The real estate market: a realm of opportunity for some, yet still out of reach for others. The global real estate market reached $326.5 trillion in 2020 – that’s four times the size of the world’s GDP. Despite this phenomenal growth, only 39% of under 35 year olds in the US own their own home. The major roadblock is not having sufficient savings for down payments. With blockchain technology, it’s possible to lower the cost of entry to the real estate market, allowing investors to own a portion of a property rather than purchasing it in its entirety – this is known as a fractional investment. Beyond this, blockchain technology can bring about faster mortgage applications through decentralized identity, transparency through recording housing agreements and mortgage repayments on-chain, and more efficiency through an alternative payment system that can reduce intermediaries and offer lower transaction costs. Many of these improvements can be brought about through tokenization.
How tokenization works
Tokenization refers to the process of converting real-world assets – your house, watch, or car – into digital tokens on a blockchain. These tokens represent ownership or entitlement and can be traded or transferred securely and transparently. Tokenization enables fractional investments, liquidity, and facilitates new forms of value exchange. A token is created through a smart contract (a contract that self-executes through code) and can be recorded on a blockchain such as Algorand. Let's say you want to tokenize your house and sell shares in it to release some liquidity but still want to live there. These terms can be written into a smart contract that lives on a blockchain. The benefits of digitizing assets, like property, but also airline tickets, music licenses, and even agricultural commodities, are that it makes financial markets more efficient, transparent, and accessible.
Lowering the barrier of entry
High initial down payments frequently keep people locked out of the property market. Blockchain enables fractional property ownership, allowing individuals to access housing with a small amount of capital. Fractional housing investments are possible without blockchain; however, it becomes pretty costly once back-office operations and commission fees are factored in. Traditional fractional investing platforms typically require a minimum investment of $1,000 to $50,000. Blockchain can bring this cost down to as low as $50 on Lofty, a real estate platform built on Algorand that offers fractional ownership of properties across the US. Ctrl Alt, a UK-based alternative assets exchange, recently tokenized the first property in the UK, allowing anyone to invest in a percentage of the property.
Expanding access to commercial real estate
Commercial real estate is often limited to institutional and high-net-worth investors because it’s typically more expensive than residential properties. A common way to access commercial real estate, without having to buy it in its entirety, is through a real estate investment trust (REIT). Even so, commercial real estate investing can require more expertise and specialized knowledge may typically deter newcomers. SliceSpace facilitates access by buying portions of commercial real estate in the US and offering it to investors on its retail marketplace. Each listing is divided into a million slices, which lowers the cost and makes it more accessible to investors. Those who have purchased a slice of the real estate are then able to collect rental payments that are distributed daily through Algorand smart contracts.
Improving transparency and trust
The first house in the US was successfully sold through a real estate broker around 1910. What emerged in the decades to follow – licensing, certifications, and regulations – is the real estate market as we know it today. Over the past 70 years, barely anything has changed in the sale of housing and it remains incredibly opaque. Blockchain proposes transparency as a means to increase trust for all parties involved, which can empower everyone to make the best-informed decisions around property sales and investments. In addition, blockchain can enable the seamless tracking of property ownership, rental income, property performance, and portfolio management. Housing data can be readily available for brokers, sellers, and buyers – rather than hidden by a traditional, centralized real estate company.
Increasing efficiency and accuracy
At present, the property market is widely segmented across centralized marketplaces and it can be challenging to track down accurate information about a property and its current value. Through decentralization, information on properties can be widely shared and collated into a single decentralized marketplace. This marketplace would utilize a blockchain database to store and maintain information about each home. It would make it easier to ensure that property data is kept accurate and up-to-date. A decentralized marketplace could also facilitate direct interaction between buyers and sellers, which in turn would save time and reduce overall costs.
Cutting costs across the board
Blockchain can streamline real estate transactions by eliminating the need for intermediaries, such as brokers, lawyers, and title companies thanks to smart contracts that can automate the execution of contract terms and conditions. With its transparency, immutability, and ability to verify information, blockchain can also reduce costs by eliminating the need for third-party verification and audits. Indeed, there will still be a need for property management; however through the economy of scale, Lofty is proving that it’s possible to reduce the costs often passed onto investors by reducing management, inspection report, and contracting fees.
Unlocking equity for homeowners
Tokenization can be a means of unlocking equity. Property owners can sell a portion of their property to investors and gain liquidity without having to sell the entire property. For example, you could tokenize your property and sell a percentage to start a business, pursue higher education, or travel the world. In the case of Vesta Equity, each property is tokenized on the Algorand blockchain using Algorand’s Standard Assets (ASA). The legal rights of the property owner (such as retaining the right to live in the property) and the investor are locked into a smart contract. The property tokenization platform then allows for property owners to connect directly with investors and easily access the cash tied to their property.
Blockchain will bring more accessibility than ever before to the real estate market by lowering the barrier of entry and opening the door to a wide range of investors on a global scale. Blockchain can enable a new era of transparency and trust that instills confidence in buyers, sellers, and investors, paving the way for smoother transactions and better-informed decision-making. In terms of efficiency and accuracy, blockchain can streamline processes, saving time and reducing the risk of human error. Overall this technology will propel the property market forward, making it a more inclusive and trustworthy space for all.
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