Is the real estate industry prone to disruption? A blockchain perspective.
Real estate investing has created 90% of the world’s millionaires¹. It is one of the safest and most straightforward types of investments, producing income year-round through rents and appreciating in value over time. With the use of smart leverage, these wealth gains can exponentialize.
Real estate is the most illiquid class of assets, yet is how most of the global wealth is stored. Almost 50% of the global wealth is stored in real estate.
The global real estate market size was valued at USD 3.69 trillion in 2021 and is expected to expand at a compound annual growth rate (CAGR) of 5.2% from 2022 to 2030. The market is expected to grow at a healthy pace during the forecast period, owing to the rising population and a desire for personal household space. As of 2021, the commercial real estate space was estimated to be the most important element driving industry expansion².
While real estate can and often does produce great wealth for its owners, real estate is inaccessible for most people due to the high initial capital required and bureaucracy associated with real estate.
The main problems associated with real estate investing are the following:
• Capital intensive — it is very expensive to buy a property and unaffordable for the average person. In some countries the cost to buy a home it’s as high as 20.7 times the median household income ³.
• High transaction costs — the transaction costs associated with ownership changes can be as high as 11.16% of the property value.⁴ This creates a huge barrier to buying and selling real estate.
• Bureaucratic — acquiring real estate involves many bureaucratic delays and paperwork. To transfer ownership you typically need realtors, title companies, attorneys, and often bank lenders. These intermediaries require time and a lot of paperwork. Together these steps typically take 45–60 days to complete.
• Time-consuming — researching, inspecting, bidding, buying, and managing properties can often be a full-time job depending on the scale of the business.
• Illiquid — refers to the state of an asset that cannot easily and readily be sold or exchanged for cash without a significant loss in value. Real estate assets are among the most illiquid assets⁵.
• Inaccessible to foreign investors — while some markets may yield a better return than others, the whole process of acquiring property abroad can be very cumbersome for most investors, even the ones with significant resources: visas, international travel, bank transfer costs, property management, etc. can add up very fast, making the acquisition unprofitable.
These barriers have historically been endemic to real estate investing. With the birth of cryptocurrency, however, it is time to revolutionize a new path forward.
The future is fractional, tokenized real estate!
Tokenization is the process of securitizing actual assets, such as real estate, and exchanging cash or cryptocurrency for so-called “tokens.” Tokenizing an asset is dividing it into specified shares that reflect an equal piece of the underlying value.
When someone invests in a tokenized real estate asset, they receive tokens (digital shares) in return.
Every component of a property may be equated to a single token with a given value. For example, a nice vacation property in Europe for $5 million can rapidly become a liquid asset. Divide it into shares, assuming that each share is worth $1, and you have a token that represents a $1 portion of the property. The trick, by the way, is neither novel nor unique. In 2017, Michael Arringlton, a co-founder of TechCrunch, purchased a $60,000 apartment in Kyiv using Ethereum.⁶
Using blockchain technology on real estate platforms, one may tokenize real estate and trade it on an exchange platform like stocks or cryptocurrencies, hence creating liquidity in a traditionally illiquid market. Real estate tokenization via security token offers (STO) is a technique to make the selling-buying process easier and more transparent.
Among the advantages of such a system we can identify the following:
• Reduced capital requirements — now even with a small amount of money one can reap the proportionally similar economic benefits as investors with large sums of money available.
• Accessibility to big projects — some properties like shopping malls, hotels, commercial and industrial buildings can cost millions of dollars and can produce higher yields than residential units that are not in the reach of the average retail investor.
• Reduced costs — the traditional costs associated with real estate ownership changes (legal fees, paperwork, management etc.) will be reduced to almost 0.
• Diversification — by investing smaller sums in multiple projects one reduces the risks and harnesses the power of scale.
• Liquidity — it’s difficult to meet regular financial obligations with illiquid assets in case of emergency. For example, a firm that sells real estate to pay a financial obligation could be in danger. If the funds are required quickly, the corporation may be forced to sell the property at a reduced price. In any scenario, the corporation has lost a great asset for good. This will no longer be a problem with tokenized real estate since you can sell only a portion of your assets in just seconds.
• Expediency — unlike the traditional way of buying/selling real estate which takes 30–45 days will now be reduced to mere seconds.
• Transparency — because data is dispersed throughout a network of participating nodes rather than a single centralized database, blockchain data is made trackable and accessible on the blockchain while cryptographic hashes ensure that blockchain transactions remain anonymous.
Even though the advantages are multiple, for one to achieve secure and compliant tokenized real estate, a few legal hurdles must be overcome and some archaic laws navigated in various jurisdictions, which we will cover in a future article.
Nonetheless, the first company to get this right will truly disrupt the real estate industry.
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References:
- https://23homes.com/real-estate-investing-has-created-90-of-theworlds-
millionaires - https://www.grandviewresearch.com/industry-analysis/real-estate-market
- https://www.bqprime.com/business/hong-kong-homes-ranked-world-s-least-affordable-for-11th-year
- https://www.rocketmortgage.com/learn/costs-of-selling-a-house
- https://www.investopedia.com/terms/i/illiquid.asp
- https://www.coindesk.com/business/2021/05/25/techcrunch-founders-apartment-to-be-sold-as-nft/
