance companies. If the office tower is broken down into tokens that you can buy, then the market is open to small investors.” The charm that the expert sees in this: One thus has the opportunity to bring real estate into free float – like stock companies.

Yield results from the profit of the real estate

Instead of buying entire houses, private investors in the U.S., England or around the world were able to invest in open-end real estate funds with smaller amounts even before the first tokens. However, investors here usually don’t know where exactly their money is going. With digital real estate investments such as those from Finexity or Exporo, investors invest directly in a specific property. And the return is also derived directly from the profits generated by the property. However, these digital securities are token-based debt instruments, not proportional real estate ownership. This introduces additional risks.

New opportunities through real estate tokenization

Tokenization of real estate nevertheless offers investors entirely new opportunities:

1. Market access on a small budget: traditional real estate investments are capital intensive. Real estate tokens allow even small investors to invest in real estate.

2. Better tradability: Real estate is one of the classically illiquid assets. In the form of real estate tokens, they can be traded more easily. However, the prerequisites are appropriate legislation and flawless technical implementation.

3. Easier diversification: When investing in real estate tokens, investors can put together a diversified real estate portfolio even with a small capital investment and reduce the risk

Portrait Prof. Dr. Michael Voigtländer, Institute of the German Economy

With real estate tokens, the same prices apply to everyone. This is also an advantage from a social point of view.

Prof. Dr. Michael Voigtländer, Institute of the German Economy

Double returns with real estate tokens

As proportionate owners of tokenized real estate, investors are largely free of worries – at least as far as administrative expenses are concerned. They have nothing to do with further development, leasing or maintenance. Their investment returns virtually on its own. And this is twofold: Owners of real estate tokens not only benefit from regular distributions from rental surpluses. They also participate in the increase in value of the property. In addition, there may be redemption gains if a provider partially finances real estate via partner banks at optimized conditions. What investors in the USA and England need to be aware of: Rental income can disappear and increases in value are always only a forecast. Because there are two sides to every investment. And they always consist of return and risk, even with tokenized real estate.

Real return example

  • Tokenized apartment building with condominiums.
  • Mien Boh, Rahlstedt in Hamburg. Tokenized by Finexity.
Projected payout / year
Projected appreciation / year
Projected redemption gain / year
Projected total return / year
Source: Finexity

Cheaper transaction costs on the blockchain

Proponents of tokenization always point to cheaper transaction costs. But are they really lower? The benchmark is always today’s transaction costs of a traditional house purchase, says Prof. Dr. Michael Voigtländer. “And they are very high – just because of the notary and because of the land registration.” On the blockchain, a lot could be saved here. “The more we digitize, the more favorable the transaction costs will be.”

Blockchain facilitates real estate valuation

And the expert cites another advantage: “Once you have the tokens, you can trade them individually among each other.” That would lead to the emergence of real estate exchanges. And that, in turn, would have crucial significance for valuation – especially of commercial real estate. “We still have big problems establishing an actual value here. If there is regular trading of units, valuation is of course correspondingly easier.”

Costs in the financing phase

Calculated on a real example (Finexity multi-family house in Hamburg). The figures shown include VAT of 19%.

Purchase price
Euro 548,000
Incidental purchase costs
Euro 42 141.-
Euro 22 664.-
Structuring costs
Euro 26 085.-
Agency commission
Euro 19 564.-
Liquidity reserves
Euro 3288.-
Total acquisition price
Euro 661 742.-
Bank loan
Euro 327 156.-
Debenture capital
Euro 33 586.-
Source: Finexity

Blockchain trading ensures price efficiency

The blockchain also ensures price efficiency. Until now, the real estate market has been an insider’s market: those who are better informed can get cheaper prices. With real estate token trading on an exchange, that’s over. With tokens, one can achieve much more market transparency and generate much more objective price information. “Then the same prices apply to everyone. Of course, that is also an advantage socially,” says Voigtländer.

The future lies on the blockchain

However, there is still a long way to go before real estate property rights can be mapped on the blockchain without a land register and notary. The bottle-neck is the legal framework. These first have to be created, says Voigtländer. But the expert is convinced that tokenization offers very interesting opportunities for the real estate industry. For management consultant Dr. Daniel Pehle, the opportunities of blockchain-based real estate investments also outweigh their risks, as he sums up in an article in the Bank Blog. For him, the technological feasibility suggests a future with tokenized assets. Voigtländer also sees this: “At the moment, this is still pie in the sky. But the future can come quickly. Because the technology is always evolving.”

Clarify return and riskThe

tokenization of value assets is advancing. We have already reported on other investment areas, including the return on wine tokens. Meanwhile, there are also numerous platforms that offer art tokens. Before buying, it is worthwhile for investors to clarify the risk of counterfeiting or fraud. The return on art tokens depends on the current situation of the art market.

FAQ – Frequently Asked Questions

What is the composition of the return on real estate tokens?

Returns on real estate tokens consist of surplus rental income and the increase in value of the property. Investors benefit from the profits generated from the rental income in the form of regular distributions. The profit from the increase in value can only be realized at the end of the term or when the tokens are sold on the secondary market. Caution: Expected returns are always forecasts.

What are the benefits of tokenized real estate investing?

On the blockchain, you can invest in real estate on a small budget while building a diversified portfolio. Investing is quick and convenient online with minimal bureaucracy. Transaction costs are lower than with traditional real estate purchases. In addition, you benefit from the price efficiency provided by the blockchain.

Can real estate tokens be traded on digital exchanges in the future?

At present, there is no way around the notary and the land register. First, legislation must change so that tokens can be used to represent direct ownership rights to a property. Then it will also be possible to trade real estate tokens like shares on a stock exchange.

Sabine Melichar

Editor | MBA University of Cologne / San Diego State University.
Main focus: Tokenization | Enterprise Digitization | Vocational Education | Society

Sabine Melichar

Redakteurin | MBA Universität Köln / San Diego State University
Schwerpunkte: Tokenisierung | Digitalisierung von Unternehmen | Berufsbildung | Gesellschaft