Real estate is one of the most illiquid assets. They are capital-intensive and difficult to trade. Therefore, they are traditionally an investment for wealthy individuals or institutional investors. For retail investors, this asset class has been largely inaccessible. With real estate tokens, that has changed.
How does a real estate tokenization work?
In a tokenization, the real estate provider splits up a property in question into many, small shares – so-called tokens. These tokens digitally map the property on the blockchain. Investors in the U.S. or England can buy the tokens and thus acquire proportional ownership of a property with small investment numbers. This entitles them to pro-rata profits from the property through rental income or appreciation in value. They can resell the tokens on the blockchain.
The number of providers is growing
With the AspenCoin, one of the first real estate token investments came onto the market in 2018. In the meantime, the list of global providers has grown – to currently 41 real estate tokenizers. Over half of them are based in Europe, as our list of providers shows. Companies such as BrickMark, Brickbuy, Finexity, Exporo and Crowdlitoken allow small investors to invest in multifamily and office buildings in the form of tokens. Most real estate tokenizers are fintechs – young companies that use crypto financing to realize construction projects and make real estate purchases.
High returns always come with high risk
Bureaucratic hurdles such as notary appointment and land registration are out of the way. Investments combine the advantages of low transaction costs with comparatively high returns. The return on real estate tokens is derived directly from the profits generated by the property. However, English and American investors still take some risks, as the following list shows:
- Most real estate investments are tokenized debt instruments, not “real” tokens.
- Rent defaults are one of the classic risks of a real estate investment. Investors also get to feel rent declines.
- Lack of expertise in valuing properties also poses the risk of buying junk real estate on the blockchain.
We have written in all details about the risks and dangers of real estate tokens in a separate post.
To map proportional real estate ownership, we need a comprehensive blockchainization of the national economy.Dr. Cyrus de la Rubia, Chief Economist and Head of Research at Hamburg Commercial Bank (HCOB)
Buying real estate tokens – how does it work?
Many real estate token investments are possible from a deposit of 500 euros. Even small investors thus have the opportunity to diversify their portfolio with real estate. The providers require a simple registration via email to create an account. As with any account opening, one must identify oneself. This can also be done online via digital authentication. After that, one can invest in digital shares in a few clicks. To process the purchases and sales, each registered user has an e-wallet integrated into the respective platform with a digital credit account. This takes over the function of a virtual wallet. At any time, users can deposit unlimited amounts of money into this account, which they can then use to buy digital shares in real time and have the proceeds from sales paid out to their bank account.
Real estate tokenization not yet possible
The list of providers is steadily growing. However, demand is currently still manageable. Crowdlitoken had just 608 investors from 6 countries at the end of 2020, according to MoneyToday. In addition, all projects have one thing in common: they do not tokenize the property itself, but a profit participation right, a share, a bond or a fund. Debt claims packaged as securities are not tokenization in the sense of a cryptocurrency. Exporo co-managing director Patrick Hartmann also admits this in an interview: “The security token we use represents the customer’s right to ongoing income and increases in value of the underlying property.” Not, in other words, to the property itself. The reason: there is no other way so far. “Across the EU, true tokenization of real estate is hardly legally possible and currently not yet scalable.” Much of what the real estate industry expects from blockchain technology cannot yet be implemented because the basic requirements are lacking.
Tokens in an ideal real estate world
The ideal of real estate tokenization is so beautiful: Each token owner owns a corresponding share of the building. Thus, he has a pro rata claim to the rental income and can resell his tokens on the secondary market at any time or even pledge them. At the same time, he pays proportional property taxes, bears repair costs and serves insurance premiums – all just like a real property.
Blockchainization of the national economy necessary
Dr. Cyrus de la Rubia, Chief Economist and Head of Research at Hamburg Commercial Bank (HCOB), sees this ideal real estate world coming. In it, everything will be fully automated via blockchain. However, the prerequisites for mapping proportional real estate ownership are very high, according to the economist: “We need a comprehensive ‘blockchainization’ of the national economy for this.”
Key laws also missing for land registry
The primary prerequisite for tokenized real estate is a sufficiently elaborate regulatory environment. This is the conclusion reached by Cyrus de la Rubia and his colleague Prof. Dr. Philipp Sandner of the Frankfurt School Blockchain Center in the study mentioned at the beginning of this article. However, the legal foundation is missing – for all assets on the blockchain. This also applies to cars, wines and tokenized racehorses. For tokenized real estate, the land register is already a problem. That’s the only thing that determines who owns a property. If it were digitally mapped, the blockchain could update it fully automatically and manage it efficiently, says Cyrus de la Rubia. But legislation is lacking for this as well. Here, authorities such as the Swiss Federal Office of Justice or the German Federal Ministry of Justice and Consumer Protection would be in demand. And, “As long as the land register is not on the blockchain, no direct tokenization can take place.”
What would be needed are automated contracts
However, the coordinated legal framework alone would also not be enough to map real estate holistically on the Blockchain – and to fully exploit the benefits of the technology. “It also needs a revolution in the insurance sector toward automated contracts and rapid progress on the Internet of Things,” says Cyrus de la Rubia. Because you can’t do it without physical support. This would come in the form of sensors on the respective properties – so-called “oracles.” Their task is to record electricity and water consumption, check the functionality of electrical devices, and arrange for repairs and maintenance if necessary. If the contract tradesman is then still connected to the blockchain, he immediately gains insight into the error message.
Fully automated real estate management
If this idea were taken a step further, the brave new world of real estate would be completely free of intermediaries. All contracts would be in the form of smart contracts – not corruptible and fully automatically self-fulfilling. The real estate manager would then be nothing more than software. So far, this is all beautiful utopia. But according to Cyrus de la Rubia, it doesn’t have to remain so. Because: “The technology has disruptive potential. It can make the real estate market much more efficient.”
Refinancing via tokens also conceivable
It also creates new opportunities for investors and owners. This is because all rights, obligations and transactions can be mapped in smart contracts on the blockchain in a legally secure manner for all parties involved.
- With refinancing on the blockchain, homeowners can pay off mortgage loans early or bypass them in advance. All they need to do is tokenize their own property and sell a portion of the tokens to third parties.
- The blockchain also offers good prospects for rent-to-own models. Tenants of a tokenized property buy part of the tokens. The claim to rental income they have with it reduces their own rental expenses. The money saved helps to accumulate the necessary equity for a real estate purchase over time.
- Public construction projects can be financed as community projects with tokens. Local investors can provide financial relief to communities and cities – for example, in the construction of hospitals or the restoration of historic architecture.
The future belongs to real estate tokens
Cyrus de la Rubia and Philipp Sandner do expect that it will take some time for the regulatory environment for real estate tokens to mature. “But trends around tokenization in other areas could even create synergies. The great enthusiasm around NFTs in particular continues to drive developments in the token space,” they concluded in their study. In the future, token owners may not only be able to call a piece of real estate their own, but also a work of art, a tokenized diamond or a noble galloper.
FAQ – Frequently asked questions
No. At the moment, there are only real estate tokens in the form of profit participation rights, bonds or funds. Real estate tokenization in the actual sense is not taking place because, among other things, the legal basis is lacking.
Land registers would have to be digitized and located on the blockchain. The insurance sector would have to switch to completely automated contracts. The Internet of Things (IoT) would have to quickly become more widespread.
If all rights, obligations and transactions can be mapped in a legally secure way for all parties involved in smart contracts on the blockchain, homeowners can tokenize their own property. Tenants can buy shares in a tokenized property they occupy. Cities and municipalities can involve local investors in public construction projects.