How to invest today in the future’s real estate market
Investment in tokenized assets
Not a day goes by without hearing about “Security Tokens” and their public offerings (STOs). In most cases, these are newly created companies that issue shares or bonds in the form of tokens in order to collect equity or debt capital. However, more and more blockchain projects are targeting real estate rather than business. The possibility of fragmenting and making real estate negotiable through tokens promises new opportunities for investors of all kinds.
As a reminder, tokenization is mainly a process of digital securitization of the ownership of certain goods, assets or rights. In short: practically anything can be tokenized. It doesn’t matter if it’s stocks, blocks of apartments or licensing rights for musical works.
The largest market in the world
Before you start thinking about how to invest in a market, you have to find out about the volume and potential of that market.
In this specific case, it is good to know that the largest asset class in the world is not stocks or bonds, but real estate. According to the real estate service provider Savills, real estate represents about 60 percent of all global investmentand just under three times the global GDP.
The potential of this giant market, on the other hand, is much less exploited than that of other asset classes. Therefore, there is a big difference between the potential market volume and the actual market volume, i.e. what investors have access to through markets and financial products.
As it can be seen, most of the capital tied up in real estate is not available at the markets.
In principle, this is not a problem. After all, most properties are residential, and their residents have little interest in participating in the financial market with their property in any way.
However, there are enough properties and planned real estate projects that would benefit from greater efficiency and accessibility to the market: there is dormant capital in the order of several billion euros waiting to be awakened.
By reducing transaction costs and other obstacles, this capital that was previously inaccessible to the financial sector due to the restrictive nature of the market can be released.
In this context, the following questions arise in the field of tokenization and real estate:
- Why should/does tokenization improve efficiency and accessibility to the real estate market?
- What is the most affected area of the real estate market?
- How can private and individual investors participate in the evolution of the real estate market through tokens?
Tokenization: how can investors benefit?
Asset securitization through tokens has several advantages over traditional securities.
For example, by reducing the costs of issuing a security through tokenization, real estate can be taken into account in financial instruments that previously could not be securitized in an efficient manner.
In addition to that, an IPO in tokens can be feasible for a small or medium sized company by reducing transaction costs. A reduction in market entry costs can also mean new financing and real estate investment opportunities with a smaller investment size.
Through a higher degree of automation, it is possible to make a public offer of Security Tokens (STO) for a fraction of the costs of a classic stock exchange float.
Similarly, tokenization of smaller real estate projects can be cheaper than conventional documentary securitization. This does not (yet) replace a registration in the Land Register or at the Public Notary, but it facilitates the subsequent negotiation with real estate shares.
Specifically, this allows, for example, for an investor to acquire tokenized shares in a property for only 50 euros and to benefit from the proportionate share of the rental income. Of course, a traditional, non-tokenized real estate fund can also be registered in a securities account.
A private investor can easily buy a share in a property development company that is listed on a stock market. However, this classic fund will contain a huge property portfolio and will only provide a moderate return for the small investor.
The same applies to the shares of a REIT. These large property managers usually offer little flexibility and transparency. In addition, ancillary costs, such as the initial charge and administration costs, are usually quite high in relation to revenues.
A new opportunity: investing globally
Nowadays, if you want to invest exclusively in your region, or even only in your residential area, you will have a hard time finding a suitable investment vehicle.
If an investor has enough liquidity, he can buy a specific residential property in his local area, but investors with a smaller budget are excluded.
Tokenization comes precisely to reduce these access barriers.
Standardized processes and service providers on Blockchain can also, for example, make individual apartment buildings or other developments accessible to a large group of investors, not only those with large capital.
The key is not so much to minimize the number of intermediaries but rather to implement a more profitable and fungible securitization through tokenization, which allows for affordable investment amounts for a large mass of small investors.
As an additional advantage, investors can benefit from increased liquidity in secondary markets.
Conclusion: advantages of tokenization
In summary, tokenization offers the following advantages:
- Fragmentation of property
- Immediate liquidity
- Increased liquidity and market depth, allowing better access for investors
- Use of smart contracts
- Automatic compliance with rules and regulations
- Increased transparency
- Lower transaction costs
- Asset interoperabilty
- Trading open 24 hours a day, 7 days a week
Join the revolution of the property market
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