The Basics of Real Estate Tokenization
Real estate tokenization is a game-changing use case of blockchain technology. Historically, real estate has been one of the biggest investment markets yet most illiquid asset types, requiring large capital investments and lengthy, costly transaction processes. Property managers have realized that they need a solution to lower the entry barrier and unlock liquidity for this asset class. This is where tokenization comes in to introduce operational efficiencies and data transparency to real estate transactions, as well as the benefits of fractionalized ownership and liquidity to real estate investing.
With the real estate tokenization market valued at US$ 3.8 billion in 2024 and projected to reach US$ 26 billion by 2034, the impact of this innovative approach is undeniable.
So what is real estate tokenization and why is it important? What is its significance to investors and how does it work? Read on to find out.
Tokenization Explained
In a nutshell, tokenization is the process of bringing real-world assets and securities on the blockchain and breaking it down into smaller units by issuing digital security tokens on its behalf, with each token representing fractional ownership, rights, or equity to the asset depending on each situation.
By tokenizing assets such as real estate, we are essentially converting a real-world asset into several digital security tokens that can be made available to everyone anywhere in the world. Security tokens of real world assets are also known as real world asset tokens, or RWA tokens – and anyone who buys the token will get to own a fraction of the underlying asset in proportion to the number of tokens they bought.
Asset tokenization is made possible today because of blockchain technology, which allows an issuer to issue tokens representing real world assets on the blockchain using smart contracts. From this point forward, the issued tokens work like your typical cryptocurrency that people can buy, sell, and trade on secondary markets and exchanges - and in the case of real estate assets, this is nothing short of revolutionary.
Note: In a study published in 2019 entitled "Tokenized Securities and Commercial Real Estate", the Massachusetts Institute of Technology's Digital Currency Initiative distinguished security tokens from tokenized securities by defining security tokens as blockchain-native tokens representing securities that do not exist out of blockchain. Meanwhile, they defined tokenized securities (such as tokenized real estate) as blockchain-embedded representations of real-world securities.
Tokenization of Real Estate
Real estate tokenization has been a particular topic of interest for a lot of investors in the blockchain and TradFi space because of its massive potential for growth and in addressing the systemic liquidity problem that has plagued the real estate industry for years.
Since these tokens are backed by physical assets, their value will depend on the performance of the said underlying asset, just like how traditional real estate investments work. However, tokenized real estate has the added flexibility and convenience that blockchain technology provides, especially when it comes to the storage and transfer of these tokens.
Through tokenization, real estate ownership is fractionalized into tokens, which opens a range of possibilities that has never been possible before, including enhanced flexibility, more efficient processes, more inclusive accessibility, and above all, deeper liquidity.
For illustration, imagine a rental property owner earning $10,000 monthly from a property valued at $1 million. By tokenizing the property, the owner could create 10,000 tokens, selling them to investors for $100 each. This approach allows the owner to access liquidity without selling the property. Investors who purchase these tokens would receive a $1 monthly share of the rental income. Additionally, these tokens could be traded on a digital asset exchange, providing even more liquidity.
How Real Estate Is Tokenized
Below, we break down the real estate tokenization process, consisting of four stages:
- Off-chain formalization
- Tokenization
- Primary offering
- Secondary trading
1. Off-chain Formalization
As an asset owner looking into tokenizing your real estate, it is important to understand first what the token you will issue will represent, and that includes whether it’s:
- fractional ownership to your asset
- equity interest in a legal entity that controls your asset
- an interest in a debt secured by your asset
- a right to share in the revenue or profits generated by your asset, or
- any other variation that you’ve determined prior to tokenizing your asset.
This part is done off-chain and is very crucial because the nature of the right or interest being tokenized determines which regulation will apply to the tokens you will issue.
Also read: Real world asset tokenization - is a license needed? - Written by InvestaX's legal team.
2. Tokenization
Once the off-chain formalization is sorted, you move on to the actual process of tokenization, which from a high-level perspective includes the following:
- Choosing the real estate tokenization platform - The real estate owner taps a platform like InvestaX that will allow them to tokenize their asset.
- Tokenizing the asset - The platform will create the smart contract that will govern the tokenization of the asset, such as how many units will be issued and what interest will be vested, and deploy it on a blockchain.
Also read: Public vs. Private blockchain for asset tokenization
3. Primary offering
This step is also called the primary issuance of real estate tokens. Once the smart contract is deployed, the asset owner issues the tokens and offer the tokens to investors through a licensed marketplace.
4. Secondary trading
Interested buyers and investors who bought the token during the primary issuance can buy, sell, and trade the tokens on secondary markets.
Above is a real estate tokenization process from a high-level perspective. At InvestaX, we have a comprehensive solution for tokenizing real estate. Our tokenization Software-as-a-Service (SaaS) platform enables the issuance, trading and custody of real world asset tokens. To address the liquidity challenge of the RWA market, we offer a marketplace for the primary offering of RWA tokens, a process previously called security token offerings (STO), and a secondary marketplace for token trading, all licensed by Monetary Authority of Singapore (MAS). Additionally, our sister platform IX Swap offers the first-ever compliant automated market maker (AMM) solution for RWA tokens, allowing any issuers and investors to start liquidity pools legally and compliantly to facilitate token swaps.
Contact us for a consultation on your real estate tokenization strategy.
The Advantages of Real Estate Tokenization
One of the more obvious reasons to tokenize a real estate property is to raise funds for its development, just like how a company would issue shares to the company in order to raise the needed capital to expand their operations.
On a macro level, there are several advantages to tokenizing real estate and these include:
- Enhanced Liquidity - The greater access made possible by tokenized real estate welcomes more market participants and ensures better liquidity of the investment.
- Lower Barrier to Entry - Investors don’t have to buy the whole property in order to invest in it. Tokenizing a real estate into multiple tokens provides investors with a more affordable option to invest in the property by allowing them to purchase the number of tokens that their budget would allow.
- Faster Processes and Lower Transaction Cost - By tokenizing real estate, processes are digital, happen on-chain, and generally executed by the governing smart contract, thus there are no time-consuming and resource-intensive processes or costly human intermediaries involved.
- Greater Accessibility - Tokenized assets are available on secondary marketplaces and exchanges that investors, regardless of where they are in the world, can access 365 days a year, 24/7.
- Passive Income - Tokenized ownership allows you to earn passive income from the property without having to worry about anything else other than holding on to your tokens.
- Raise Funds Without Divesting Ownership - As an asset owner, you can raise the funds that you need by tokenizing only a portion of your asset so you don’t have to sell the whole property.
Key Takeaway
State Street, one of the world's largest asset management companies, said on their blog that in the long run, all financial markets will have to digitize their processes and tokenize their assets to remain relevant. That couldn’t be more true for the real estate industry, which stands to benefit from a myriad of advantages that comes with tokenization.
As the world transitions to Web3, traditional financial markets like real estate will have to leverage the technological solutions available today to equip themselves with the right capacity to confront the future where tokenization plays a crucial role.
At InvestaX, we offer the leading Singapore Licensed Tokenization Service-as-a-Software (SaaS) platform for Real World Asset Tokens (RWA) and Security Token Offerings (STO). We provide a one stop shop for tokenized assets for global investors, including real estate, private equity, venture, ESG, startup, private credit/debt and more.
Looking to tokenize your real estate asset? Contact us to discuss your tokenization strategy.