Blockchain in real estate is restoring much-needed transparency and efficiency in the core real estate operations. But also, blockchain is transforming real estate investment processes.
This article will walk you through how private permissioned blockchains implement property tokenization, fractional ownership, and crowdfunding to ease real estate investments.
Types of blockchain
Public permissionless blockchain
A public blockchain is an open distributed ledger network which is an open network. It operates without a central owner and allows anyone on the internet to participate without any restriction.
Private Permissioned Blockchain
A private permissioned blockchain is a distributed ledger that operates under a single central authority. It does not allow permissionless participation in the network.
Blockchain in real estate investment
How is private permissioned blockchain transforming real estate investments?
Private permissioned Blockchain provides a protected platform for safe investments
Tokenization for real estate and crowdfunding
Blockchain in the real estate industry utilizes innovations like tokenization, crowdfunding, and fractional ownership.
Real estate tokenization is the process in which real estate assets are converted into blockchain tokens or security tokens. Then, a blockchain ledger securely records these.
Hence, these security tokens act as a digital representation of the physical asset.
Such tokens represent several shares for said assets. Therefore, the owner can trade these tokens to investors via a distributed ledger for crowdfunding opportunities worldwide.
This is known as Security token offering (STO). Investors can purchase these tokens, or “micro-shares” and become fractional owners of that asset.
The digitization of assets and their direct trading between owners and investors does not require any middleman. Here, investors get direct partial ownership of the asset.
Hence, they can participate in cash flows, capital appreciation of assets, and other property management tasks.
The steps for tokenization are as follows:
- Identification of assets – this involves the identification of the real estate asset and its acquisition, financing and appraisal.
- Smart contract formulation– the creation of a smart contract that complies with securities law.
- Token creation– the number and type of tokens to be issued and the platform for the exchange is decided.
- Marketing and distribution– advertising of the token offering, confirming the authority of investors and listing of tokens on the exchange through a security token offering (STO).
- Post listing support – ongoing support to investors and distributing profits and other rights to payment.
Benefits of blockchain based tokenization:
Asset tokenization generates a win-win situation for both the owners and investors.
An asset owner can easily digitize their security and trade it to a wide pool of global investors for crowdfunding. As a result, they can access capital much faster.
Kalyuzhnova reports it requires almost 15 days for property transactions to complete due to complex paperwork and middlemen. However, a private permissioned blockchain uses smart contracts to secure the agreement terms in its distributed ledger.
A Private permissioned blockchain automates transactions without consensus among participants. Moreover, digital tokenization of their security enables the owner to connect to overseas investors.
Fractional ownership opportunities also attract a wider number of investors who could not access investment properties due to their illiquid nature and a higher cost of investment.
The owners also have the authority to tokenize a certain fraction of their assets, while retaining the majority to themselves. Hence, they can raise funds via tokenization to develop the property they own.
Buyers and sellers can use blockchain-based smart contracts to ease the purchase and sale of real-estate tokens.
And, smart contracts are legally binding that allow transparent transactions.
Furthermore, property owners can enjoy automated enforcement of the terms of the agreement in a cost-effective way.
Real estate Investors:
Tokenization of security, crowdfunding, and fractional ownerships unlock real estate investment opportunities like never before.
Capital requirements in real estate investment are higher than other securities.
Pillsbury reports that although the Global real estate market is around $228 trillion, only 7% is currently available for investment to retail investors. The same report shows only 3% of the global population has invested in real estate.
But, blockchain in real estate investment converts a previously illiquid asset to a liquid one. This lowers the bar for entry into the market for every investor.
Blockchain technologies subdivide the underlying code in the digital token. This allows the owner or the investor to sell a fraction of the shares at a reduced cost. As a result, smaller investors can enter the market at a minimum investing cost.
Fractional ownership of security and assets allows investors to earn steady rental income from rental properties. Moreover, they can sell fractions of their asset at any given time. Hence, their asset has higher liquidity.
Blockchain-based Smart Contracts also legalize the discussed terms of transactions including trade conditions and asset description.
Next, private permissioned blockchain platforms and smart contracts ensure data protection. Therefore, real estate investors enjoy transparent and reliable investments.
Benefits of private blockchain in real estate investment:
Private blockchains simplify real estate transactions
- Speed and cost-effective:
The smart contract protocols remove intermediaries and lengthy paperwork. Hence, real estate transactions not also speed up but also become affordable.
- Greater liquidity:
Blockchain-based tokenization of assets and the easy conversion of shares into fiat allows greater liquidity flow.
Security Token Offerings also enable an easier exchange of shares between sellers and investors in secondary markets.
- Reduces transaction-related risks:
In a Blockchain, a token contains a smart contract algorithm that has the terms and clauses of the agreement. And, it also contains an immutable ownership record of each token.
Therefore, it ensures data protection and reduces the risk of record tampering.
- Facilitates market access:
Tokenization and fractional ownership lower the minimum investment requirement to a great extent. Hence, small and mid-sized investors can enter the real estate market globally. As a result, the global trading volume increases largely.
The Lilypads Bottomline: Blockchain in real estate investment is the future of the real estate industry
Blockchain in real estate has largely transformed investment processes. Tokenization, fractional ownership, and crowdfunding have changed the traditional arrangement of security trading.
Dailyhunt.com reports that between 2016 to 2017, tokenization caused the property investment sector to grow from 7.4 trillion USD to 8.5 trillion USD. In 2025 the global real estate market will be able to earn a revenue of at least 4.2 billion dollars through tokenization investments.
Blockchain offers a transparent, hassle-free, and cost-effective way of transactions. Moreover, real estate investors can benefit from a safe trading platform.
Hence, it can unlock investment opportunities in the market and pave the path for a true revolution of the industry.