Real Estate Tokenization: How Blockchain Technologies Are Transforming Conservative Investments?

Real estate tokenization is the process of anchoring rights to a property with one or multiple crypto tokens that exist in a decentralized database, also known as blockchain.

Technically, real estate tokens are not different from non-fungible tokens (NFTs) and fungible tokens (cryptocurrencies), except that their value is backed by real-existing properties.

During tokenization, a token or a group of tokens can represent one of the following rights:

• Ownership of the entire property.
• Ownership of a portion of the property.
• Stake in the organization that, in turn, owns the real estate.
• Receipt of debt and interest backed by the real estate.
• Receipt of profits from managing the property.

For instance, the last option is utilized in the operating model of Sabai Property, the flagship product of the Sabai Ecoverse project. When employing this approach, the investor doesn't become the direct owner of the real estate but has the right to receive profits from it.

This model comes with several advantages. The primary one is that the investor is not obligated to report the acquisition of the property, especially if such requirements are imposed by the laws of the jurisdiction in which they reside. From a legal standpoint, they own not the real estate itself but a contractual right to receive profits from it.

How Does Real Estate Tokenization Work?

Tokenization is a relatively new process in the real estate market, as well as in any other market. Therefore, there are currently no widely accepted standards and models, and each individual tokenization case may have its own peculiarities. However, there are several common stages in this process that can be identified:

Selection and Verification of the Property

The tokenization process begins with the selection of the property and negotiation of the acquisition price. Thorough verification of the legal and financial integrity of both the real estate and the transaction is also conducted at this stage. This is necessary to protect future investors from potential unforeseen risks.

Preparation of Legal Framework

At this stage, lawyers develop the necessary contracts and agreements to establish the legal foundation for tokenization. This step is particularly crucial, as tokenization must comply with both international standards and local laws.

Token Creation

After preparing the legal framework, a limited number of tokens is issued. Typically, these tokens are created on the basis of an existing blockchain, allowing the platform to avoid the resources needed for developing and maintaining its own network. For example, Sabai Property tokens are based on the popular Polygon blockchain, known for its high security and low transaction fees.

Investor Registration

Typically, this is followed by the submission of applications from investors who wish to acquire real estate tokens and their verification to ensure compliance with requirements. This process notably includes verifying the identity of investors.

Establishment of the Technical Foundation

Real estate tokenization involves the development of not only a legal framework but also a technical one. It should encompass a series of smart contracts—automated software algorithms that will handle a significant portion of real estate operations, such as distributing rental profits among investors.

Token Sale

After all preparatory stages are completed, the sale and distribution of tokens to previously registered investors take place. Usually, the sale price is fixed and determined by an appraiser based on the market value of the real estate being tokenized.

Formally, at this stage, the tokenization process is complete, as investors have received their tokens. However, a crucial aspect is the creation of the opportunity for secondary trading of tokens. Typically, secondary real estate transactions do not take place on open crypto exchanges but on the platform of the company that tokenized the property.

This is necessary to comply with legal norms, as new investors seeking to acquire tokens on the secondary market, just like the initial ones, must have completed identity verification.

At Sabai Property, the secondary market is presented both in the form of trading between platform users and in the form of instant token buyback by the platform itself at 80% of their market value. This dual solution significantly enhances the liquidity of real estate tokenized by Sabai Property.

Diving into Tokenization's Benefits

While tokenization is not yet widespread in the real estate sector, it is rapidly integrating into the industry due to the numerous advantages it offers compared to traditional real estate ownership.

Reduced Entry Barrier

Tokenization, closely linked to fractional ownership, lowers the minimum entry threshold. Breaking down ownership rights into a large number of tokens provides access to the real estate market for investors with limited capital and streamlines the property selling process for developers by reducing buyer requirements.

Additionally, the technologies behind tokenization, such as blockchain and smart contracts, make it easier to account for a larger number of investors, economically managing numerous tokens and making each individual token more affordable. For example, at Sabai Property, the cost of one token is only $50.

High Liquidity

Traditional real estate transactions are typically lengthy and involve a significant amount of bureaucratic procedures. Tokenization addresses this issue, as trading tokens is technically similar to trading conventional cryptocurrencies or NFTs.

This significantly simplifies transactions involving tokenized real estate and enhances the liquidity of this market. Token trading also enables the implementation of order book-based buy and sell requests on property tokenization platforms. Therefore, token holders can instantly sell them to potential buyers by placing their orders.

Increased Transparency and Security

The tokenization process is built on blockchain technology, providing a secure method of storing and processing information. The integrity and immutability of the network are maintained by a large number of users, and any attempt at fraudulent data alteration is bound to fail.

Moreover, blockchain is inherently transparent. Anyone can view all transactions recorded in the blockchain since its inception. Transactions do not contain personal data of crypto wallet owners but only their public addresses in the network. This makes blockchain simultaneously transparent and anonymous as a tool for accounting real estate tokens.

Reduced Intermediary Risks

Traditional ownership of investment real estate typically involves intermediaries, such as government cadastres, companies holding property titles, depositories where shares of the real estate-owning company are held, and many other structures.

When utilizing tokenization, the chain of ownership rights is minimized by excluding intermediaries, as property tokens are stored directly on the crypto wallets of the immediate owners.

Increased Efficiency

The absence of third parties also enhances the efficiency of tokenized real estate. To transfer tokens to a user, one simply needs to create a transaction, which will soon be recorded on the blockchain, placing the token in the wallet of the new owner. This process is much faster than the traditional transaction procedures, which can take several days. For comparison, in the Polygon blockchain, which is used for Sabai Ecoverse and Sabai Property tokens, in particular, transaction processing times typically take only a few seconds.

Tokenization Drawbacks: Putting Things into Perspective

Despite all the advantages of property tokenization, this direction faces several significant challenges.

Lack of Established Technical and Legal Processes

As mentioned earlier, tokenized real estate is a relatively new direction that lacks a ready-made legal and technical foundation. Instead, platforms have to independently develop solutions based on the tools available to them, especially in terms of legal regulation.

Low Accessibility for Investors without Blockchain Knowledge

Tokenized real estate differs from conventional real estate, requiring investors to have knowledge in the field of blockchain. For instance, token owners need to create a crypto wallet at the very least before purchasing tokens for a property.

This requirement potentially increases the risks of fraudulent activities against investors and unintentional loss of tokens due to the owner's errors. For this reason, platforms are compelled to protect their users, such as restricting the transfer of tokens only to verified users. Additionally, in the case of accidental token loss by a legitimate owner, platforms like Sabai Property may provide support. After a thorough review, the Sabai Property team will deactivate the lost tokens and issue new ones to the investor.

The Future Outlook for Real Estate Tokenization

Real estate tokenization is a groundbreaking solution in this field designed to address issues that have been relevant for centuries. However, this sector is still in its early stages of development.

Flagship companies in this industry and legal regulators are yet to develop and implement universal solutions for real estate tokenization, aiming to simplify and systematize the process.

Nevertheless, in the future, once real estate tokenization overcomes its current challenges, it could become a widely accepted form of property ownership, thanks to its undeniable advantages over alternative approaches.

Dive deeper into the realm of tokenization and real estate investments with Sabai Academy! A wealth of expert articles and video courses awaits you for optimal comprehension!