Why Tokenization Could Be the Answer to Real Estate Liquidity Crunch

May 07, 2024

The tokenization of real-world assets (RWAs) is fast gaining momentum, with traditional fund managers, including the likes of Blackrock and Franklin Templeton, now issuing tokenized U.S. treasuries.

However, amidst this surge of RWAs, one asset class that has yet to get the attention it deserves is real estate. The latest statistics reveal that the global real estate market was valued at $613 trillion in 2022, with projections showing it could eclipse $729 trillion by 2028. However, despite this potential, real estate remains one of the most illiquid asset classes.

To provide some context, assets like stocks and bonds are traded on a daily basis, but a piece of property can take more than a decade before it changes hands. Of course, one of the main reasons is that property owners prefer to hold real estate as a long-term asset or because of the sentimental value attached to generational ownership.

But at the same time, we cannot ignore the fact that disposing of real estate can be an uphill task, especially if one is urgently in need of cash (liquidity).

Bridging the Access Gap in Traditional Property Ownership

According to a tokenization report by BCG, the opportunity to tokenize illiquid assets such as real estate, art, and select commodities stands at a whopping $16 trillion. This partly explains why traditional financial companies that have been anti-crypto are, for the first time, willing to join the digital asset bandwagon.

So, what’s in it for the real estate market? With tokenization, it is now possible for small-time players and underprivileged communities to gain access to the traditional real estate market through fractional ownership. Instead of buying a whole building or a huge piece of land, tokenization allows prospective investors to own a small portion by purchasing a specific number of digital assets that represent part of the underlying property.

You might be wondering, how about the nuances associated with real estate property ownership, such as the notarization of the transfer documents or profit allocations in the case of an income-generating property?

Although a nascent area of innovation, Blocksquare’s real estate tokenization protocol is a good example of the handful of RWA projects that have managed to integrate a foolproof notarization and registration process in its smart contract infrastructure. The project recently completed tokenizing a parking slot in Slovakia’s Tech Park Ljubljana, executing the first-ever notarization of a tokenized real estate asset that was registered in the Slovenian land registry.

While some technical operations were involved, the tokenization process involved Blocksquare creating an ERC-20 smart contract dubbed ‘Prop Token’ to define the maximum number of its native token ‘BSPT’ that would be issued to represent the parking lot. On the other hand, NDP, which is the real estate company that manages the parking lot, drafted a corporate resolution, outlining the obligations and rights associated with the property.

This corporate resolution was then made public through the InterPlanetary File System (IPFS) and recorded on the Prop Token smart contract to automate the token issuance process and distribution.

The final and most critical step was the notarization which involved a loan agreement to tie down the parking lot as collateral. In this case, Blocksquare acted as the lender, issuing BSPT tokens that were distributed to several investors by NDP real estate management (borrower). More importantly, this transaction was authenticated by a certified notary public hence the recognition in the Slovenian land registry.

Of course, there are many other approaches that real estate RWA projects are using to tackle the liquidity gap and introduce the aspect of enforcement to digital property. Notably, the projects in this realm could benefit from partnering with local authorities that are involved in the property market which happens to be the case in a country like China. This way it would be more seamless to tokenize real estate with the blessings of the regulators.

To add to it, specialization in certain types of real estate is also a need in the current market. For instance, assuming a potential real estate investor in the U.S. wanted to acquire high end properties in tourist destinations such as Thailand, it would be a cumbersome endeavor if they decided to go through traditional realtors. However, with decentralized real estate marketplaces such as Sabai RWA, these types of properties are now just clicks away.

What Is the Future of Tokenized Real Estate?

As mentioned in the introduction, real estate holds immense potential for investors looking to maximize their returns or diversify their portfolio. It doesn’t stop there!

Besides the allure of returns to investors, the real estate tokenization market could soon become the go-to ecosystem for loan borrowers in the commercial real estate (CRE) industry. According to a report by Reuters, the CRE market faced one of its biggest liquidity gridlocks last year following the Fed’s aggressive rate hike regime. Even private lenders who are considered ‘last resort’ could only lend to the CRE market at very high rates.

What if more real estate were tokenized? This would mean more accessible capital for CRE borrowers at lower rates, while at the same time, even small-time lenders would get a piece of the real estate pie.

In summary, the tokenization of real estate doesn’t stop with issuing or distributing tokens; this ecosystem can easily have a trickle-down effect on other asset classes that have long been cash-strapped due to over-reliance on illiquid property.