Tokenizing Real Estate: Benefits & Challenges to Consider

RWA (real-world assets) tokenization is a trending discussion topic within blockchain and finance circles that continues to gather increasing attention.?

In previous blogs, we discussed the potential benefits and advantages of tokenizing various asset sectors including precious metals, premium spirits, diamonds, books, and also real estate (RE), through the use of blockchain technology and the issuance of digital tokens.?

Considering the market size of various?asset classes, real estate (commercial and residential property) is among the largest and most traditional with an expected value in the trillions, according to different reports. Compared to the emerging blockchain and Web3 sector by market size, the global real estate market is much bigger by many orders of magnitude.?

This contrast shows the disparity between the rapidly growing yet nascent nature of blockchain and real estate, with many blockchain-based or Web3 products & services under development to find a product-market fit.?

In the case of real estate, its considerable market value and relative lack of digitization offer a compelling opportunity for blockchain to transform its practices and provide unprecedented value to investors and companies looking to buy or sell real estate in the future.

Key Takeaways

• Real estate tokenization involves digitizing real estate assets by issuing digital tokens on a blockchain network, offering benefits such as enhanced liquidity, transparency, accessibility, and portfolio diversification.
• Additional advantages include greater information exchange, simplified asset management, increased asset visibility, access to DeFi products and services, and enhanced market efficiency.
• Challenges include regulatory capture, education, technological and accounting standards, and creating user-friendly systems.

How Does Real Estate Tokenization Work?

RE is a market that relies on signed contracts and land or property deeds to allocate ownership to individuals, corporations, or other entities. Depending on the location of the property, many of these records can be relatively difficult to access as they are typically recorded in local municipalities and/or on physical paper in emerging and underdeveloped markets. Even in more developed regions, the level of access can depend on the amount of records digitization that has been undertaken to enable the public to freely view property records via online searches.?

Real estate?tokenization?refers to the digitization of real estate assets by issuing digital tokens (usually in the form of?NFTs) on a blockchain network to represent the actual physical property. Leveraging the immutable and transparent properties of a decentralized blockchain network, all asset transactions and important information related to the RE asset would be automatically recorded, verified, and stored on the network with anyone able to view it at any time.?

Anybody or any organization interested in transacting a tokenized RE asset could potentially list, buy, and sell it by transferring the digital token via a token wallet, in line with local regulations.

The?NFT metadata?would contain the property’s details, which are used to identify it, and any other essential information for potential buyers. Holding the NFT, in turn, means ownership for the person or entity controlling the wallet.?

Related reading:

• The basics of real estate tokenization
• Why Cardano is an ideal blockchain platform for asset tokenization
• Here are different asset classes that can be tokenized

Real Estate Tokenization: Benefits

Tokenized assets can enjoy many benefits, and real estate is no exception. In many ways, the race is two-way: blockchain developers and projects are trying to expand the blockchain market, by delivering products & services the market demands, and real estate businesses are looking to access and connect more buyers and sellers for commissions.?

In a?previous blog, we listed some of the major advantages of real estate tokenization, including:

• Enhanced liquidity?for a real estate asset
• Greater transparency?behind real estate transactions
• Increased accessibility?to real estate investment opportunities
• More portfolio diversification?opportunities

However, there are also other advantages that real estate tokenization can offer.

Additional RE Tokenization Benefits

• Greater information exchange: As mentioned, owning the NFT would indicate ownership over the property that it digitally represents. The token metadata would include relevant information to prove ownership along with necessary information about the asset. In the case of RE assets, they tend to change ownership over time as owners want to sell and buy other assets. By utilizing a form of NFTs called?Dynamic NFTs, it would be possible to more easily automatically update NFTs and the valuable token metadata upon transaction completion. This would make the RE transaction process more efficient for both buyers and sellers. As NFT technology improves, these tokens could be able to hold and update more forms of information including videos and images.
• More simplified asset management: Real estate is, in many ways, a paperwork and logistical hassle for many. There are deeds to a property, registrations with local governments, tax forms, insurance, and a lot more. The owner or a third-party agent acting on behalf of the owner must track and secure all of these important documents to submit to relevant authorities.?However, RE tokenization would allow all of these data points to be aggregated in a single NFT that could record it with less margin for error. Once recorded properly and verified, it would be nearly impossible to lose it, manipulate the information, or have ownership stolen by a third party due to the immutability and transparency blockchain technology provides.

Read more: What’s the potential for the asset tokenization market?

• More asset visibility: Following up on the many real estate transactions that happen can be time-consuming and difficult. It often takes many parties, both public and private, just to certify a new owner and verify certain pieces of information. A distributed ledger or blockchain network could streamline all these steps with?blockchain-based transactions?and the usage of tools such as blockchain explorers to help with increased visibility into RE transactions and other related data. There could be more trust in this sort of transparency as the security and immutable nature of blockchain can better prevent the manipulation of records by an external actor.
• Access to DeFi products and services:?DeFi?(decentralized finance) is a growing field of interest that offers greater access to financial services for those who have been typically underserved as well as those looking to utilize an emerging field of financial services. By leveraging decentralized blockchain technology, DeFi applications are peer-to-peer without a?centralized administrator?and utilize digital tokens that can be used as collateral, loaned, traded, or used for many other financial operations. If integration and compliance are ensured, tokenized real estate could have access to all of these DeFi possibilities as the market for RE tokenization and DeFi grow in tandem over the coming years
• Enhanced market efficiency: Depending on the geographical region and government, real estate can be afflicted by fraud, incomplete records, and corrupt actors. Anyone who has purchased real estate knows it’s important to verify all records and check for missing or misrepresented items.?Tokenized properties would be a single source for all of this information. Buyers would no longer need to read about and track a property’s history extensively as they would have the necessary information via the NFT and blockchain network.? The result is that deals would happen faster, and people could worry less about any manipulated or missing details.

Real Estate Tokenization: Challenges

The tokenization of any asset is a thorough process. Especially when the asset in question has a heavy public sector side that needs to be accommodated. Some of these challenges are:

• Regulatory capture: Real estate is heavily intertwined with government functions. Tokenization needs public involvement to work, but if it goes too far, the process can get lost in the bureaucratic mechanisms of policy.
• Education: Tokenization requires familiarity with how blockchain and related tools such as wallets operate as well as knowledge of?blockchain user security best practices.?These subjects are still not mainstream and need more time to allow for mass adoption.?
• Technological and accounting standards: How is information recorded? In what format? Accounting styles? Similar questions need to be answered before mass adoption. A market cannot be efficient if every tokenization platform does it in its own way with some sort of globally recognized and adopted standardizations.???
• Difficult systems: Blockchain is still not as friendly for general users as it should be, particularly because it relies too much on browsers rather than mobile apps. User interfaces, applications, and more mobile integration need to take place to remove the cumbersome process behind browser-based applications, problems with?wallet?connectivity, and other issues that prevent non-technological people from being able to easily store and transact via NFTs and digital assets.

Read more: Get up-to-speed with crypto wallet security best practices

NMKR: Removing Technical Barriers to Tokenization

NMKR?is an NFT and Tokenization platform service leveraging the Cardano blockchain to enable businesses and individuals to quickly create NFTs of various assets. Providing plug-and-play tools that do not require coding knowledge removes many of the technical barriers to getting started.

As an established go-to platform in the Cardano ecosystem, NMKR’s services have been used by businesses, gaming projects, creators, and more to successfully mint NFTs of various assets including e-books, diamonds, video game items, and more.

Its products including NMKR Studio and?NMKR Pay?with multi-language support allow anyone to enter the Web3 space seamlessly and also offer traditional fiat payment options to mint their NFTs.

Follow EMURGO on X and LinkedIn for More Tokenization Content

Want to stay up-to-date on the latest business use cases for NFTs, such as real-world asset tokenization, DAOs, and more?

For more content, follow EMURGO on?X?and?LinkedIn.

About EMURGO

• Official Homepage:?emurgo.io
• X (Global):?@EMURGO_io
• YouTube:?EMURGO channel
• LinkedIn:?@EMURGO_io

Disclaimer?

You should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained herein shall constitute a solicitation, recommendation, endorsement, or offer by EMURGO to invest.