#81 Tokenized Real Estate vs. REITs: Key Differences and Investment Considerations

The world of real estate investing has evolved significantly in recent years, especially since ScanSan was born in 2022. Today, we will discuss REITs and Tokenization.

I am quite passionate about it because every time I talk with someone about the ScanSan Investment Platform, the first question is: Can you explain the difference between REITs and the ScanSan platform?

A major difference is that we have created the platform to create a generation of wealth in people’s lives.

At the end of the day, both offer opportunities to invest in property without direct physical involvement, but they are fundamentally different in structure, accessibility, and investment potential.?

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What is Tokenized Real Estate?

Tokenized real estate is a process of converting some form of assets into a token that can be issued, transferred, recorded or stored on a blockchain system. This process converts the value of any assets (tangible or intangible) into a token which can be exchanged along a distributed ledger technology. These tokens represent fractional ownership, allowing investors to purchase a share of the asset without needing to own the entire property. Transactions are recorded on the blockchain, ensuring transparency, security, and efficiency. Tokenized real estate has grown in popularity because it lowers barriers to entry, allowing investors to participate in high-value assets with relatively small amounts of capital.

What are REITs?

REITs are companies that own, operate or finance, income-producing real estate across various sectors such as residential, commercial, or industrial. By purchasing shares in a REIT, investors gain exposure to real estate portfolios without having to directly manage properties. REITs are typically traded on stock exchanges, making them a liquid and regulated investment option. They are well-known for providing steady dividends and potential capital appreciation.

Key Differences Between Tokenized Real Estate and REITs

Tokenized Real Estate

1. Invest in a Property of Choice: Investors can choose specific properties to invest in rather than a broad portfolio.
2. Ownership of a Part of the Property: Each token represents fractional ownership of a property, offering direct exposure to the asset.
3. Specific Yield: Investors receive a yield based solely on the performance of the property they invested in.
4. Property Manager Accountability: Each property is managed by a dedicated property manager, ensuring accountability and responsibility (always all subject to the agreement).
5. Peer-to-Peer Trading: Tokens can be traded peer-to-peer on various platforms, providing flexibility.
6. Transferability: Tokens can be transferred between individuals easily.
7. Regulation Status: Tokenization is not yet fully regulated, as the industry is refining its standards.
8. Sole Ownership Option: A property can belong to a single individual if desired.
9. Landlord Control: The landlord determines how many tokens are issued in the market, maintaining control over liquidity.
10. Enhanced Liquidity: Tokenization creates liquidity for a broader audience, offering more options for investors.
11. Fractional Ownership with Transparency: Rent and lending operations are fully transparent through blockchain technology.

REITs

1. Invest in a Fund: Investors buy shares in a fund rather than individual properties.
2. No Direct Ownership: Shares do not represent ownership of the properties themselves.
3. Portfolio Yield: Investors receive an average yield from the entire portfolio, which may be lower due to underperforming properties pulling down the mean.
4. Risk of Fund Mismanagement: If the fund is mismanaged, the entire portfolio is at risk, even if individual properties are performing well.
5. Restricted Trading: Shares can only be traded on specific markets during specific hours.
6. Non-Transferable Shares: Shares cannot be transferred between individuals.
7. Regulated by FCA: REITs are regulated by financial authorities, providing investor protection.
8. Owned by SPVs: Properties are typically owned by Special Purpose Vehicles (SPVs) within the REIT structure.
9. No Landlord Control: The landlord has no say in when or how shares are issued.
10. Historical Liquidity: REITs have historically provided liquidity for investors but are limited by traditional market structures.
11. Limited Transparency for Rent and Lending: Standard REITs do not enable transparent rent and lending operations for banks.

Investment Considerations

When deciding between tokenized real estate and REITs, here are a few factors to keep in mind:

• Risk Tolerance: Tokenized real estate is relatively new and may carry higher risks due to regulatory uncertainties and market adoption. REITs, especially public ones, are more established and provide stability.
• Investment Goals: If you’re looking for liquidity and steady dividends, REITs might be a better choice. For those interested in fractional ownership and long-term property appreciation, tokenized real estate could be ideal.
• Diversification: Both options can complement each other in a portfolio. Tokenized real estate offers granular control over asset selection, while REITs provide diversified exposure to multiple properties.
• Technological Comfort: Investing in tokenized real estate requires some familiarity with blockchain technology and digital wallets, whereas REITs are more traditional and easier to navigate for most investors.

Final Thoughts

Tokenized real estate and REITs each offer unique advantages and challenges. While REITs have a long-standing history of delivering reliable returns, tokenized real estate represents the future of property investment with its innovative use of blockchain technology. As an investor, understanding these differences will help you make informed decisions that align with your financial goals and risk appetite.

Whether you choose to embrace the innovation of tokenization or the stability of REITs, one thing is clear: the real estate investment landscape is more dynamic than ever before.

Tokenization: Offers more flexibility, transparency, and direct ownership options but operates in a less mature regulatory environment.

REITs: Provide a regulated structure with historical liquidity but less control, transparency, and personalization for investors.