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Tokenization - Game Changer for Commercial Real Estate?

Interested or not, high profile terms like bitcoin and cryptocurrency have pushed blockchain and tokenization technologies onto everyone’s radar as innovations that have the potential to seriously disrupt industries and everyday life.

Although the financial industry has so far garnered all the attention, adopting this emerging technology to facilitate instant digital payments for products and services, other industries are now starting to investigate how it might work to their advantage. For commercial real estate, this begins with an understanding of what tokenization is and how it might be used.

What is Tokenization in Commercial Real Estate?

The tokenization of real estate assets has been enabled by blockchain technology. Blockchain is essentially a shared record of digitized ‘transactions’ held in blocks on a network. New blocks of data are added to the chain once a transaction (which could be a contract, records, deeds or other information) has been verified. Following verification, all other blocks in the network update their version to match the new record, creating identical records across the distributed network which cannot then be altered in any way.

Tokenization in real estate involves assigning digital tokens to assets so that they may be traded online much like trading stocks and shares. Tokens can represent the ownership of several asset types including a piece of real estate, participation in a real estate investment trust, profit share rights or dividend interests in a property. Tokenization is the primary way to transact digitally, however the applications for blockchain are far-reaching for the real estate industry and joined-up they represent a truly end-to-end digital transaction.

CRE Challenges Meet Blockchain Solutions

For buyers and sellers of real estate, blockchain-based solutions offer a decentralized approach to record-keeping where the network is self-sufficient, contained and no third-parties are required to complete a transaction; cost and complexity are therefore removed compared to the onerous processes and procedures of a conventional real estate exchange.

From property marketing through to building management, there isn’t an area that can’t be enhanced through blockchain. These are some of the industry’s entrenched difficulties that may be addressed;

Opacity and Number of Intermediaries

The commercial real estate ecosystem is known to be traditional and has always required a multitude of intermediaries to each do their part in getting a transaction across the line. The parties involved in a typical transaction can extend much further than just the buyers’ and sellers’ representatives to surveyors, lenders and environmental consultants.

Relying on others to fulfill their role efficiently can be a pain point in real estate, not least for the cost involved in the to-and-fro between these middlemen but the time and frustration it adds to the process too. Professional services don’t come cheap but as blockchain usage becomes more widespread and technology assumes the functions of these stakeholders, the process becomes quicker and less convoluted, reducing costs for all.

Constrained Cash Flow for Property Owners & Barriers to Entry

Selling large commercial assets can be a lengthy process and a drain on the seller’s cash flow waiting for the ideal institutional buyer to come along. Tokenization allows the owner to split the property into tokens and sell those tokens to both institutional and individual investors, improving their cash flow position in the process. Property tokenization also reduces barriers to entry for individuals who wouldn’t normally have enough funds or the route to be able to invest directly into a specific property. This type of ‘fractional’ or ‘fragmented’ real estate ownership is slowly becoming more commonplace as more and more blockchain startups enter the market. Many online investment platforms use blockchain technology in giving individuals the opportunity to invest in institutional quality private investments with as little as a few hundred dollars.

Errors, Omissions and Security

Siloed procedures controlled centrally by organizations with incohesive systems (think lawyers, accountants, fund managers and financial institutions) are traditionally paper-based, face-to-face activities. These processes are prone to human error and fraud, often adding thousands in unnecessary costs for buyers and sellers alike.

Whether it’s inaccurate due diligence, financial verifications or fraudulent activity that goes undetected, most stages of the CRE transaction are open to mismanagement. Utilizing digital identities, verification and smart contracts to fully automate processes will bring speed and efficiency to the process through transparent, safe and accurate data sharing.

Title management is one area where blockchain has the potential to transform a slow and archaic manual system into a streamlined and secure process which takes days rather than months. Property details, condition, historic transactions, title registration and more can be stored and tracked on blockchain with secure access available online. Some countries have already implemented blockchain to reduce corruption and title fraud in their real estate industry; Swedish government agency for land registration, Lantmäteriet pioneered the use of blockchain technology for property sales and estimates taxpayer savings of over $106 million per year by expediting transactions from months to hours, reducing fraud and eliminating paperwork.

Slow on the Uptake

Of course there are barriers to widespread adoption of tokenization in commercial real estate, largely cultural it has to be said. Blockchain is relatively new and intimidating for an industry that’s notoriously slow on the uptake of new technologies and as a somewhat mystical development, still in its infancy, there’s a level of distrust among users for both the technology itself and for the other parties using the networks.

There was no doubt similar resistance from industry traditionalists to every other major technological advancement of the past thirty or forty years but there would have been little business during the pandemic had it not been for the internet which was itself a radical concept before it’s commercialization.

Lack of knowledge or more accurately the lack of motivation to gain that knowledge on blockchain and its application in real estate will not hinder progress; in our opinion reduced costs, bigger market, better transparency and enhanced cash flow are just some of the reasons there’s too much at stake and it’s only a matter of time before blockchain comes of age. It’s not just the CRE industry that stands to benefit from blockchains exponential growth opportunity either - it’s a global economy game-changer.

Expert Opinion...

"Non-fungible tokens (NFTs) will be the future of Real Estate transactions. NFTs will change the way individuals and companies interact with buying/selling/investing/trading real estate.
In the most basic form, NFTs are proof of ownership. This characteristic enables an often overlooked feature of NFTs, their ability to be used as loan collateral. Loans can be issued on the value of a real estate NFT. Real estate transactions will be executed by smart contracts and recorded on the blockchain, and signed as NFTs.
The residential market is ahead of the Commercial market, yet a massive opportunity exists with Commercial. The market is ready, the audience is listening, the only thing standing in the way is waiting for regulation to catch up."

Liza Horowitz, early crypto investor.

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