We at RainFin are Enabling Real Estate Tokenization—Here's Why

We at RainFin are Enabling Real Estate Tokenization—Here's Why

As the CEO of RainFin, I am increasingly receiving requests from property owners and investors eager to tokenise real estate to invest or sell. This growing interest has led us to build a dedicated team to focus on providing the tools and support necessary for this innovative approach. Here's why we believe in the potential of real estate tokenisation and how it benefits sellers and investors.

Traditional Real Estate Investment vs. Tokenization

Traditional real estate transactions in South Africa come with high costs that significantly impact profitability. For a property valued at 10 million ZAR, sold three times over 20 years, the cumulative costs include:

• Estate Agent's Commission: 6% per sale, totalling 1.8 million ZAR.
• Transfer Duty: Approximately 933,000 ZAR per sale, totaling 2.799 million.
• Legal Fees: 1% per sale, totalling 300,000 ZAR.
• Deeds Office Fees: Roughly 1,500 ZAR per sale, totalling 4,500 ZAR.
• Total Traditional Costs: 4.9035 million ZAR over 20 years.

These costs can reduce the profitability of real estate investments, making them less attractive for investors and property owners.

The Structured Approach of Real Estate Tokenization

Tokenising real estate involves creating a digital representation of property ownership on a blockchain. This method, often structured through an En Commandite Partnership (ECP), allows investors to trade Limited Partner (LP) certificates representing their share in the partnership. This approach offers several significant advantages:

Lower Transaction Fees

Blockchain platforms typically charge around 1% per transaction, significantly lower than traditional transaction fees. This reduction in fees can translate into substantial savings over time.

Elimination of Transfer Duty

LP certificate transactions are exempt from traditional transfer duties, which further reduces the costs associated with buying and selling property.

Reduced Legal and Administrative Costs

Smart contracts automate many processes, reducing legal fees and administrative burdens. This automation ensures that transactions are efficient, transparent, and secure.

Cost Savings with Tokenization

• Blockchain Transaction Fees: 1% per transaction, totalling 300,000 ZAR for three sales.
• Total Blockchain Costs: 300,000 ZAR over 20 years.
• Total Savings: 4.6035 million ZAR.

These cost savings make real estate tokenisation an attractive alternative to traditional real estate transactions, offering property owners and investors a more efficient and cost-effective solution.

Advantages of Tokenization for Property Owners

Tokenisation allows property owners to sell a portion of their property to investors while retaining ownership of the remaining share. This approach allows owners to:

Raise Capital Without Losing Control

Property owners can sell tokens as needed, retaining control over the rest of the property. This flexibility allows for capital raising without selling the entire property.

Capture Future Upside

Owners can hold onto tokens and sell gradually as the property's value increases. This approach allows for potential appreciation in property value to be captured over time.

Near Zero Fees

The costs associated with buying and selling tokens are minimal, making it an economical option for property owners.

Flexible Financial Strategies

Owners can sell tokens when needed and repurchase them after refinancing. This flexibility allows for dynamic financial strategies to adapt to changing market conditions.

Facilitate BEE Transactions

Tokenisation can enable partial ownership with direct management and the ability to repurchase after government lease terms, providing liquidity events for BEE (Black Economic Empowerment) investors. This feature supports government initiatives and promotes inclusivity in property ownership.

REITs vs. Tokenization

While REITs (Real Estate Investment Trusts) have been a popular investment vehicle, they have faced significant challenges in South Africa. The largest five SA REITs have lost over R100 billion in value, demonstrating their volatility and risk. However, REITs do offer liquidity, diversification, and professional management.

Advantages of REITs

• Liquidity: Easy buying and selling on the stock market.
• Diversification: Exposure to various property types and locations.
• Professional Management: Expert handling of property investments.

However, liquidity challenges can still exist for tokenised real estate until the market matures and gains widespread adoption. Despite this, tokenisation presents a forward-thinking and potentially more profitable investment avenue than traditional REITs.

At RainFin, we are committed to enabling real estate tokenisation by providing the necessary tools and support. This innovative approach offers substantial benefits, including significant cost savings and greater flexibility for property owners. By holding property in an En Commandite Partnership and trading LP certificates, tokenisation reduces transaction fees, eliminates transfer duties, and simplifies legal processes. For South African investors and property owners, real estate tokenisation presents a forward-thinking and potentially more profitable investment avenue compared to traditional REITs