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A Detailed Overview of Real Estate Tokenization

The game-changing blockchain technology has entered the realm of real estate too. Tokenization is digitizing an asset in the form of security tokens stored on a decentralized and distributed ledger. The token can be used for representing ownership rights, receiving interest income, or holding equity shares of the physical property. 

The Advantages Rendered by Real Estate Tokenization 

  • Facilitates fractional ownership – A property can easily be split into multiple fractions. Each part will be denoted by a specific number of security tokens. 
  • Eliminates barriers to entry – It permits any individual to own shares of the property by purchasing tokens. Hence, an affordable model of investment is ensured in real estate boosting accessibility for the common man. 
  • Ensures sufficient liquidity – It enables easy trading of assets on the blockchain network without any geographical or time restrictions. The Real estate sector which is considered to be historically illiquid gets a constant infusion of liquidity through the phenomenon of tokenization. 
  • Enables diversification – It enables optimum use of investments by allowing investors to diversify their portfolio by investing equity into multiple properties located in different parts of the globe. This is a unique approach offered through the concept of fractional ownership. 
  • Better financial inclusiveness – There is no need to hold a significant amount of wealth to become a part of real estate tokenization. Hence, everyone who has an interest in tokenization and satisfies the minimum capital requirements can wholeheartedly participate in the process and gain returns from his investment. 
  • Maintenance of transparency – Every single record is stored in a secure and safe ledger that is tamper-proof and immutable. This prevents any sort of corruption and induces a higher level of transparency into the process. 
  • Smooth compliance – Smart contracts ensure easy execution of operations whenever pre-defined conditions are met on the blockchain network between different participants. This enables automated compliance checks such as KYC (Know Your Customer). Hence, it eliminates the need for manual intervention in the process making it less time-consuming and cost-effective. 

Related: How to Tokenize Real Estate Assets?

Limitations of Real Estate Tokenization 

  • Inconsistent regulatory framework – The concept of security tokens is not being clearly regulated across the globe currently. Though blockchain eliminates all the intermediaries from the process, a regulatory compliance structure is urgently needed for optimizing the performance of Real estate tokenization. 
  • The requirement of licenced platforms – For the tokenization model to work successfully across different kinds of assets, it needs licenced and certified programs to manage the issue of Security token offerings. Hence, multiple trial and error tests have to be carried out through complex procedures before growing fully-functional. 
  • The need for robust security measures – Though the blockchain platform ensures complete security of users’ data, there needs to be a concrete mechanism for establishing custody solutions and figuring out the security for digital tokens. In case the users’ tokens get hacked or stolen, the consequences would be devastating. 
  • Tax implications – Though tokenization provides more inclusiveness to invest in the growing real estate market, tax regimes concerning cryptocurrencies have not been properly defined in many countries. This leads to more complexity in execution as the tax structure would be different across various countries triggering ambiguity among investors. 

Related: How to Tokenize Commercial Real Estate Asset

The Future in Store for Real Estate Tokenization 

The concept of tokenization is truly revolutionary to take the real estate sector to greater heights. But, it faces problems in large-scale implementation especially in operating at an industry-grade level due to uncertainty in regulations and rapid changes in market conditions. Many prospective real estate investors are not even aware of the potential of blockchain technology and the meaning of security tokens. Hence, since the industry is operating on a limited primary scale now, it will take a long time before getting adopted by the masses. There are also heavy concerns with the scalability of the technology. 

At the end of the day, it brings positive results for every stakeholder in the form of better access to capital, broader investor groups, improved market transparency, real-time ownership tracking, direct asset trading, and a higher level of control over owned properties. Hence, the entire real estate market can be streamlined in one shot with the help of tokenization and blockchain technology. 

In the future, it will attract more attention from investors and unlock the enormous potential for ambitious and profitable real estate development in the sector. Hence, investors have the full freedom to invest as much capital as they want by choosing from a wide range of global properties. This ensures the fragmentation of property ownership by promoting access to small-time investors. This would lead to a greater amount of funds raised and faster liquidation. Real estate tokenization can also significantly impact other forms of investment such as private equity and venture capital. Hence, the benefits offered by tokenization completely outweigh the shortcomings making it a force to reckon with for the future. 

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