Ownership of building fragments and real estate development are among the areas for the introduction of blockchain technology to the real estate business.
Ownership of building fragments and real estate development are among the areas for the introduction of blockchain technology to the real estate business. From democratizing access to real estate investment to increasing market liquidity, it must be said that tokenization has a net positive effect on real estate. Tokenization through partial real estate investments is also another example of a burgeoning “sharing economy” that appears to be promoting collectively funded properties, a trend that could contribute to the decentralization of global asset markets into multiple sectors. With millennials, the first generation of digital locals entering their prime, the digitization of the real estate market may have more market interaction than this particular demographic.
However, as with any partial ownership in general, token investment in real estate has its drawbacks. Due to the new nature of the company, financing options can often be limited, resulting in lower market liquidity and a general lack of flexibility. Basically, a fraction is a subsidiary of Hong Kong fintech firm Fraction Group which has received regulatory approval from the Securities and Exchange Commission of Thailand to trade tokens, which have partial ownership of physical and digital assets. While the approval includes tokenized investments in physical and digital goods, Faction’s initial focus will be on partial real estate investments and the Initial Fraction Offer (IFO) will be used.
According to the company’s announcement in September, IFO will make it easier for future investors to enter the high-end real estate market. The IFO token will represent partial ownership of a luxury real estate offering for just $150, which is likely to lower the barrier to greater market participation. In January Faction listed its first property on its own stock exchange platform, an apartment in On Nut, Bangkok, Thailand. According to information on the company’s website, the process involves full digitization of the deed of ownership, followed by sharing of ownership before offering token ownership to these factions via IFO.
During an interview with Josh Stech, co-founder and CEO of Sundae, a platform for the digital residential real estate market, highlighted the benefits of tokenization and partial market ownership. “Investing in residential real estate is one of the greatest opportunities for creating wealth and is, unfortunately, especially available to the wealthy,” Stech said. “Blockchain housing tokenization promises effective and open access to the largest asset class in the United States not only for young people, but also for anyone who wants to invest in real estate without the funds for an entire real estate deal.” With crypto and blockchain technology, Stech said that tokenization will serve to lower the barrier for investors to make partial investments in real estate. “While mutual funds and real estate platforms offer several investment opportunities, they are hard to find, difficult to value, illiquid and only accessible to accredited investors,” added CEO Sundae.
Real estate tokenization is still in its infancy and remains a niche aspect of the market. Industry insiders say there is tremendous growth potential with UK accounting network Moore Global, which forecasts the tokenized real estate market could reach an estimated $1.4 trillion by 2026, versus tokenization of just 0.5% of the global real estate market today. While the token space shows promise for real estate, there are some key issues that need to be addressed. Lack of liquidity, especially in the secondary market, institutional fluctuations and lack of regulatory clarity are among the main barriers to this.
According to Tal Elyashiv, founder and CEO of blockchain-focused venture capital firm SPiCE VC, small-scale real estate ownership via tokenization is still a long way off. “I believe that in order to scale up the real estate tokenization market, we need to see another level of institutional comfort with tokenized assets, which is expected soon. There is already an entry of institutional grade projects in the market. The market must also experience innovation in the field of dedicated real estate platforms that make it possible to invest in pegged real estate values without investors having to deal with the basic complexities of blockchain. The founder of SPiCE VC added that this dedicated platform that trades the value of tokenized real estate is essential to increase market liquidity. According to Elyashiv, such a platform would make investing in symbol-based real estate more intuitive.
For now, the tokenized property remains fragmented with the various projects offering their own rather limited platforms, while unclear regulatory provisions change from time to time. However, there are some important developments in the market. In the summer of 2020, Overstock’s regulated exchange platform tZERO began trading security tokens partly owned by a luxury Colorado resort. The launch attracted record trading volumes at the time, but the initial excitement was likely muted by the market slowdown caused by the coronavirus pandemic. In September, RealX, a fintech company based in Pune, India, introduced a blockchain-based registration system to enable partial ownership of real estate in the country. According to a previous report, tZERO has also partnered with real estate finance firm NYCED Group to symbolize $18 million worth of real estate.
The increasing demand for shareholdings can be a trigger that stimulates greater acceptance of tokenized real estate. With the turn of the millennium as the world’s dominant consumer demographic, mutual funds steeped in the ethos of the sharing economy could become even more popular in the next few years. The current growth of the sharing economy appears to be at least partly due to accessibility rather than the ownership structure that characterized older economic models. This penchant for access-based services has in several ways contributed to non-business success, such as attracting passengers, co-financing content, streaming entertainment, and more. With cryptocurrencies, service providers and the millennial consumer class likely have the right mechanisms in place to stimulate token-based fractional ownership.