Tokenizing Commercial Real Estate (CRE)

Tokenization is the process of representing an ownership interest in real estate with a token. These tokens can represent ownership in the underlying real estate assets. Ownership with tokens can also be used to divide rental yield accordingly. Tokenizing commercial real estate can democratize access to an asset class that is traditionally difficult for retail investors. Despite being well-known as a viable investment option, investors cannot invest in real estate without a substantial starting capital.

Blockchain Technology is Revolutionizing the Commercial Real Estate Market

The blockchain is an immutable distributed ledger technology in which transaction data is recorded. Its benefits include transparency, traceability, accessibility, enhanced security, cost reduction of processes, and irrevocable documentation of the processes. More details on Blockchain applications can be found here.

The ability of Blockchain-based processes in executing transactions without an intermediary or a clearinghouse very much suits a private market like real estate. The distributed ledger holds a history of a transaction, a property, an asset, or a title. It develops a digital secure identifier for a proposed transaction. Also, it offers the ability to transfer funds in new ways. For example, using a digital encrypted (or crypto-) currency such as Bitcoin.

Blockchain in real estate, therefore, can eliminate the need for intermediaries like lawyers and agents by providing a means of property verification and payment to buyers. Paying for a property using cryptocurrencies can also help buyers bypass bank fees. It cuts the fees associated with escrow by using smart contracts that can be customized according to users’ needs. The technology makes it easier and provides more accurate deed transfers. It can improve transparency issues in investing as well as speed up MLS (multiple listing services) listings.

Average Joe and Jane might not be able to afford whole properties or even have access to Commercial Real Estate offerings. Therefore, the tokenized nature of cryptocurrencies makes crowd ownership and fractional sales of real estate possible. Transferrable and tradable tokens representing shares and ownership is the new liquid way for property and landowner to sell or enable growth-financing. Thus, making it accessible to a broader investor crowd.

Innovation for Real Estate

The rise of blockchain technology has birthed to several tokenized "offerings". The more commonly known ones are Initial Coin Offerings (ICO). But as we progress with the emerging technology, a few more have appeared:

  1. ATO (Asset Token Offering),
  2. STO (Security Token Offerings)
  3. DSO (Digital Securities Offerings)
  4. TAO (Tokenized Asset Offerings)

Tokenizing these various assets allow firms, projects or property owners to crowdfund real estate development using cryptocurrency by tokenizing assets. Here’s an article to learn more on the process of tokenizing assets: Security Token Offerings (STOs) — What You Need To Know

Security tokens are exactly what they sound like. They are securities on a Blockchain. A security token could digitally represent any number of real-world assets, from commodities, real estate or car title, to shares of a company or bonds. As with any securities, security tokens are subject to strict regulations.

Tokens are also “programmable.” The code can determine how they’re used based on pre-defined criteria. For example, earning from rental can be automatically payed-out according to an agreed-upon schedule to token holders. This code can be executed without the use of a traditional middleman, like a bank.

A flow of tokenizing real estate from land survey, title creation, blockchain title and title tokenization

Tokenizing assets like a venture fund, a building or a car, enables new liquidity to these asset investments through much easier ways of trading these assets over the web.

The Potential for Tokenization

Wouldn’t it be great to buy a home with a few clicks and sell it in the same manner?

A world where value is exchanged at the speed in which information moves today. Today with cryptocurrencies and blockchain, we are already able to use the internet to securely transfer tokens of value; seamlessly, peer-to-peer, without intermediaries.

A graph of the rise of real estate technology companies

2012–2018, real estate tech companies have raised over $12 billion in funding and 6 companies have been minted to the unicorn club.

A chart of the real estate market in major areas of the world

2004–2020, global real estate investments, by region, in USD trillion…real estate emerges as the biggest asset class out there (not counting derivatives), today worth approximately $217 Trillion.

A real estate market where each property is represented by a limited supply of unique tokens that give certain rights (e.g. use of property, voting, ownership) to those holding them. These tokens are linked exclusively to the real estate asset in question. They can be securely transferred to other users in exchange for payment at any given moment, simply by using your smartphone. When rights to a commercial real estate property are represented by tokens, created on an immutable, permanent, verifiable and auditable Blockchain infrastructure, the underlying asset becomes inherently divisible. Tokenization will transform a once cumbersome and lumpy real estate property into a transportable liquid digital asset.

Predictions estimate, that by 2021 most real estate crowdfunding platforms will leverage tokenization. Investors online might be incentivized to invest in deals that offer a potential 5–30% liquidity premium upside, making the ‘traditionally’ crowdfunded investments less appealing.

Supercharging Real Estate Crowdfunding With Tokenization

Security tokens are digital shares that live on a Blockchain. They offer an efficient path to fractionalize a single high-value asset like a real estate property. Price discovery will be enhanced with the increased trading activity of fractional ownership. Markets will become more efficient for assets that have historically traded infrequently due to high unit costs. Blockchain-based digital shares are changing how we invest online, as liquidity is increased through secondary markets. A tokenized real estate property can be traded anywhere, without limitations. The Blockchain ecosystem is a technology stack where “always open” is the de facto standard on exchanges, where tokenized properties can be traded 24/7.

Digital shares outperform other methods of recording and trading ownership claims:

  • 24/7 markets
  • Decentralized trade
  • Transactional transparency
  • Irreversible code
  • Public auditing
  • Investor pseudo-anonymity
  • Rapid settlement
  • Reduction in direct costs
  • Increased liquidity and market depth
  • Fractional ownership
  • Programmability
  • Automated compliance
  • Asset interoperability
  • Self-custody
  • Fees = fraction of traditional costs
  • Accurate land titles
  • Cross-border simplification

Most new technology comes with a promise to improve business and profitability. And whether one likes it or not, there can be a threat to survival if a business doesn’t adapt to the changing times. Blockchain is challenging status quo and perhaps require CRE companies to better understand the technology and revisit their existing business model, strategy, processes, and financial plan.

Blockchain technology has significant potential to drive transparency, efficiency, and cost savings for CRE owners by removing many of the existing inefficiencies in key processes. Hence, CRE companies and industry participants have to evaluate a potential upgrade or overhaul of their current systems and strategy. Blockchain-based tokenization is essentially the issuance and distribution of digital shares. It’s here to stay — and to bring investors higher liquidity, better diversification opportunities, distributed risk through token holders, and open new marketplaces through peer-to-peer transactions.

The four phases of land development projects- development, opening, growth and maturity.

Sources: CBInsights, Moonwhale, PwC, Deloitte, University of Oxford, McKinsey

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Looking for an STO Consultant?

Moonwhale Ventures position ourselves to provide STO solutions, helping businesses with our STO Financing service. Based in Delaware, USA, Moonwhale will assist you in One-Stop-Shop solution for your security token offering:

  • Token Economics
  • Token Creation & Issuances
  • Marketing Materials
  • Private Sale Fund Raising
  • Public Sale Fundraising
  • Secondary Market Trading

Please feel free to contact usRead our previous blog post on Blockchain Adoption in Mainstream Businesses or Tokenizing Commercial Real Estate.

About The Author:

Danny Christ is the CEO & Co-Founder of Moonwhale Blockchain Ventures Inc.

Based in Kuala Lumpur, Danny has over 20 years of IT, Operations and Supply Chain experience across Germany (home), US, Singapore, Indonesia, Thailand, Malaysia, Vietnam, and the Philippines. He managed IT projects (ERP, CRM, POS, BI) and regional expansion (franchise, M&A) for various SMEs in the Consumer Industry. His career rose to Vice President of a 3500 employees organization.