Real estate has historically been one of the favorite asset classes for wealthier investors, with brick and mortar buildings offering long-term stability, a hedge against inflation and portfolio diversification. As a rule, real estate assets tend to appreciate over time, and that makes them extremely attractive.
There are lots of pros to investing in real estate, but only if you can afford to do so. Unfortunately, not everyone can. Property is a great example of a highly “illiquid” market, being expensive to access and burdened by regulatory complications. You need lots of spare cash lying around to buy a prime piece of real estate, or at least, that used to be the case. But tokenization is challenging that idea.
When real estate is turned into digital tokens, it opens the door to a new financial model that enables fractional ownership of property assets, increasing liquidity and making the market more accessible to retail investors.
Tokenized real estate is any property that’s represented by digital assets on a blockchain. To tokenize a property, all you need to do is create a new cryptocurrency or NFT collection, where each one represents a share in the corresponding apartment, hotel, vacation home or whatever piece of real estate is being tokenized. You then draw up some kind of legal documentation that ensures token holders can enforce their ownership rights, and you’re good to go.
With tokenization, we have a more efficient and transparent way to crowdsource real estate investing and ownership. A luxury beachfront rental property that costs $1 million to purchase outright can be represented as one million digital tokens. In such a case, each token holder owns a millionth of a share in that property, and by holding the asset, they’re entitled to a proportional share of the rental revenue it generates.
These tokens can be traded freely via a decentralized marketplace, allowing investors to buy and sell their shares in a transparent, verifiable way without intermediaries or paperwork.
Investors will be able to acquire these tokens individually, dramatically reducing the cost of exposure to real estate assets. For example, an investor might buy up $2,000 worth of tokens for our luxury $1 million beachfront property. By holding those tokens in his or her digital wallet, the investor will receive a regular share of the income it generates from rent payers, each week or month or annually, according to the smart contract that handles these transactions.
There’s a lot of interest in this new model, with a recent forecast by CMI estimating that the market for tokenized real estate will grow from $3.5 billion in 2024 to more than $19.4 billion by the end of 2033.
If that sounds optimistic, it’s because there’s already a great deal of work being done in this area. ICB Labs is one of the most promising real estate tokenization projects, building the underlying secure blockchain infrastructure to support digital asset markets.
As a research-driven organization, ICB Labs has identified tokenized real estate as one of its major priorities. To support this nascent industry, it has developed a highly robust and scalable proof-of-stake blockchain with an integrated and efficient tokenization platform that makes it simple for anyone to create digital tokens representing real-world assets.
With ICB Lab’s infrastructure, the native $ICB token can be used as the primary payment mechanism for peer-to-peer real estate transactions. Investors will pay $ICB tokens to acquire tokenized properties directly, without any middlemen, meaning lower fees. Moreover, the rental income from these properties will also be converted into $ICB tokens and redeemed into investor’s wallets. To facilitate this economy, ICB Labs has developed a broad supporting ecosystem of services, including a platform for creating NFTs that can represent tokenized real estate, educational services and a blockchain-based identity system to ensure regulatory compliance. To date, it has accumulated more than 23,000 KYC-verified users.
The fact that ICB Labs has plenty of rivals in the tokenized real estate industry illustrates just how big the potential for fractional ownership really is. For instance, a European startup called Blocksquare is focused on building decentralized markets for tokenized commercial and residential properties, offering global investment opportunities for forward-thinking investors. Meanwhile, Dubai-based Propchain provides access to fractional investments in real estate in the United Arab Emirates and several European countries. There’s also Lofty, which is based in the U.S. and enables anyone to invest in tokenized properties with as little as $50.
Increased accessibility to previously illiquid markets is one of the major advantages of fractional ownership. By acquiring digital tokens, smaller investors who lack sufficient capital to buy a property outright now have a way to access the market for the first time. In doing so, they can participate in potentially lucrative investments and, at the same time, diversify their investment portfolio, away from traditional stocks and shares and commodities.
Property developers also benefit, because tokenization allows them to obtain funding from a different pool of investors. Traditionally, a property developer in, say, Montego Bay in Jamaica would have only limited opportunities for raising capital – either local banks or investors. The lack of options means they have to agree to less favorable terms to obtain that capital. But by tokenizing their project, they can access a global pool of investors and gain much more favorable terms.
Blockchain can also provide alternative financing options for homebuyers. Instead of approaching their bank for a mortgage, a prospective homeowner could obtain a loan using a decentralized finance protocol, putting up the house they’re buying as their main collateral. The property will be tokenized, and so long as the homeowner repays the loan, they will get to keep their tokens. Should they default, the tokens would instead go to the investors who put up the capital for their loan, enabling them to sell the property and recoup their investment in the event of a default.
Another benefit of blockchain-based real estate transactions is security and transparency. The blockchain is a public digital ledger that records every single transaction and can be viewed by anyone. Because it’s operated by a distributed network that requires every node to agree, it’s impossible to alter these records, making it more resilient to fraud.
With real estate tokenization comes more liquidity. Typically, to sell a house, the owner has to hire a real estate agent and put the property up for sale on the market, then sit and wait for interested parties to come and view it. Once they’ve found a willing buyer, which can take weeks, they’ll have to wait further weeks for all of the paperwork to be completed, the buyer’s loan to be approved and so on. It’s extremely slow, and that’s why real estate assets are considered to be illiquid.
A tokenized property, on the other hand, is highly liquid. Because transactions are so fast and there’s a much lower barrier to entry, it’s possible to sell a tokenized property – or a fractional share of it – in a matter of minutes. Users simply list their tokens for sale, and anyone interested in buying them can go ahead and do so instantly. This makes real estate much more liquid than before.
Tokenization means that real estate as an asset class is no longer restricted to high-net-worth individuals, accredited investors and hedge funds. Now, anyone can get involved as a fractional investor. It’s a transformational model that’s going to change the way we think about real estate ownership and make it far more accessible by breaking down financial and geographic barriers.
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