The real estate industry has always been resistant to change. Endless paperwork, Time-consuming transactions, in-person meetings, and manual due diligence make industry operations notoriously slow-moving. However, in the post-COVID era, technology has made inroads in every market and industry and real estate is no different. And, herein comes Web3 in commercial real estate.
The third wave of the internet or Web3 is building a new Digital real estate ecosystem that relies on Blockchain, NFTs, Metaverse, Crypto-mortgages, and so on. Not only does Web3 in commercial real estate bring an innovative and immersive impact on traditional property transactions, but the increased digitization of real estate is gradually streamlining, securing, and democratizing property investments.
In this article, we will delve into the various impacts of Web 3 in Commercial real estate and how it will impact CRE businesses and operations in the near future.
What is Web 3.0?
Web 3.0 is the next generation of the internet. Based on blockchain technology, Web 3.0 is an upgrade of the existing version of the internet (Web 2.0). Its main objective is to provide a decentralized internet that allows users to securely store information and data without being controlled by a central authority.
By integrating machine learning and artificial intelligence technologies, Web 3.0 provides its users with a semantic web experience i.e web apps are more intuitive, connected, and intelligent.
Features like 3D graphics, permissionless, and decentralization are transforming industries by creating a virtual world that is not governed by centralized authorities. Moreover, it helps in eliminating intermediaries.
From the commercial real estate perspective, these features are opening doors for virtual real estate investment.
The trends of Web 3.0 in Commercial Real Estate
With the introduction of blockchain technology, the commercial real estate sector is finally embracing technology after decades.
Blockchain technologies like NFTs, smart contracts, cryptocurrencies, and now Web 3.0 are about to transform the industry entirely.
Here are 5 latest Web 3.0 trends in the commercial real estate sector:
1. Asset Tokenization
The concept of tokenization came into existence with the introduction of blockchain and NFTs (non-fungible tokens). It is noteworthy that the main reason behind the growth of NFTs amongst investors is tokenization. This is because it helps in increasing efficiency, liquidity, globalization, and lowering entry barriers.
In commercial real estate, the concept of tokenization refers to the conversion of commercial properties into digital real estate or unique tokens. In converting an asset into a token, all ownership details and rights are transferred to the blockchain’s digital ledger.
In contrast to traditional real estate investments, tokenized assets are much more convenient. The steps involved in real estate asset tokenization are:
- Deal Structuring – Selecting the right type of asset to tokenize. For deal structuring, it is important to consider ROI timeframes, cash-on-cash returns, and investment security.
- Legal Structuring – To digitize real estate, a legal wrapper needs to be created over the individual property to securitize and form an investment vehicle. Some of the common structures are Real estate funds, REITs, and SPVs.
- Selecting the right platform and technology – Selecting the right real estate blockchain platform for asset tokenization and programming smart contracts to automate compliance checks with relevant legal regulations and program the behavior of the tokenized asset.
Connecting tokenized assets to required systems such as crypto wallets, payment gateways, KYC/AML verification services, etc.
- Distribution and Marketing – This stage focuses on the generation of tokens and distribution and provides several payment options for buying tokens.
Tokens are minted and awarded to investors during primary distribution in return for capital. Smart contracts oversee the token management processes such as shareholder voting and dividend distribution.
Listing tokenized assets on an exchange platform to enable secondary market trading.
The tokenization of commercial real estate has resulted in increased security, liquidity, and fast settlements. This results in an increase in investment. The Global tokenization market size is expected to reach $5.6 billion by 2026.
Furthermore, tokenization allows you to divide the property into tokens/shares that are sold to investors to raise funds. This brings us to the next trend – fractional ownership or fractional investment
2. Fractional Investment
Besides asset tokenization, Web 3.0 also provides real estate investors with fractional investment opportunities. Commercial real estate has always been an investment sector that requires extensive capital. Thus making it out of reach for normal investors.
Tokenization of commercial real estate properties allows investors to invest in shares (fraction) of an asset. Investors can purchase shares/tokens with prices as low as $100, thus making them accessible to all investors.
The fractional investment process is faster than traditional real estate investment. It eliminates the need for intermediaries, and the hassles of paperwork, bureaucracy, and effort.
Moreover, investors can also purchase and sell tokens seamlessly, thereby increasing liquidity in the investment. Other benefits of fractional investment include passive income and portfolio diversification.
As a result, millennials are turning towards fractional ownership of CRE assets for a stable yet affordable investment.
You can learn more about fractional investment by visiting our blog.
3. Smart Contracts
Smart Contracts are self-executing digital deeds that run on a blockchain platform. It contains the terms of an agreement between buyers and sellers written in code which are activated once the conditions are met.
For instance, in tokenization, the tokens represent the information of buyers and sellers, the percentage of property ownership, records of purchase, and other necessary details. All this information is stored on a distributed ledger network with the help of a smart contract.
Moreover, smart contracts help in making transactions more secure, accurate, and faster while eliminating intermediaries’ expenses.
Check out our blog to know more about Smart Contracts and how to use them.
4. Crypto backed Mortgages
Besides tokenization of real-world assets, investors can also participate in virtual lands and properties in the Metaverse. Virtual lands are one of the most appreciating digital real estate assets.
Virtual real estate assets open opportunities for crypto investors as well. Crypto investors have long wished to be able to use their cryptocurrency holdings for commercial real estate investment.
However, investing in such assets is also capital intensive as the prices of these digital assets have been increasing constantly. With Decentralized Finance(DeFi), investors can lend and borrow against collateral like NFTs or in this case, virtual real estate.
5. Peer-to-Peer Marketplace
Web 3.0 in real estate provides a peer-to-peer marketplace by utilizing blockchain’s decentralized network. It allows property owners to easily sell a fraction of their real estate-backed NFT directly to buyers eliminating the need for intermediaries.
With the inclusion of a peer-to-peer network, owners of tangible and digital assets will be able to deal directly with their peers on complex financial transactions.
Lilypads has embraced these latest trends to help you modernize your real estate investment. As one of the top digital real estate companies, Lilypads is offering investors products like Trustokens, DigiTrust Wallet, and Lilypads Securities to buy tokenized real estate and explore lucrative opportunities for virtual real estate investing.
Check out our blog to know more about what Lilypads is offering to digitize your real estate investment using blockchain and Web 3.0 technologies.
Web 3.0 impact on Commercial Real Estate
Web 3.0 is yet to make an official introduction in commercial real estate but is already leaving a significant impact on the industry. While some Web 3.0 applications are improving existing processes, others are introducing fundamental changes such as:
1. Redefining Ownership
The process of purchasing a traditional real estate property is complex, time-consuming, costly, and involves several intermediaries. Web 3.0 has the potential to remove all these obstacles in the process of real estate investment.
The tokenization of real estate assets has not only made commercial real estate investment accessible but also redefined ownership. Since ownership is enforced by a distributed open ledger, property ownership on the blockchain network is authentic.
Moreover, tokenization leads to fractional investment which opens doors for fractional ownership opportunities.
2. Easier Transaction and Settlements
Web 3.0-based platforms in commercial real estate facilitate a seamless and efficient transaction process.
In a blockchain network, user transactions are automated through smart contracts, enabling faster, more secure, and more cost-effective commercial real estate investments.
Smart contracts also manage timely payouts directly to investors’ wallets during the event of a sale or reinvestment of digital property or tokens.
Furthermore, using cryptocurrencies as a mode of payment provides opportunities for crypto investors to invest in digital real estate.
3. Data Monetization
The commercial real estate industry is built upon data and historic records. Investors use these data for performing due diligence and calculating metrics such as ROI, NOI, cap rate, etc.
However, these property-related data are gathered by large companies and third parties that are later sold to investors for a profit.
Introducing Web 3.0 will allow investors to get access to any property-related data stored on the blockchain network. This frees them from the shackles of historical data aggregators that charge tens of thousands of dollars a year for the service.
Moreover, by integrating technologies like data analytics, real estate professionals can benefit from large sets of data available at a much cheaper cost. Thus making commercial real estate investments more efficient.
4. Fund Managers Replaced by DAO
A commercial real estate firm requires huge capital to purchase properties and portfolios. Generally, the firm hires fund managers to raise such huge investment capital from high-net-worth individuals or giant companies. In return, the fund manager keeps a percentage of the fund raising.
A Decentralized Autonomous Organization (DAO) makes it easy for investors to bypass traditional fund managers. Every member of a DAO holds the right to vote and make decisions on proposals, thus eliminating the control of a central authority.
DAOs collect funds from each member generally in the form of cryptocurrencies which are later invested in commercial real estate. As a result, DAO members make more profit by removing fund managers.
5. Metaverse – A New Real Estate Investment Sector
Blockchain and Web 3.0 have made it possible to invest in virtual properties and assets existing only in the virtual world also known as the Metaverse.
Web 3.0 has made us rethink real estate investment with the help of NFTs and cryptocurrencies. NFTs in the metaverse could mean any kind of virtual property such as virtual lands, properties, items, art, or anything of significant value.
Metaverse platforms like Decentraland and Sandbox allow their users to take part in virtual land and properties which have the same features as real-world properties.
The main benefits of investing in virtual properties are:
- Properties in the metaverse are highly liquid assets
- High appreciation.
- Doesn’t require maintenance or construction expenses.
- Supports globalization
6. Impact on Multifamily
Multifamily is considered one of the top real estate asset classes. A multifamily property facilitates several tenants and generally requires a property manager for various tasks like collecting rent from the tenants.
Signing lease agreements on smart contracts automate rent collection processes. Thus, saving owners from the expenses of hiring property managers.
7. Impact on Retail Industry
In the aftermath of the COVID-19 pandemic, more businesses are shifting towards an online presence. By providing virtual tours, technologies like virtual reality and augmented reality (AR/VR) improve user experiences.
The adoption of Web 3.0 technologies in commercial real estate has not only provided retailers with an alternate solution but also a way to strengthen their brand name.
The Lilypads Bottomline
The future of Web 3 in Commercial real estate is inevitable
Although blockchain and Web 3.0 technologies are still in their infancy, they are increasingly disrupting the commercial real estate sector.
Concepts like tokenization and fractional investments help in broadening the spectrum of investors and open doors to new investment opportunities that were previously inaccessible.
Thus, Web 3 in commercial real estate ensures that the future of the industry is tokenized, free, decentralized, and transparent.