Real estate constitutes a significant portion of the global economy, but it is traditionally known for its high barriers to entry, lack of liquidity, and inefficiencies in management. However, it is undergoing a transformative shift thanks to the opportunities that blockchain technology and real-world asset (RWA) tokenisation bring. In this article, we guide you through the benefits and challenges that come with tokenisation, as well as the preliminary steps to take before tokenising real estate.
Fractionalised ownership: a true benefit of tokenisation
The primary advantage of real estate tokenisation lies in its ability to counter the traditionally illiquid nature of the market, thereby creating liquidity. This is particularly impactful for individuals seeking to venture into the property market or climb the real estate ladder. The introduction of fractional ownership emerges as a practical solution for those wanting to start or continue building their real estate portfolio, providing a lower entry point, a crucial factor in certain regions around the world.
The benefits extend beyond merely lowering entry barriers; they encompass the opportunity for individuals to kickstart or diversify their real estate portfolios. Fractional ownership allows investors to own fractions of multiple real estate assets, effectively spreading risk and enhancing portfolio resilience.
The role of community in tokenised real estate
In a communal sense, fractional ownership fosters a sense of pride and community engagement. Local residents can come together to co-own a share of a property, instilling a shared responsibility for the community's well-being. Nevertheless, the true value of tokenisation lies not only in lowering entry barriers but also in the returns it offers to investors. In return, the community gets to share in the benefits of sustaining these communities akin to participating in traditional loyalty programs. Thus, understanding the intended purpose of tokenisation and the process involved is pivotal for prospective investors.
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Real estate tokenisation: What to watch out for
Navigating user experience
While the prospect of tokenising real estate brings forth exciting possibilities and benefits to participants, there are noteworthy challenges. A significant hurdle lies in the current user experience, where individuals often grapple with the complexities of managing their wallets and private keys. The unfortunate consequence is the frequent loss of access to these essential components. As we strive for widespread recognition and adoption of tokenisation, the participation of all individuals becomes imperative. To achieve this, a user-friendly solution is necessary, one that extracts away some of the difficulties associated with using a traditional browser plugin.
One expected solution to this challenge could be by operating through apps. By doing so, we can simplify the user interface and alleviate the common struggles associated with wallet management and private key security. This anticipated shift toward app-based solutions aims to make tokenisation more accessible, encouraging broader participation and contributing to the seamless integration of this transformative technology into the real estate market.
Overcoming property scarcity
Moreover, there is a noticeable scarcity of properties, limiting the achievement of true liquidity. To address this, ongoing experimentation is essential, involving the introduction of assets into the market. This iterative process aims to build trust among market participants, enhance their understanding, and foster education about the underlying technology. Continuous efforts in developing existing assets will contribute to the growth of the tokenisation ecosystem.
Real estate tokenisation: Understanding the basics
If after reading the benefits and challenges of tokenisation has piqued your interest in participating in this exciting new technology yourself, we’ve prepared a guideline to the preliminary basics and preparation for asset tokenisation.
Why are you doing this?
Before starting the process of tokenisation, make careful considerations and develop a structured approach. In tokenisation it is essential to define your objectives – understand why you are tokenising an asset, identify your target audience, and determine where you intend to sell the tokens. Then comes the question — how do you tokenise an asset?
Are you equipped?
Jurisdiction plays a crucial role in token issuance, with nuances varying across different regions. Ensuring compliance and obtaining the necessary licences are key steps often overlooked during the initial stages of proposing asset tokenisation. It is imperative to check all the boxes to create a seamless process. Are you equipped with the correct licences or partnering with a suitable licensing entity? Is the token issuance in line with regulations? Are perspectives aligned for each relevant jurisdiction? These elements are often overlooked when the idea first arises in tokenising an asset.
Who do you involve?
As the market evolves, participants of the tokenisation space gain experience and trust in tokenisation techniques. Engaging a law firm knowledgeable in representing assets on a blockchain becomes crucial. This ensures a secure and trustworthy tokenisation process for high-value, non-liquid assets like real estate. Furthermore, investors entering the space need clarity on how to account for, hold, and customise their tokenised assets. Unlike traditional investments in stocks and bonds, the unique nature of tokens prompts the need for a comprehensive value chain. This includes custodians, accountants, auditors, and tax authorities – professionals adept at navigating the intricacies of tokenised assets. Their collective expertise guides investors and streamlines the overall process.
This answers the question of: How can you create an asset that is tokenised safely in which people can trust the surrounding technology? Properties tend to be high-value assets, so if you're going to tokenise it, you want to be sure that your legal frameworks are in the correct order.
What then?
Once a real estate asset is successfully tokenised and recorded on the blockchain, the next crucial step involves the incorporation of a liquidity mechanism. This is pivotal for reaping the benefits of having the asset tokenised. Liquidity pools incorporate a decentralised finance (DeFi) layer that facilitates lending and borrowing against tokenised assets. In essence, if you require access to liquidity, utilising a liquidity pool allows you to collateralise the asset and secure a loan against it, adding a layer of flexibility to the tokenised real estate assets.
Conclusion
As the real estate tokenisation landscape evolves, participation from various market players is increasing. The development of technology, including liquidity pools and DeFi layers, adds new dimensions to the tokenised real estate market.
In conclusion, the answer to "Can I tokenise my house?" is a resounding yes. Real estate tokenisation brings forth a new era of accessibility, liquidity, and community engagement. As the market matures and participants become more familiar with the technology, the potential for widespread adoption and innovation in the real estate sector is vast. Investors, both retail and institutional, have an opportunity to redefine their approach to real estate investment through the power of tokenisation.
To hear more from industry experts about the possibilities of asset tokenisation, talk to our team.
This article was inspired by Defactor Podcast episode 3
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