Property Tokenization: the Future of Real Estate Investing
Asset tokenization will increase financial inclusion by opening up illiquid asset classes to a broader investor base. This value proposition is particularly relevant in real estate markets.
Metro 10 goes from Paris city center to Boulogne-Billancourt, a commune in the western suburbs of Paris. It’s one of the wealthiest cities in France, with an average household income of nearly twice the French average.
Strolling through the streets of Boulogne, one can find some of the finest architecture in the country, with many buildings worth millions of dollars. One of those buildings is the AnnA Villa, which is valued at € 6.5 million. Last week, the building became the first ever property in France that was sold via a blockchain transaction.
Investing in a Villa nearby Paris for as little as € 6.50
The transaction took place in three steps. Firstly, the ownership of the building was transferred to a joint-stock company called “SAPEB AnnA.” Secondly, the ownership of the company was divided into 10 Ethereum-powered tokens which were distributed among the new owners. In the last step, each of these tokens was then further broken down into 100,000 units, meaning each token has a face value of € 6.50.
The blockchain investment management platform Equisafe managed the deal. French real estate companies Sapeb Immobilier and Valorcim bought the tokens.
While this was the first property deal on a blockchain in France, similar transactions have occurred in Germany and Switzerland.
Looking across the pond, the U.S. has already seen its fair share of larger real estate-backed security token offerings, with deal sizes of more than $30 million.
In the meantime, institutional investors are looking at the use case as well. Earlier this year, Elevated Returns (ER) and Securitize claimed they will tokenize $1 billion of real estate assets using the Tezos blockchain. In Germany, Peakside Capital launched a tokenized real estate fund last month with a target volume of € 200 million.
Use case real estate: increasing liquidity and financial inclusion
Property tokenization is one of the most promising use cases of blockchain technology. With a total asset value of $228 trillion globally, real estate is a more valuable asset class than bonds and stocks combined.
Despite the enormous market size, real estate is still an illiquid asset class with high barriers to entry. Previously, investors would have needed € 6.5 million to buy AnnA, meaning the average investor could not afford to participate in the deal. In a tokenized market, everyone could buy a stake in Villa AnnA with as little as €6.50.
Increased financial inclusion will open up illiquid asset classes that have so far been out of sight for the average investor. One may argue Real Estate Investment Trust (REIT) funds propose the same value proposition, but REIT funds often come with minimum investments and high upfront and brokerage fees. As investors can buy and sell tokenized real estate through digital exchanges, there are virtually no minimum investments and transaction costs are significantly lower.
Property tokenization does not only allow a wider range of investors to access the asset class but will eventually also enable a liquid secondary market. Once the issuer has listed a token on a digital exchange for secondary trading, investors can easily resell their assets.
At this point, a functioning secondary market for security tokens does hardly exist. However, given the enormous value proposition, it won’t take long until secondary token markets attract sufficient liquidity.
What’s being said for real estate is equally valid for other illiquid asset classes – like arts or private equity. But considering the size of the real estate market, that’s where tokenization can make a huge difference for investors, developers, and fund managers.