A Simple Guide to Real Estate Tokenization in 2023
Traditionally, real estate is a desired yet illiquid asset. It requires substantial financial investments and drawn-out transaction procedures. Nevertheless, tokenization has changed the situation. Today, the tokenized property is rocking the market.
According to Atlas One, a Canadian-based digital securities company, the market for digital securities currently comprises around 40% or $200 million of real estate tokens.
Real estate tokenization is a new alternative that allows monetizing existing property and selling it to investors worldwide.
This article will help you understand what real estate tokenization is, its mechanisms, and its advantages. We also share our example of how we developed a tokenized real estate platform for a German company.
What is real estate tokenization?
Tokenization definition in real estate is creating blockchain-based tokens that reflect a part of real estate ownership, making it easier for smaller investors to make investments.
Real estate is referred to as being tokenized when a piece of property is broken up into digital tokens that reflect the underlying asset with all of its rights and liabilities.
It’s an emerging trend in the real estate industry that allows anybody to invest in properties of different kinds, be it regular residential buildings, luxury resorts, or even a historical part of the city. How? Let’s find out.
How does the tokenization of real estate work?
Property tokenization is frequently misunderstood.
Contrary to popular belief, owning real estate tokens does not grant holders the right to a particular property.
Flexibility and the capacity to be quickly swapped are lost if more people possess property directly. It occurs because each transaction would necessitate updates to the property registry, which are costly and time-consuming. Direct ownership of real estate assets is, therefore, ineffective.
Instead, you tokenize securities issued by a business that either owns the real estate directly or has a claim to it.
In plain English, the real estate is owned by a sort of corporation called a Special Purpose Vehicle, and investors possess shares represented as tokens. Such implementation is more flexible because it is possible to store shares directly on the blockchain in certain countries. Therefore, there’s no need to report each transaction to regulators. It makes having many different investors and an active secondary market more feasible.
It does not imply you can tokenize real estate assets in countries like Switzerland or Liechtenstein, which recognize securities on the blockchain. In a forward-thinking jurisdiction, it is conceivable to create a holding company that will either directly own real estate in your country or own a corporation there that does. The particular form is determined case-by-case and depends on the local real estate ownership laws and restrictions against double taxation.
While tokenizing real estate revolutionizes the real estate investment market, many investors and real estate agencies still prefer dealing with Real Estate Investment Trusts (REITs) instead. Let’s look into this traditional way of investing in real estate.
REITs as traditional real estate investment options
Real Estate Investment Trust is a corporate form enabling fractionalized investment in property. Retail investors interested in real estate can access these funds. They have a variety of benefits since they are taxed more favorably than conventional businesses, but they also have some disadvantages.
For example, REITs are prevented from purchasing new properties since they are required to pay dividends that can occasionally be as high as 90% (this is where their organizational revenue generates), according to the National Association of REIT.
They also have a limit on how much risk they will take for themselves while having a limited ability to use leverage. This accounting strategy makes it impossible to reinvest their earnings in purchasing or renovating other real estate assets, limiting the pool of investment methods and the investors’ potential return.
Real Estate Investment Trusts (REITs) allow participation in a pool of real estate assets managed by a single firm. It implies investors won’t choose what to invest in or the needed exposure. Furthermore, REITs necessitate extra commissions.
Finally, REITs have limited investing plan options. Their stop-loss triggers include risk and leverage, which results in a restricted potential return they can provide. As a result, REITs are unable to focus their strengths on a single sector of the economy (i.e., one specific form of real estate), which leads to poor results.
How do investors and owners benefit from tokenizing real estate?
Real estate tokenization is a much more attractive option than other investment types when it comes to operations with real estate.
Compared to real estate investment trusts, property tokenization offers significant benefits. It democratizes the investment process, grows the property’s value, and ensures liquidity and programmability.
Let’s check the benefits of real estate tokenization in detail.
Democratization of investments
The tokenization of real estate drastically reduces the minimum investment threshold. It represents the ownership of a building in the form of blockchain tokens. Therefore, one building can be owned by many people.
With tokenization, real estate investors can start with as low as $200 instead of a big amount to buy a property. This feature enables business owners to reach a new audience of potential investors and boost sales.
The pieces of real estate can be traded, which makes such investment opportunities even more attractive and finding investors easier.
It works the following way: once the property object’s ownership is put into a token, the given token can be broken into a range of smaller tokens, where buying one means investing in the property.
As opposed to real estate investment trusts, property tokens can get liquidity using decentralized finance tools but have fewer limitations, enabling them to deliver higher returns.
Growth in value
Tokenized real estate is usually seen as a long-term investment. Investors can receive stable payments from a real estate operation (such as rent) by owning a token.
In addition, investors can sell a token at a higher cost than initially bought if the project is attractive to other investors.
Programmable and understandable profit division
Numerous mechanics and instruments of blockchain can be valuable for investment management and income division workflow. If you have an established business, a smart contract will help simplify the real estate’s management and financial flows and make them more transparent.
For example, you can let investors jointly make decisions related to using real estate in which they have a digital share with the help of DAO (Decentralized Autonomous Organization). These people might be located worldwide and not necessarily know each other.
Tokenizing real estate management doesn’t require physical presence and numerous seals on documents.
In addition, by establishing an income distribution formula, you can be sure that investors will receive their income from using the real estate, no matter what. A smart contract will ensure honesty and timely payments.
5 types of properties that can be tokenized
There are five types of properties that can be tokenized. Let’s consider each real estate tokenization property type in detail.
1. Residential property
Except for luxury apartments, tokenizing this type of property in a single copy isn’t generally practical. However, what makes sense is issuing tokens backed by a set of apartments. Some alternatives include social or energy-efficient housing, which adds a social purpose to the investment, making it more appealing.
2. Commercial property
It may provide excellent profits if tailored to a correct market niche. Furthermore, most individuals cannot invest in commercial real estate, so such an offer would be in high demand.
3. Infrastructure projects
Typically, such initiatives are funded by large institutions. Still, tokenization means providing a new route aimed at lowering capital costs.
Given the expanding population, this is an asset with a fixed supply and increasing demand. Therefore, it has a lot of upside potential to attract investors.
5. Other property types
Besides land, you can tokenize yachts, airplanes, and other high-end items.
How to develop a tokenized real estate platform
As a product design company, we imply that developing a tokenized real estate platform involves creating a digital product users will interact with to buy, sell, and trade real estate assets through blockchain.
If you want to develop a platform for real estate tokenization, the following seven steps, defined by our product designers, will help you get started.
1. Discovery: define the scope and goals of your platform
Determine what real estate assets your platform will tokenize and the markets to target. We recommend answering the following questions while defining the scope of work for the future tokenized real estate platform:
- What does tokenization mean for your target audience?
- Will you focus on residential or commercial properties?
- Which countries or regions will you serve?
- What do you want to achieve with your platform?
For example, at Limeup, we start the collaboration by discovering the platform’s target audience, discussing functional and non-functional requirements, and defining the platform’s value.
Contact us if you need help designing and developing a platform for real estate tokenization.
2. Choosing a blockchain technology
Select a blockchain platform that supports smart contracts and can handle many transactions. A couple of popular and useful solutions for building real estate tokenization platforms include Ethereum, Polkadot, Binance Smart Chains and Tezos.
3. Legal stage
Tokenizing real estate assets requires compliance with local laws and regulations. Consult with legal experts in your target jurisdictions to ensure your platform is legally compliant.
4. Smart contract creation
Creating a smart contract is the cornerstone of the tokenization of real estate: this technical part will be further responsible for the platform’s usage terms and conditions, defining the token’s properties, and the token’s mechanics.
5. UI/UX development
Prototyping is a step that can be conducted parallel to smart contract development, as it’s an essential part of the entire technical process which includes conducting UX research, working with functional and non-functional requirements, and defining a user story. MVP-wise, it includes creating a dashboard for users to view their portfolios, track their transactions, and manage their tokens at the given tokenized real estate platform.
6. Beta-testing and security audits
Once you finish the design work, we recommend testing the platform thoroughly to ensure it functions correctly and meets the needs of your target audience. Testing should cover security audits to identify and fix any usability issues and vulnerabilities.
7. Deployment and maintenance
It’s time to launch the platform: this is when the engineering team makes it available for the target audience and when the SDLC is over. For a better experience, make sure to hire a customer support team: they will assist users with any questions or issues they may encounter while using your platform, contributing to a more seamless experience and client satisfaction.
Tokenized real estate platform development is a complex process, requiring knowledge and experience in blockchain technology, real estate markets, and legal compliance. If you want to create a real estate tokenization digital product, we recommend partnering with product designers, user experience researchers, developers and legal experts who have previously worked on similar projects.
Contact us if you need help with real estate tokenization design and development. At Limeup, we are ready to discuss your current needs, share how we work and define the next steps for your project.
Tokenization of real estate example
At Limeup, we’ve partnered with Blockch.in, a real estate tokenization platform from Germany. By breaking properties into smaller digital token units, Blockch.in aims to revolutionize real estate market liquidity. Our team’s task was to design and develop real estate web and mobile applications.
Here is what we’ve done step-by-step.
1. Conducted market research
Our team suggested developing a web application based on a thorough market study. The platform should simplify buying, selling, and tracking ownership fractions and revenue.
2. Designed information architecture
We determined the information displayed on each page and how pages should be linked. You can see an example of the information architecture we’ve created that explains the web application’s navigation flow.
Blockch.in information architecture developed by Limeup experts
3. Defined a user persona
At Limeup, we’ve created user personas to visualize the platform’s target audience with their goals, needs, motivation, and frustrations. User persona analysis was part of our extensive user experience research to collect valuable research insights and implement them during the design phase.
Blockch.in user persona created by Limeup experts
4. Conducted user interviews
Our UX research experts conducted user interviews to better understand users’ needs before creating a clickable prototype for usability testing and product design.
5. Platform design and development
After testing and iterating clickable prototypes, our experts started designing the platform for the tokenization of real estate.
While developing a platform for Blockch.in, we’ve extended the conventional tokenized platform functionality. Namely, we’ve developed functionality to enable users to control their property, keep up with the regulations more thoroughly, and manage their tokenized assets.
Contact us if you want a similar real estate tokenization platform solution or a custom one.
User interface design for the Blochch.in web application.
Looking for a partner to design a real estate tokenization platform?
Contact us if you need help with product design and development.
At Limeup, we are ready to assist you at every stage of the product design process, from ideation to user experience research, prototyping, product design, and implementation.
After filling out the contact form on our website, we will hop on a quick call to discuss your needs and define the right next steps.