Graana.com, presents a complete guide to tokenized real estate.
Digitalisation is the new trend taking over the real estate sector, like many others before it. The real estate sector is among the biggest industries in the world, valued at close to $280 trillion. To digitize this age-old industry, tokenized real estate is a concept that is heavily discussed these days.
Graana.com, presents a complete guide to tokenized real estate.
Tokenization is the fragmentation of a real-world property or asset into digital representations or tokens. These virtual Tokens represent the value of the property according to the dividend assigned by the creator.
It’s analogous to everyone getting a slice of cake but digitally distributed. It is comparable to the concept of Non-Fungible Tokens (NFTs), which is all the hype these days but involves a physical commodity that bonds the token to its value.
Tokenization is an advanced technology that is sometimes hard to wrap your head around. Tokenization is the digital distribution of assets so dividends can be paid according to the number of tokens a shareholder owns.
Digital tokenization is not an answer to all of the real estate industry’s problems in Pakistan. However, it offers promising new opportunities by creating new revenue streams. It is a method of raising capital as digital tokens can be exchanged for fiat or cryptocurrencies.
Blockchain technology is used to help with tokenization as it provides a safer space for transactions and storage of virtual tokens. It is the basis of the underlying technology.
Virtual tokens are categorized into three types, each having its own unique features and legalities.
The three types are as follows.
These are customized and multipurpose tokens that allow virtual access to applications and other services.
These tokens encompass rules and regulations on repayments, and loans and work with derivatives and structured products.
It is a digital depiction of a unique asset which makes the direct transfer of different non-fungible tokens impossible. This is further complemented by the unalterable nature of blockchain technology as these tokens ensure originality, authenticity, validity of transactions and transparency in ownership rights.
The traditional shares have been digitised on the blockchain framework via the security tokens. It provides the holder of the token the ownership rights. Thus, the trade and issuance involved with these tokens must be regulated carefully.
Payment tokens are coins that serve as a medium for conversion in transactions and the big names in the cryptocurrency world like Bitcoin and Litecoin are a few examples of these types of tokens. These tokens work in a similar way to the traditional supply and demand.
Moreover, the reciprocal nature of the supply and demand of these tokens decides their value. Theoretically, the finite number of Bitcoin that can be mined will cause a supply and demand misalignment which may potentially result in a major value boost for these coins.
Traditionally, the buyer would pay a small amount of good-faith money to assure the seller of his serious intention to strike a deal with him.
The token would be in either of the two forms; a less severe conditional token that places no penalty should any party back out of the deal, and the confirmed token in which the money or “bayana” has to be paid within the set deadline or else the defaulter pays the price.
With the tokenization process in the Blockchain framework, the transactions are irreversible and unalterable and thus the seller and the buyer cannot default on the transactions.
Tokenization is a revolutionary concept in the real estate industry that has the power to majorly disrupt this institutional industry. It offers a lot of benefits, some of which have been listed below.
The main benefit of digital tokens in real estate is that they allow higher liquidity for illiquid assets like real estate. There are a lot of transfer costs associated with real estate which hurt its liquidity. Tokenization can help increase that liquidity by a significant margin through trading on decentralized platforms.
Real estate is an expensive commodity, and in this age of rising inflation, it is very difficult for most people to own property of any sort. However, fractional ownership can solve that problem by allowing everyone to own a part of a property.
This divisible ownership approach paves the way to greater access and more efficient liquidity of the investment. Fractional ownership of property is something that can create a trillion-dollar industry even if it covers a fraction of the industry.
Tokens have a high transactional efficiency as they save cost. This efficiency in executing transactions is evident in fast processing speeds. The high upfront investment costs which included the commissions of the middlemen involved and documentation made traditional real estate investments a dream for the mediocre.
With the introduction of blockchain and cryptography, investors can transfer the ownership of the property without involving the closing costs that contributed significantly in normal real estate investments.
One of the most attractive features of the use of blockchain technology in tokenization of the property is transparency. It provides a high level of security to the concerned parties that prevent any individual or an organization from controlling or manipulating the transactions and records.
After gaining acquaintance with the authorities of the asset in consideration, there is no further need for registries and all the transactions will be known to the public which adds to the transparency of the whole process.
Since Blockchain technology brought about drastic reductions in investment costs, the industry is now more accessible to a multitude of investors. The processes are more streamlined which curtails the barriers posed by the inefficient procedures. The tokenization approach has opened the doors for investors globally at any hour of the day.
Fractionalization has allowed masses to invest in smaller cost properties more easily. The divisible ownership and the reduced costs are major contributing factors in the boom in the real estate industry.
Moreover, investors now have the opportunity to diversify their portfolios of investments. With a global market just a click away, they can now invest in varying assets of their choice.
The digitalization of the process has removed the intermediary processes of documentation, account opening, and dividend payments via the use of “smart contracts”. The use of smart contracts on unchangeable blockchain transactions also helps reduce the costs incurred and the fees involved at various stages of the ownership transfer.
Tokens have limitations, and there are some glaring ones which are highlighted below.
Since tokenization in real estate is a relatively new concept, regulatory procedures still have a long way to go. The varying perspectives on the value of the tokens can be a hurdle in the design of the regulatory framework.
Some organizations view them as security tokens while others consider them as currencies. Yet another group may see them as taxable objects.
The inconsistencies and loopholes in the regulations affect the credibility of the tokenization approach in real estate. This may deter the investors later down the line.
Cryptocurrency is a developing industry, and with the introduction of an alien concept of tokenization on top of that results in hesitation from investors. Since the market value of the digital assets is a gamble, investors can bet on the prices which results in huge market influxes and pitfalls.
The volatile nature of the cryptocurrency market is not a major risk when it comes to tokens as there is a physical asset associated with each one. This gives the investors more control and the overall processes have higher transparency and security.
The revolutionary nature of tokenized real estate is gradually beginning to present itself. A large pool of investors is taking an interest in this technology due to the provision of greater accessibility. This technology still has a long way to go, however, if it were to become large-scale and sustainable, proper regulations must be set in place to ensure its credibility.
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