Real Estate

Real Estate Tokenization: Types and Models Explained

Investing in real estate has always been popular. The managed property market hit a trillion dollars in 2020. Many investors want to capitalize on commercial or residential real estate, but not everyone has the opportunity. Investments in real estate require significant capital investments, and the payback of such investments is quite long. Asset tokenization is already being used in many areas and could be the best solution to simplify and democratize real estate investments. Interested in learning how real estate tokenization works? Read the explanation from Digishares.io below.

What is real estate tokenization?

Real estate tokenization involves issuing tokens with information about objects and placing them on the blockchain. The property is divided into fractions, which opens the way for private investors. Any property can be tokenized. For example, it could be an office building, an apartment, or a luxury resort.

Digishares.io analysts expect that in 10-15 years, most of the real estate will be tokenized and transferred to the blockchain. So far, this process is developing in rather slow steps, as not all developers understand how real estate tokenization and fractional ownership work. However, it is obvious that tokenization will gradually gain momentum as market participants get used to innovative technologies.

What are real estate investment funds?

A real estate investment trust (REIT) is a legal entity that allows you to make partial investments in real estate. REITs operate under a special taxation scheme compared to other companies, so investing through such companies is profitable. REITs pay dividends up to 90%. However, this payment scheme limits the possibility of acquiring new real estate.

REITs also have a certain risk limit. For example, such organizations cannot take on too many levers. Digishares.io recommends tokenizing real estate not through REITs, since real estate tokens will also provide liquidity through decentralized finance, while having fewer restrictions, so you can earn higher returns.

Why should you tokenize your property?

Digital asset tokenization has many benefits, but two key ones are worth considering today. First, the minimum threshold for investment has been significantly reduced. The investor may not buy the entire property, but only a certain part of it. For example, tokenization allows you to divide an object worth $1,000,000 into shares (tokens). Each investor can purchase a certain property and receive the corresponding profit.

The second key advantage is better liquidity and, as a result, secondary trading. If the investor is not interested in further receiving dividends and the value of the object has increased, he can simply get rid of his tokens by selling them. Now there are two options for selling tokens:

P2P transactions. These are private transactions between two parties, a buyer and a seller. They can find each other through message boards and make a deal.

Decentralized secondary trading. This is a safer way with liquidity pools. In this case, transactions are regulated by smart contracts, that is, the level of fraud is minimal. One such solution is DS Swap by Digishares.io .

From the point of view of a property owner who wants to tokenize real estate, the main advantage is that the offer will be of interest to more investors. The threshold is lower, the conditions are easier, which means more investors will be ready to invest in your property. Accordingly, you will receive the necessary funds faster.

Basic real estate tokenization model

Let’s look at the basic real estate tokenization model first. By itself, the token does not confer ownership of the asset. If this were the case, investors would need to obtain the proper property documents. Because of this, flexibility and the ability to easily exchange can be lost. Every transaction in any state requires entry into the real estate register, so direct ownership of real estate is inefficient.

Asset tokenization is not done directly. In essence, you get tokenized shares in a company that owns this or that property (this is called a Special Purpose Vehicle). This option is more flexible as some countries allow securities to be stored on the blockchain. In this case, there is no need to report to the regulators on each transaction, which makes it possible for thousands of investors to participate, and an active secondary market opens up.

It is important to understand that not only property that is located in jurisdictions that allow the storage of securities on the blockchain can be tokenized. In Switzerland, Liechtenstein or any other progressive country, one can set up a holding company that owns real estate in the desired country, or own a company that owns real estate in the desired country. There may be different forms depending on local laws and regulations. Digishares.io helps to choose the optimal model and jurisdiction during consultations for companies considering real estate tokenization.

What protection is provided for investors?

Security tokens are legally considered securities. Accordingly, they are subject to all legislative norms in force in a particular state in relation to securities. In addition, when buying tokens, a special contract for the sale of tokens is concluded. Please note that the Digishares.io tokenization infrastructure includes the stage of signing an agreement to purchase a token. This document provides additional legal protection.

The owner of real estate is always a legal entity. And it also provides additional protection. If the company has all the documents in order, there are no legal problems, then the rights of investors are protected. Such companies are required to distribute real estate profits among token holders. If the organization does not fulfill its obligations, investors can go to court.

Advanced Real Estate Tokenization Models

In addition to standard tokenization models, there are advanced ones that may be even more interesting for investors. Of these, the following can be distinguished.

Pick-up-then-buy model

One of the main problems reported by Digishares.io customers is the transfer of real estate from an individual to the company’s balance sheet. This is quite an expensive procedure and the price can be as high as EUR 30,000, which makes tokenization more of a challenge. One solution is to pass these costs on to investors. However, you first need to raise funds and then buy real estate using the proceeds from the sale of digital assets.

It is important to focus on two aspects – obtaining guarantees for the purchase of real estate and financial attractiveness. The first aspect is solved by concluding a special booking agreement. The second nuance depends on the value of the property. If it is relatively low, then the $30,000 premium will be tangible to investors in terms of their returns. However, if we are talking about very expensive projects worth several million dollars, the amount of re-registration will have little effect on profitability.

Segregated Portfolio Company Model

A segregated portfolio avoids the need to create multiple companies for each asset. One legal entity is enough. As a result, costs can be significantly reduced. However, there are certain risks, such as the inefficiency of any facilities. If one of the properties does not make a profit, the company will have to pay dividends from efficient properties owned by other investors.

However, this problem can be solved by dividing the balance. The balance in this case should be maintained separately for each type of property. With the help of tokenization, it is possible to issue separate securities for each separate real estate segment.

Conclusion

Real estate tokenization is one of the best options for attracting real estate investments. Property owners can attract investments faster and expand the pool of investors by lowering the entry threshold. There are several tokenization models, and each company can choose the most suitable one for itself. All approaches have their advantages and disadvantages. It is important to study them in detail in order to choose the best option. An experienced consulting company with successful tokenization cases can help you with this.

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