In certain markets where technology has not intervened in the real estate sector, the buyers and sellers go through the same lengthy procedures, pay heavy commission fees to the agents for various tasks, and the settlement process takes a couple of weeks or months to be executed.
However, blockchain technology along with the implementation of smart contracts is a positive change for the industry.
The Different Areas Where Real Estate Tokenization Is Being Implemented Now Are
- Management of land titles – Currently, handling land titles is a cumbersome process as the data contains a lot of errors and is difficult to maintain along with issues in transferring the title to different parties. Smart contracts will help the titles to be efficiently stored on a decentralized ledger removing chances of corruption or manipulation of data. It leads to more trust formed between the buyer and the seller.
- Access to secondary markets – Digital security tokens can be raised on smart contracts. It can be traded easily on international secondary markets.
- Eliminates the role of intermediaries – By eliminating the services of middlemen such as agents, brokers, banks, and lawyers, it enables direct striking of deals and reduces cost and time for transfer of properties. Different parties can securely transact with each other.
- Adherence to due diligence – It facilitates the storage of digital identities for participants and properties. The property rights will comply with the prevailing regulations and the prospective investor can conduct due diligence on the seller of the property. This reduces the need to pay fees for auditing.
- Ensures automatic disbursal of payments – Payments can be automatically processed by using the smart contract that operates on predefined conditions.
- Better management of property – Smart contracts enables digital signatures and e-agreements formed between different parties. The entire process of property management can be automated sans human intervention as each party will be held accountable to fulfill their individual obligations. This decreases the costs involved in the inspection, auditing, and rental monitoring.
Why Tokenized Real Estate Has Massive Potential?
While investing in Real Estate is thought to be a costly affair, tokenized real estate reduces the barriers to entry for the small investors enabling them to reap the benefits of fractional ownership. The security tokens can be bought and sold 24×7 in international secondary markets based on the current value of the property, unlike traditional markets that operate only for a limited number of hours. This contributes to increased liquidity in the industry. Data can be maintained transparently through digital records and the flow of information can be improved. It creates a lot of value for the industry by reducing costs, enabling automation and improves processes, assists in better management of properties, and facilitates direct interaction. It ends up opening new doors for investors, owners, and developers.
Currently, the market is characterized by a lot of cumbersome paperwork and delays in the change of property ownership. The market has a complex architecture due to multiple stakeholders, the presence of middlemen, and numerous regulations. With tokenization, the investors have more control over their funds through private keys. Through the availability of smart contracts, the transparency and traceability of token transactions can be enhanced. It is the right time for property tokenization for eliminating the defects such as long paper processes and slow turnaround time. Though the real estate market is always slow to adopt emerging technologies, tokenization will help to solve its long-time problems and give it the driver’s seat by becoming more modern and friendly towards investors.
Obstacles Involved in the Implementation of Real Estate Tokenization
- The concept of security tokens has not been clearly regulated across the world. A common framework related to the regulatory structure is needed urgently for optimization.
- Many licensed platforms need to be set up to operate when the real estate property is converted into security tokens. It is quite a complex process as multiple trial and error methods need to be worked out before growing fully functional.
- Institutional-grade custody solutions and security standards for tokens need to be finalized sooner than later. In case the tokens happen to be stolen or hacked, the consequences would be costly. Hackers can cause massive havoc to buyers and investors.
- Many countries have not formed tax regulations related to cryptocurrencies. This creates a lot of complexity as tax structure varies across countries impacting investors differently. In some countries, taxes are applicable only when cryptos are converted into fiat.
- Not many people are aware of the potential of blockchain technology and security tokens. There are concerns about scalability.
- It requires a lot of regulatory reforms and a tremendous amount of marketplace liquidity and demand.
- Buying tokens of property using cryptos is a risky affair as the prices can change rapidly keeping investors who prefer stability out of the process.
- Many Cryptocurrency exchanges in the market currently do not offer the facility of security token trading. Hence regulatory approvals are needed for the mass adoption of tokens. This results in uncertainty for both issuers and investors of security tokens affecting the liquidity of the secondary market.
- Confidentiality issues may arise as security tokens being traded in the secondary market can lead to the disclosure of commercially sensitive information for facilitating investments and transactions. Hence, there is a need for concrete blockchain protocols to enable data transparency that protects different stakeholders against unlawful concealment of information without revealing confidential business data.
What Lies in Store for Tokens of a Real Estate Property?
While real estate needs to battle regulatory and legal issues, better infrastructural solutions are needed urgently for improving payment capabilities, reducing settlement risks, and improving the overall operational efficiency. Buying and selling small amounts of property through tokenization will eliminate a lot of friction from the industry and open the floodgates for investments to flow into. There is a lack of a proper time frame for investors to appropriately jump into the fray for joining the bandwagon of tokenization.
Tokenization has revolved around changing traditional business models so far by improving the efficiency of operations and simultaneously creating new profitable opportunities. It can also be applied in the future to employee incentive programs, lease-to-own arrangements, and co-working spaces. Regulators across the world need to quickly adapt and embrace this new wave of financial innovation. Institutional involvement and the development of robust business frameworks are critical for the success of real estate tokenization in the long run. Multiple stakeholders with adequate knowledge, experience, and influence must work together to create a strong and valuable ecosystem.