Hello and welcome to the next episode of our guide on tokenization. This time we’ll be speaking about tokenizing real estate. Let's discover how the process goes, look at the benefits of real estate tokenization, and analyze real-life examples. Ready to jump right into it? Let's go! So, what is real estate tokenization? To understand what real estate tokenization is, let's first see what tokenization and tokens are in general. Tokenization describes the process of digitizing an asset. It’s based around cryptocurrency fundraising, during which investors can exchange their fiat or cryptocurrencies for digital units – tokens. Thus, real estate tokenization is the process of creating tokens using blockchain technology and assigning them to real estate property. Not only can tokens be used for the sale and represent ownership of the property, but they can also represent capital interest. This means they can be used to raise funds and attract a wide range of investments. What types of real estate tokens are there? Mainly, there are two types of tokens used in real estate: The first is equity tokens They work in the same way as a traditional stock asset. Equity tokens show what percentage of ownership belongs to the investor. Thus, buying this token allows you to become a joint owner of a piece of real estate. The second type is debt tokens These are debt instruments such as rentals and mortgages. The token digitizes the rent charged for real estate and automates the process of collecting rental receipts. The distribution of rent between token holders also occurs automatically. The amount of payment they receive depends on the conditions predetermined in smart contracts during the token's initial purchase. What are the advantages of tokenizing real estate? Fractional ownership and high accessibility Tokenization allows owners to divide the full value of the property into smaller shares. For example, a room or a section of the house’s premises in square meters can be represented by a token on the blockchain. This way owners can sell shares to a broader group of investors and further diversify real estate sales. Flexibility and liquidity of digital assets Anyone can invest a certain amount and become a partial owner of a property and yield profits. Additionally, tokens can be sold and purchased on secondary markets. Real estate tokens can be traded on exchanges just like any other stock. Digital ownership allows you to sell your assets at any time, without the need to follow lengthy procedures. Global availability Digital assets stored in a decentralized blockchain ledger are immune to location restrictions. Nobody can stop you from purchasing an estate on the other side of the globe in the middle of the night. Speedy deals and transactions Tokenization means no more tedious paperwork processes. Deals are automated with smart contracts which automatically process transactions when the terms and conditions are met. Every detail is encoded into digital assets, which leaves no room for errors and no reason for unwanted delays. Low entry barriers With real estate tokens, investors no longer need large sums of money to purchase an entire property. Fractional ownership leads to more opportunities for lower-end investors and enables a more complex shareholding structure. Business growth By offering tokenized real estate, you open up new ways to promote your business, attract new customers and investors, and gain access to more tools for selling property. What about the regulations? Although there are some local jurisdictions, real estate tokens generally qualify as securities. They are regulated under state and federal law. As for the United States, here the Securities and Exchange Commission (SEC) is the primary regulator overseeing securities offers, sales, and investment activities, including those involving digital assets. This means that real estate tokens must be registered with the SEC or they might also fall under one of the exemptions that free them from registration. Another structure for token sales in the US is Rule 506(c) under Regulation D. Rule 506(c) allows a company to sell an unlimited amount of securities to accredited investors. However, securities issued under Rule 506(c) are restricted securities under the Securities Act of 1933. As a result, they cannot be sold or transferred without registering a statement filed with the SEC, or having an exemption from a requirement such as Rule 144. In the UK, security tokens are generally regulated in the same way as other types of securities with similar basic characteristics. Firms offering security tokens need to consider and ensure they comply with the authorization and financial promotions requirements of sections 19 and 21 of the Financial Services and Markets Act 2000 (FSMA). Real estate companies also have to consider whether those tokens qualify as “transferable securities” under FSMA, which cross-refers to the definition of transferable securities in the MiFID II legislative framework. No matter where your company operates, a qualified consulting team can help your STO campaign meet all the regulations. How to tokenize real estate assets? There are important decisions to be made and points to consider when tokenizing property. First of all, you need to learn what STOs are. STO stands for Security Token Offering, which is about issuing digital security tokens on blockchain that fall under securities laws and regulations. Security token sale location is a special STO platform built on the blockchain. They allow property owners and agencies to digitize real estate shares, turn them into security tokens, and put them up for sale. Here is how real estate STO platforms work: A real estate owner, company or agency launches an STO campaign They digitize property shares and convert them to security tokens Investors create an account on the platform. Then, they get access to information about the property, transactions, and tokens. Once they get AML/KYC verified, they can purchase tokenized shares All records about the investors and their tokens are safely stored within the smart contract When running STO campaigns, both issuers and investors can enjoy multiple benefits such as better liquidity, efficient management of digital assets, greater accessibility, low risks, direct participation, and high transparency level. Choose the right platform or create one. In order to launch an STO campaign, it is extremely important to determine the right blockchain platform. The platform should enable asset owners to easily transfer ownership to anyone they prefer and provide compliance with local legal terms. It should offer automated KYC/AML verification systems for accredited investors, and provide high liquidity for real estate tokens. You also have the option to build your own platform. In this case, you can customize it according to your needs. For example, you can create custom reports for legal purposes, make unique designs of all content, and customize KYC and contract flow. Plus, you can work with developers to come up with any new features that will make your platform visually appealing, easy to use, and, importantly, highly profitable. Pay attention to the platform architecture and token design. Whether you choose a third-party platform or build your own, remember that the platform should be designed taking into account the different types of property assets, the shareholders and users involved, and the regulatory framework. You will have to determine the value of the assets and find the best way to digitize and divide it into tokenized shares. Another important thing to do is to define the rights of shareholders. Token and smart contract design must include the rights of shareholders and define what they can do with an asset. For instance, receive dividends or participate in governance. Be sure to analyze the types of potential investors. The business environment and jurisdiction determines which types of investors will be enabled to deal with the asset. Providing tokens with the appropriate compliance mechanisms and features that attract a variety of investors are key for a successful real estate project. And finally – token distribution. Tokens can be distributed through token sales. In this case, the tokens will be transferred directly to the investors’ wallets after they acquire the digital share of the real estate. Another option that can actually help attract new users to your platform is organizing token airdrops. This implies the distribution of tokens, usually free of charge, to the first users who come to the platform. Showcasing your property on popular marketplaces and featuring your tokenized platform can also help in getting closer to mainstream use. Additionally, you can consider developing loyalty programs. Tokens can be used in loyalty programs in residential real estate where tenants are granted bonuses and use them to get additional services like cleaning, repairs, or home security perks. What real estate tokenization projects have already been successfully implemented? While there are plenty of them, let’s take a look at the examples that have garnered a lot of attention. Templum Markets sold a security token representing the St. Regis Aspen Resort stock, accepting USD, Bitcoin, and Ethereum. By buying Aspen Coins through a regulated broker, accredited investors can now indirectly own the resort’s shares. The AnnA villa near Paris became the first piece of real estate in France to be sold through a blockchain transaction. The villa, whose value is estimated at €6.5 million, was sold in three stages. First, the ownership of the building was transferred to the joint-stock company SAPEB AnnA. Then the property was divided into 10 Ethereum-based tokens and the tokens were distributed among the new owners. The result was that each of the tokens was split once again, into 100,000 units worth €6.50 each. Smartlands successfully completed its pilot STO worth £12.06 million. It became the first company to tokenize a UK-based property. This was a student accommodation block in Nottingham. The key goal was to enhance the investment experience for all the parties involved, from investors and issuers to asset and fund managers. They did so by automating and digitizing operations related to real estate management. Thank you for watching. We hope our guide shed some light on property tokenization and drew away any doubts about the opportunities tokens offer real estate businesses. To keep up with the latest technology trends — check out our PixelPlex Blog where we cover all these and many other related topics. Stay tuned! Bye!