The advent of blockchain technology is stirring a rethink in global real estate transactions and ownership. Traditional approaches include fractional ownership, whole ownership, or purchasing shares in real estate investment trusts (REITs).
The latter is the most popular of the bunch, but a new investment model in the form of tokenized real estate ownership is daring to revolutionize the market. The model entails tokenized securities, smart contracts, and digital ledger technology.
Every technique has a unique set of benefits and challenges, so understanding both is essential to making sound decisions. If you’re weighing up your options, here is an in-depth comparative analysis between tokenized real estate and REITs.
Understanding Traditional REITs:
REITs were established in 1960 by Congress as a gateway to investing in large scale, income-generating real estate. They are trusts and corporations that own, operate, or finance different sectors of real estate.
REITs and real estate tokenization are two distinct approaches to real estate investment. However, both models are subject to local regulations, including revenue sharing with stakeholders.
As an investor, therefore, all that’s required is to purchase shares from a trust that oversees a portfolio of properties. According to the Wall Street Journal, the annualized ROI on REITs averages over 10%. This model is quite popular because anyone can invest in real estate without buying, managing, or financing assets directly.
Pros:
● Enhanced liquidity as shares are easily traded on stock exchanges
● Access to a diverse portfolio of properties
● Regular cash flow from rental income
● Portfolios are run by experienced managers, reducing investor workload
Cons:
● Lacks the tax advantages of direct real estate investment because dividends are taxed as ordinary income.
● Suffers from market volatility as share prices are typically affected by fluctuations in the stock exchange.
Exploring Real Estate Tokenization:
Firstly, real estate tokenization is the concept of dividing/converting ownership of real estate into digital tokens on the blockchain to enable fractional ownership, enhanced liquidity, and greater access for small investors.
These tokens can securitize assets using blockchain technology, and are not limited to real estate. Security tokens can represent financial instruments like funds, bonds, and tangible assets such as art.
For example, if the commercial value of a luxury hotel is split into 50,000 shares, then each will represent one digital token on the blockchain. If an investor buys 10 of these tokens, they straightaway own a fraction of the hotel, and are entitled to receive dividends from its rental income.
One major upside to real estate tokenization is it lowers the barriers to entry for small investors wanting to break into real estate. This model has added a whole new frontier to cross border transactions and ownership of real estate.
Transactions are facilitated by smart contracts and don’t require intermediaries, so tokens can be bought or sold in seconds. Crucially, all transactions are recorded publicly on the blockchain, a platform that guarantees traceability and regulatory compliance.
Pros:
● Enhanced access to fractional ownership for small investors in high-end properties
● Smart contracts automate processes and are more efficient
● Tokens can be traded on digital platforms with a press of button, bringing a new level of liquidity.
● All transactions are recorded on the blockchain, which is the most transparent public digital ledger.
Cons:
● Every jurisdiction has its own set of rules that govern property sales, so the lack of a unified regulatory framework poses challenges.
● The blockchain technology, including stable coins, is a fairly recent innovation, hence the purchase of much of tokenized real estate is still done via off-chain bank transfers.
Comparative Analysis:
While REITs and tokenized real estate share certain similarities with respect to liquidity, risks, and potential returns, they utilize distinct approaches to investing. Below is a summary of how they compare:
| Real Estate Tokenization: | Traditional REITS: |
| ● Token holders’ ownership is tied to the performance of an asset/property. As a result, they are entitled to a loss or profit share if a property depreciates, appreciates, or is sold. | ● Investors become shareholders in the trust/corporation that owns a portfolio of real estate. |
| ● Liquidity is possible through sale of tokens, but that depends on the existence of secondary markets that trade those tokens | ● Can easily be bought or sold on the stock exchange, offering better liquidity for real estate properties. |
| ● Token holders must make proportional contributions to the management and upkeep of properties. | ● Shareholders don’t partake directly in the capital gains process of assets |
| ● Lack a centralized regulatory framework. | ● Operate under local tax and regulatory authorities. |
| ● Blockchain technology allows for instantaneous trades to take place in real time. | ● While generally more liquid than direct real estate investment, transactions can be delayed by trading limitations and timescales. |
| ● More accessible to a broader audience as investors can own properties for a fraction of the cost required for REITs. | ● Typically require a higher minimum cost to invest, which can be a barrier for small investors. |
| ● Common risks include cybersecurity and regulatory uncertainties. | ● Exposed to higher interest rates and market volatility. |
| ● Its efficiency has potential for higher returns because it eliminates management costs. | ● Often perceived as a stable income stream from rental income. |
Investment Considerations:
Are you looking to invest in real estate but are unsure whether to take the REITs or Tokenized approach? As technology evolves, the market dynamic for both models is likely to change. REITs, valued at $1.3 trillion by Statista, is a stable traditional financial market that is likely to leverage technology to enhance operational efficiency.
On the contrary, tokenized real estate is gaining traction, particularly as blockchain technology goes mainstream. Its market estimate is projected at $5 trillion by 2030. For both models to be stable, however, clearer regulatory frameworks must be developed.
Conclusion:
Both investment approaches present unique advantages and risks that can cater to different investor preferences. Few markets are as dynamic as real estate, and that has been made more acute with advancement in technology. Whichever route you take will ultimately depend on investment capital, expected ROI, and risk tolerance.
Disclaimer:
CBD:
Qrius does not provide medical advice.
The Narcotic Drugs and Psychotropic Substances Act, 1985 (NDPS Act) outlaws the recreational use of cannabis products in India. CBD oil, manufactured under a license issued by the Drugs and Cosmetics Act, 1940, can be legally used in India for medicinal purposes only with a prescription, subject to specific conditions. Kindly refer to the legalities here.
The information on this website is for informational purposes only and is not a substitute for professional medical advice, diagnosis, or treatment. Always seek the advice of your physician or another qualified health provider with any questions regarding a medical condition or treatment. Never disregard professional medical advice or delay seeking it because of something you have read on this website.
Gambling:
As per the Public Gambling Act of 1867, all Indian states, except Goa, Daman, and Sikkim, prohibit gambling. Land-based casinos are legalized in Goa and Daman under the Goa, Daman and Diu Public Gambling Act 1976. In Sikkim, land-based casinos, online gambling, and e-gaming (games of chance) are legalized under the Sikkim Online Gaming (Regulation) Rules 2009. Only some Indian states have legalized online/regular lotteries, subject to state laws. Refer to the legalities here. Horse racing and betting on horse racing, including online betting, is permitted only in licensed premises in select states. Refer to the 1996 Supreme Court judgment for more information.
This article does not endorse or express the views of Qrius and/or its staff.
