Learn how to fund your next real estate project on the blockchain
Real estate asset tokenization is an emerging trend representing the convergence of real estate investing and blockchain technology. Tokenization helps asset or fund owners raise capital more efficiently, and gives investors unprecedented access to private real estate investments, transparency, and liquidity.
In this article, we’ll explain what tokenization means, how owners and investors can benefit, and how the tokenization process works.
Tokenization is a relatively new term used to describe a cryptocurrency fundraise in which investors exchange fiat or crypto currency for “tokens”.
In a nutshell, tokenization is one way to securitize real assets.
To securitize an asset means to divide it into shares that you can sell to investors. In the same way, to “tokenize” an asset is to divide it into shares, or “tokens”, that represent a predefined share of the underlying asset. They are therefore often called “security tokens”.
These tokens are secured through the immutability of blockchain technology, and they’re tradeable via crypto exchanges or Alternative Trading Systems (ATS).
When an asset owner decides to tokenize a property, an Ethereum-standard (ERC20) real estate token (also called a security token) is created to represent shares of the property. The total value of all tokens will be equivalent to the total value of the securitized asset. Let’s look at a simple example.
Suppose you want to tokenize a 100,000 sq ft property that’s worth $30M. A simple way to divide the property into shares is to offer one share for every square foot. So you would divide the property into 100,000 shares, each representing one square foot of the property and valued at $300.
Alternatively, you could divide the property into square inches, in which case each token would be worth $2.08. You might choose this option to make your project accessible to a wider range of investors. Of course, you could also choose to limit the share offering to a certain percentage of the asset – say 20%, to retain majority ownership while raising funds for a new wing or renovations, for example.
The next step is to sell the tokens to investors.
The initial sale of a security token is typically called a security token offering (STO). It’s also sometimes called a tokenized security offering (TSO) or a tokenized asset offering (TAO). But no matter what term you use, the result is the same.
ICOs offer investors a token, but this token doesn’t necessarily represent ownership inthe underlying asset or company. In many cases, the tokens sold are called “utility tokens” because they only have value on the company’s platform. Buyers are therefore “investing” to support the project and with the hope that, as the platform grows, the value of the tokens will increase.
STOs are distinct from ICOs because the tokens sold (security tokens) represent ownershipin a real asset. STO investors know the real value of the underlying asset they’re buying and benefit from any future price appreciation in the asset.
Some asset owners choose to sell their tokens via a crowdfunding campaign. For example,we worked with Indiegogo to launch the Aspen Coin, which represents fractional ownership in the St. Regis Aspen Resort. This campaign successfully raised $18M.
Another option is for asset owners to market and sell their tokens on their own. The best part about STOs is there’s no one way to do them. Asset owners are in complete control of how they want to market their STO.
Once tokens are created and sold to investors, they need to be listed on an exchange so investors can trade their tokens. There are not many listing options out there, but the list keeps growing.
Many of the most popular cryptocurrency exchanges are in the process of obtaining regulatory approval to list security tokens. Another option is to partner with an Alternative Trading System (ATS): These are FINRA-registered institutions that sometimes partner with tokenized security asset owners to list security tokens and provide their investors with access to a liquid secondary market. Our ATS partner is Templum Markets.
Keep in mind that a single token can be listed on multiple exchanges.
Tokenization removes the middle man, making it easier and cheaper for investors to buy/sell real estate and for owners/developers to raise capital. Investors can trade tokens almost instantly and for a very low fee (similar to stock market trades). For owners, tokenization makes it possible to raise capital without financial intermediaries to underwrite the project.
Real estate has historically delivered attractive returns, but it has high barriers to entry because the assets involved are so expensive. Investors in tokenized real estate assets get the best of both worlds: the high returns of real estate investments (even with a very small investment), and the liquidity of the stock market.
It’s also important to note that because real estate tokens are backed by real assets, they carry far less risk than cryptocurrencies or ICOs, which are highly volatile and speculative assets. What’s more, stabilization measures can be put in place to ensure the value of the security token does not deviate too far below the underlying net asset value (NAV) of the property.
The global real estate market is valued at US$228 trillion. Before the tokenization of real estate, only accredited and institutional investors had access to the most exciting projects. But now asset owners and developers can market their projects to retail investors as well as institutions.
Tokenization also brings much-needed liquidity and transparency to a traditionally opaque industry. The ability to trade shares in real assets, in real-time (the same way public companies are traded in stock markets) should attract more investor attention and unlock the potential for more ambitious and unique real estate developments.
Of course, investors can already buy and sell real estate investment trusts (REITs), but these often have high minimum investments and represent a large portfolio of companies rather than a single property or new development.
The tokenization of real estate is giving investors and owners alike the freedom to raise/invest capital how they choose. Tokenization will also impact other illiquid asset classes, like private equity and venture capital.
Read more about the future of tokenization in this Medium article written by SolidBlock CEO Yuval Wirzberger.
SolidBlock is a real estate tokenization platform that uses blockchain technology and the Ethereum network to create security tokens representing fractional interest in real estate assets.
To get started with your first asset tokenization, please complete our short introductory onboarding process and we’ll be in touch with more details. We’ll also be happy to answer any of your questions about the process.
