Converting any type of physical asset into a token offers an irresistible value proposition. So it doesn’t take a genius to understand that the trillion dollar real estate sector offers huge profit potential by offering real estate “pieces”.
But let’s start from the beginning and remember some basic concepts.
Tokenization means that digital files are released via the blockchain. These files attest to real asset ownership, which brings benefits such as stability, traceability, and uniqueness. The latter also means that these certificates cannot be copied or turned over twice – so there are no double sales.
What are the benefits of real asset coding?
- Codes replace paper certificates
- The original can be divided into parts
- Unique Title Deeds
- Easy selling opportunities for the investor
- Easily distribute and get security tokens
- liquid assets
- Ease of conversion in secondary markets
Obviously, the benefits of using tokens outweigh them. That’s why the future of investments in real assets lies in coding, and I have no doubts about that.
But let’s move on to our central topic: real estate coding.
Real estate coding: is it possible?
It is generally understood that real estate means different investments. It can be an apartment, an office building, a commercial property, a square meter of industrial land or a plot of land.
It is often said that “real estate is token”, but is it really true? Answer: No.
I’m not aware of any real estate project that uses a token only as a title deed.
The reason for this is clear: in most countries there is a land registry in which the existence of the property and who owns it is legally recorded.
To date, the jurisprudence of these records does not accept symbols as a valid means of representing property. Example: We issue an NFT (Non-Fungible Token – ideal for representing a real estate asset) representing an apartment with associated title deeds. We record these documents in the form of metadata as NFT. This is how we create a second proof that this property exists. The owner of the NFT then becomes the legal owner of this property from the moment it is minted. We can even prove this information in the land registry of the place of residence.
Now the property owner transfers the token to a buyer who is technically the new owner of that property. However, this transfer does not affect the entry in the Land Registry as the original owner of the NFT still appears as the owner.
So it is a double entry. This circumstance inevitably leads to legal doubts for the new owner of the NFT, since the strongest legal evidence of ownership of a property is currently the land registry.
So let’s say a bona fide prospect buys an NFT and a transfer of ownership occurs. Suddenly the new owner of the NFT finds out that his house has been forfeited by the IRS, for example, because the previous owner has outstanding debts. Now, the buyer can go to court and prove ownership of the NFT, but who wants to take that risk?
So companies with advertising slogans like “We’re turning real estate into a token” or “First Florida apartment as an NFT company” aren’t telling the truth.
But what does this token stand for then? Basically two things:
- Shares or shares of the company that owns real estate
- and debt-related property
So, should you invest in tokenized real estate?
Ownership, by definition, generates rental income and/or earnings (or not) from capital gains. Real estate coding allows you to own the economic rights (interest, dividends) to the profits of the property, but not the property itself.
So the ownership is not token, although many companies in this sector claim such things.
Regardless of whether our tokens represent equity or debt, the characteristics of investing are very different from those of real estate investing. When we own stock in a company, we also share operating risk. In this case also all the risks related to the property (which are in any case). We also have to accept the fact that we are minority shareholders and are therefore at the mercy of management decisions and general meetings. In the case of debt, the risk is clear: default.
Therefore, anyone interested in real estate tokens should know that these tokens represent just real estate companies and not the real estate itself. Thorough research before investing is essential. Unfortunately, there are a large number of investors who do not really understand how to invest their money. By this I mean not only tokens, but also stocks, NFTs, mutual funds, cryptocurrencies or stamps, to name a few.
There are other ways to invest in real estate stocks, such as crowdfunding platforms, traditional real estate trusts, or listed real estate investment companies.
Real estate crowdfunding is supplemented by a token on the blockchain, which provides additional features that improve crowdfunding. I have no doubt that crowdfunding and the tokenization of real estate will see further acceptance with appropriate legislation.
Listed real estate investment companies or real estate trusts, which are traditional ways to invest in real estate, do not offer these jobs. Some say these investments are safer and more liquid, but why invest in tokens?
Coding and traditional investments in comparison
Listed real estate investment companies, as the name implies, are listed on a regulated market. The price of your stock depends, among other things, on the value and rents of the properties in the portfolio. In exchange for certain obligations, these companies get significant tax benefits. For example, their obligations include leasing the majority of assets, maintaining minimal capital, and the like.
However, there is also a huge advantage to markup over buying stocks. The new investment opportunity brings with it a new concept of independent management of one’s wealth. With the help of digital tools such as tokens and wallets, we no longer need intermediaries, but we organize everything important using smart contracts. Interest or profits are automatically distributed in the form of stablecoins and tokens can be traded in highly liquid markets within a very short time. There are already excellent projects like Centrifuge or RealT, where the community shares not only investments, but also values.
In addition, real estate coding allows you to invest in a specific business, property, street or city. The affinity with the investment and the developer is much stronger than investing in an opaque listed real estate investment company.
It is difficult to feel part of the community when investing in real estate investment companies. Because with such companies you know as little about their activities or investments as you do with banks. Yes, we probably know what directors and directors earn. I’ve even read annual reports and appraisal reports for many companies. But if we believe these documents are reliable, we learn nothing from the events of September 2008.
If you think that these real estate investment companies have a lower risk than real estate token investments, you can also say that Banco Popular or Bankia has less risk than a crowdfunding platform due to its collateral. I would like to remind you that the shares of the largest real estate investment companies in Spain fell by 50% in 2020. It is almost certain that many investors suffered huge losses. I have not seen any articles in the press warning of the serious risks of investing in these companies.
Of course, I have no objection to these companies having a certain profile of traditional real estate investors either. However, the enormous tax benefits of these investment opportunities are highly questionable compared to the tax regulations of small real estate developers and even more so than those of cryptocurrency investors.
There is a generation that no longer wants opaque investment packages from banks or real estate trusts. This generation wants transparency in its investments. Real estate coding allows for such investments. In addition, you can participate in the form of DAOs, Telegram or Discord channels and feel part of the community.
It goes without saying that any responsible investor needs to make a good analysis of the relationship between return, risk and liquidity. Appropriate diversification criteria (product, geographic location, company, etc.) are also necessary to limit potential losses.
So the question of risk is no longer which real estate investment offer you want to get into, with or without tokens. The question is whether you understand the business with its returns and all the risks and whether you are able to make a rational decision after an independent analysis.
Tokens can represent both a good and a bad real estate deal. However, delivering the benefits of the blockchain will definitely improve the way we invest.
Real estate coding is still in its infancy, but it is an unstoppable trend. Real estate investment is going through a democratic revolution with more transparency and liquidity.
All information on our website has been researched to the best of our knowledge and belief. Press contributions are for general information purposes only. Any action the reader takes based on the information on our website is entirely at his or her own risk.