Tokenization of real estate
Tokenization of real estate is an expression that indicates the new frontier in the use or purchase of a real property. In fact, the digitalization process of a real asset makes possible a new form of relationship with the investment that can also be actualized through the creation of NFTs (Non-Fungible Tokens) and blockchain systems with fiduciary custodians. These are the terms that, from this point on, will be heard used reciprocally: token, blockchain, NFT and custodian.
NFTs are “digital certificates” based on blockchain technology designed to provide a unique identification, that cannot be substituted or replicated, for the ownership of a product, in this specific case, for a piece of real property.
What is tokenization exactly?
Tokenization applied to real estate involves the creation of tokens in the blockchain and their application to real estate properties.
It is a newly-emerging phenomenon that increases the number of use or investment options available. For example, in real estate development, tokens can be used to raise capital for the creation of the property, allowing private investors and institutional players to take part in both lending and equity real estate operations. It represents an evolution in the trend already seen in real estate crowdfunding, to which the concept of asset liquidity is added, i.e., tokens.
In fact, tokenization allows for ownership of “pieces” of a property, with the freedom to be able to trade them quickly, without high transaction costs—something inconceivable until just a few years ago.
Real estate tokenization: how it works
As mentioned, thanks to real estate tokenization, a group can raise capital using a system similar to crowdfunding, but one that is based on actual assets, the tokens, available on the blockchain which is the asset’s certified home, and kept in a safe, represented by the custodian. In this case, the function of the tokens is like that of stocks because they can be traded on capital markets that guarantee liquidity, but with the difference that no intermediaries (or their respective fees) are required.
Real estate tokenization is applied to a real asset which is fractionalized with the aid of a smart contract, an automatically-generated code residing in a certified blockchain. Anyone purchasing or owning a token has rights regarding the property involved and the activity surrounding it, including any financial flows and related profits and losses.
A hypothetical example to make the concept clearer: let’s suppose that the owner of a property has decided to unload the property quickly for a given price and is not able to find available investors to close the sale at the amount requested and, at the same time, is not willing to sell the property for a lesser amount.
Tokenization offers a method for overcoming this problem. The property can be “fractionalized” into multiple units, while maintaining the juridical integrity of the asset, and each unit created will have a set value in digital tokens. With this investment model—integral in terms of legal ownership—it is the sum of fractions owned by multiple investors on an open and completely-transparent network.
The same example could be developed for financing or rentals.
Tokenization of real estate: obstacles and the future
The possibility of applying a fully-digital tool to properties, which are real assets, has launched serious juridical-fiscal and legislative reflection and analysis. This is especially true in Italy where real estate assets are part of a property preservation and registry system overseen by notaries who are public officials, and the tax system applied by the Italian Revenue Agency for the temporary or permanent transfer (rental or sale) of assets.
It is hoped that in the future, transactions will be able to be carried out on-line through the purchase of an NFT via a simple “click” and, in the same way, the property can be re-transferred through the sale of the NFT to a new purchaser.
Solving the technical aspects of taxation and property registers—an absolutely key aspect—would see the dawn of a new era in real estate ownership and management. (Source: Millionaire, 9/22, article by Maurizio Monteverdi).
Sources and for further information