Property is the world\u2019s single largest store of wealth, and if the cryptocurrency and blockchain world is seeking an express route to mass adoption, it could do worse than partnering with the real estate industry.<\/b>\u00a0<\/span><\/p>\n According to a September 2021 report by Savills World Research, the <\/span>estimated<\/span><\/a> value of all the world\u2019s real estate stands at $326.5 trillion. By comparison, crypto-sector market capitalization was about $1 trillion in mid-July.\u00a0<\/span><\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n The property market, moreover \u2014 at least its commercial real estate segment \u2014 is also characterized by costly entry barriers and asymmetrical information that favor insiders. Its fees are high, paperwork onerous, and deeds are sometimes defective, falsified or missing. Some properties can take years to move \u2014 another way of saying its market is illiquid. All in all, it isn\u2019t surprising that many believe this market is ripe for disruption, particularly through blockchain-enabled tokenization.\u00a0<\/span><\/p>\n This notion of tokenizing real estate isn\u2019t entirely new. As far back as 2019, for example, a 6.5-million-euro villa in Boulogne, outside Paris, was tokenized. One million shares were put up for sale on the Ethereum blockchain, the first property in France ever <\/span>sold <\/span>as a blockchain transaction. An individual could have purchased a part of the luxury villa for as little as 6.5 euros.\u00a0<\/span><\/p>\n Last year\u2019s <\/span>nonfungible token (NFT) breakout<\/span><\/a> \u2014 and real properties are <\/span>nonfungible<\/span>, i.e., not interchangeable \u2014 along with some more supportive regulations, like Regulation Crowdfunding (Reg CF) in the United States, have trained the spotlight more squarely on crypto and property partnerships. This year\u2019s metaverse hype, including Yugo Labs\u2019 <\/span>record-breaking virtual land auction<\/span><\/a>, has not discouraged activity in the real property world, either.\u00a0<\/span><\/p>\n \u201cWeb3 will be all about ownership, owning fractionalized shares,\u201d says Bobby Singh, founder of the NiftySky DAO, speaking at June\u2019s NFT.NYC 2022 convention, which featured an entire track on tokenized real estate. \u201cImagine fractionalizing the Empire State Building into 2 billion shares.\u201d An individual could own a piece of the Empire State Building for several dollars.\u00a0<\/span><\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n Ownership creates its own momentum, Singh continued. \u201cIf you become a collector, an owner, you\u2019re more likely to talk about it.\u201d More owners mean more excitement. \u201cThe concept of title is very important.\u201d<\/span><\/p>\n \u201cBlockchain has the potential to transform real estate,\u201d Lamont Black, associate professor in DePaul University\u2019s department of finance and real estate, tells Magazine. Real estate is all about records of ownership and how a property is financed, he explains, and \u201cblockchain is ideally suited as a shared system of record-keeping for this type of application.\u201d<\/span><\/p>\n Many of these principles are \u201calready being applied to digital real estate in the metaverse,\u201d adds Black, while the ideas behind Web3 \u2014 of which the metaverse is one part \u2014 \u201care very much rooted in ownership of digital assets, including basic things like personal data.\u201d<\/span><\/p>\n \u201cThe efficiency and certainty that comes with tokenization is undeniable,\u201d David Tawil, president and co-founder at ProChain Capital, tells Magazine, and this hasn\u2019t been lost on the real estate industry.\u00a0<\/span><\/p>\n If one accepts Savills\u2019 numbers, the value of the world\u2019s real estate is more than 300 times the size of the crypto and blockchain sector, which recently slumped below $1 trillion in market capitalization. That disparity hasn\u2019t been lost on observers.\u00a0<\/span><\/p>\n \u201cIf even just 0.5% of the total $280 trillion global property market were tokenised in the next five years, it would become a $1.4 trillion market,\u201d <\/span>wrote<\/span><\/a> Moore Global, a global accountancy, advisory and consulting network in August.\u00a0<\/span><\/p>\n Alternatively, if one uses Savills\u2019 estimate of a $327-trillion market: If just 1% of the global real estate market were tokenized, it would triple the current market cap of the entire cryptocurrency world.\u00a0<\/span><\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n About four-fifths of the world\u2019s real estate is residential, according to Savills. Commercial real estate accounts for only about one-tenth of the total, but that might be where tokenization first makes an impact, some say.<\/span><\/p>\n Singh, a veteran of the New York commercial real estate business, explained at the NFT.NYC convention that the legacy commercial real estate market has \u201ca lot of friction\u201d and is burdened by a lack of liquidity. Innovations like blockchain-based NFTs can help with record-keeping because the blockchain is transparent, \u201cand fractionalization will make real estate more liquid.\u201d<\/span><\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u201cWe believe this market will be more open to alternate sources of capital raising, including tokenization,\u201d Navonil Roy, CEO of United Arab Emirates-based LandOrc, tells Magazine. His firm facilitates lending for the real estate industry by providing access to decentralized financing, using land titles in nonfungible token form as a collateral.\u00a0<\/span><\/p>\n Capital formation is often an obstacle in real estate ventures, and tokenization can \u201copen the door for a broader pool of investors,\u201d Sean Stein Smith, assistant professor in the department of economics and business at Lehman College, tells Magazine, \u201cby being able to tokenize and bifurcate the ownership and custody of the underlying physical real estate asset.\u201d It can also enable peer-to-peer secondary transactions so \u201ca robust second market can also be developed.\u201d<\/span><\/p>\n The fact that crypto transactions are conducted in real-time offers potential advantages, too, such as \u201cincreasing the speed with which mortgages are approved and transactions are completed,\u201d adds Stein Smith.<\/span><\/p>\n Despite the enormous potential, blockchain technology has made relatively small inroads in the area of property rights so far. The Boulogne villa cited above was more of an exception than a rule.\u00a0<\/span><\/p>\n \u201cBlockchain is a technology that requires coordination among market participants. Until there is more adoption of this technology, the impact will be limited,\u201d Black tells Magazine, adding:<\/span><\/p>\n \u201cAnother hurdle is the role of government. Because real estate title is largely regulated by local governments, the recording of ownership on a blockchain will require government adoption as well. The forward-thinking and nimble municipalities will lead the way.\u201d<\/span><\/p>\n<\/blockquote>\n The \u201cpromise\u201d of a globalized, tokenized real estate market with secondary market trading has taken some time \u201cbecause it required getting multiple licenses,\u201d Max Dilendorf, partner at the Dilendorf Law Firm and who has been working on real estate tokenization projects since 2017, tells Magazine. Securitize LLC led the way, he says, becoming a U.S. Securities and Exchange Commission-registered transfer agent operating on the blockchain about three years ago, but \u201ccompanies have spent years and years to get licenses in the U.S.\u201d as well as Asia and Europe.\u00a0<\/span><\/p>\n Another obstacle is that so much of the required data to complete a tokenized real estate transaction does not occur natively on the blockchain. It has to be entered manually. University of Basel professor Fabian Sch\u00e4r, for example, wanted to invest a few hundred Swiss francs in a multifamily house in Detroit, as he <\/span>recounted<\/span><\/a> in a May 2022 Credit Suisse Insights interview:<\/span><\/p>\n \u201c\u2018The technical process related to the token functioned seamlessly.\u2019 But then came something that made Sch\u00e4r cancel the transaction: \u2018There were around 150 pages of legal documents that I had to read and sign.\u2019\u201d<\/span><\/p>\n<\/blockquote>\n The real estate sector, too, is sometimes resistant to change, which could impede adoption. \u201cReal estate brokers and agents are relatively conservative in their adoption to new technology due to both the monetary sums involved and the implications associated with property ownership rights,\u201d notes Stein Smith.\u00a0<\/span><\/p>\n More success stories may be required, too, before things really get moving. \u201cReal estate owners looking to raise money have a single goal: lower cost of capital,\u201d Yael Tamar, CEO and co-founder of SolidBlock \u2014 a real estate tokenization platform \u2014 tells Magazine. \u201cUntil they are convinced that there is an audience of investors looking specifically for property-backed security tokens, they will not bother with nice-to-have solutions.\u201d\u00a0<\/span><\/p>\n Then, too, the <\/span>DeFi summer<\/span><\/a> may have inadvertently slowed things down, with DeFi lenders becoming \u201cspoiled\u201d by the unusually high lending returns they enjoyed during this highly liquid period, suggests Roy, adding:<\/span><\/p>\n \u201cTheir expectations of returns in the digital asset world cannot be replicated with real world assets, which are grounded by real world economics. This change in mindset is the most daunting obstacle.\u201d<\/span><\/p>\n<\/blockquote>\n The path ahead could be long, too. When Savills\u2019 Marie Hickey, director of U.K. commercial research, recently<\/span> wrote<\/span><\/a> about \u201cfour trends shaping retail real estate globally,\u201d there was no mention at all of tokenization or blockchain technology. Asked about this, Hickey tells Magazine, \u201cTokenized real estate is just too insignificant to be cited as a key trend at this point.\u201d<\/span>\u00a0<\/span><\/p>\n Still, recent regulation changes in the U.S. could prompt a boom in tokenized projects in Dilendorf\u2019s view. Reg CF, whose fundraising cap was <\/span>boosted<\/span> from $1 million to $5 million in late 2020, \u201cwill pave the way,\u201d predicts Dilendorf. Reg CF enables a company to fundraise among both accredited and non-accredited investors, and there is no cap on the number of investors who can participate.\u00a0<\/span><\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n Meanwhile, alternative trading systems (ATS) based in the U.S. are building bridges to ATS platforms in Europe and Asia. \u201cSo, now if you put your digital real estate token on a platform in the U.S., an investor from Europe or Asia can participate in a secondary market trade,\u201d Dilendorf tells Magazine. This could boost the secondary market substantially.\u00a0<\/span><\/p>\n Transaction fees are low on these blockchain-based ATS platforms like Securitize as well, while smart contracts ensure that transfers are executed between Know Your Customer-verified accounts only. \u201cIt\u2019s the creation of a new way to raise capital for small firms,\u201d which is almost like an initial public offering, adds Dilendorf.<\/span><\/p>\n What form might property tokenization take? Are NFTs most promising? Simple tokenization? Or maybe some other forms, such as Soulbound tokens, or SBTs, as <\/span>proposed<\/span> recently by Vitalik Buterin?<\/span><\/p>\n Tamar says tokenization could assume a variety of forms. \u201cSome will have a part of their cap table on Web3 (for decentralized finance); some will issue NFTs for timeshares and rentals; and others will use tokens for payments or asset management.\u201d<\/span><\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n Like, sometimes people send me hitler coins to my public .eth address, and I don’t have a way to stop this, but it doesn’t really hurt me because etherscan doesn’t show them unless you intentionally scroll all the way down the really long list of spam tokens. SBTs are similar.<\/p>\n \u2014 vitalik.eth (@VitalikButerin) May 12, 2022<\/a><\/p>\n<\/blockquote>\n \u00a0<\/p>\n \u00a0<\/p>\n Jarib Figueredo, a candidate for the State House of Representatives in the U.S., who joined Singh on the NFT.NYC 2022 panel on \u201cUnderstanding the Value of Tokenized Real Estate,\u201d notes that \u201cin Florida, there are issues transferring deeds, and these can be improved with NFTs \u2014 digital files that can prove ownership.\u201d Timesharing is another promising use case.\u00a0<\/span><\/p>\n \u201cIn the future, real estate title could be issued as a nonfungible token,\u201d Black tells Magazine. \u201cThe owner of the property would maintain ownership of the token in a digital wallet. Changes in the value of the property would be reflected as changes in the value of the NFT.\u201d Further:<\/span><\/p>\n \u201cWhen the owner wants to sell the property, they could list the property NFT on an NFT exchange. Buyers could bid on the NFT, and the NFT would be transferred to the digital wallet of the winning bidder. This would make the secondary market for real estate much more liquid and transparent.\u201d<\/span><\/p>\n<\/blockquote>\n Dilendorf, for his part, doesn\u2019t see NFTs or DAOs playing a dominant role in the real estate marketplace because they are essentially unregulated, unlike Reg CF-enabled digital securities, which are SEC-sanctioned.<\/span><\/p>\n Which kind of real estate projects are most ripe for tokenization? \u201cLandmark assets will be the most successful,\u201d says Tamar, \u201cand top-tier stadiums will fall under this category. Large institutional quality properties will be more likely to get tokenized, as they will experience more liquidity, and they will attract institutions during the primary sale unlike smaller properties.\u201d<\/span><\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n Blockchain technology, too, can be of use in large swaths of the developing world where the existing infrastructure for ensuring property rights is weak or non-existent, Black tells Magazine, referencing Peruvian economist Hernando de Soto, who has argued that property rights are the key to economic growth. \u201cIf blockchain can improve property rights like real estate ownership in developing countries, this could be transformative for entire economies,\u201d says Black.<\/span><\/p>\n In an oft-cited Wall Street Journal opinion piece, de Soto <\/span>emphasized<\/span><\/a> blockchain\u2019s ease-of-access record-keeping that can be continuously updated as property ownership changes. Most of the world\u2019s population has no access at all \u201cto a formal system of property rights,\u201d he wrote, adding:<\/span><\/p>\n \u201cIf Blockchain technology can empower public and private efforts to register property rights on a single computer platform, we can share the blessings of private-property registration with the whole world.\u201d<\/span><\/p>\n<\/blockquote>\n Can the crypto industry reach a point in the future where a significant proportion of real estate will be tokenized \u2014 e.g., more than 10% of the global real estate universe \u2014 or will this remain a niche area?<\/span><\/p>\n \u201cI can imagine that day\u201d \u2014 i.e., 10% tokenization \u2014 says Tawil, \u201dbut tokenization of real property ownership is likely going to take some time, especially in places like the United States where large infrastructural changes will be required.\u201d\u00a0<\/span><\/p>\n Property deeds are recorded and stored in thousands of municipal offices, after all. These will have to be digitized. Then, too, there exists \u201ca large lobby of professionals that profit from property transactions, which may be marginalized or eliminated in a tokenized property ownership world, such as lawyers, title insurance, brokers, etc.,\u201d Tawil tells Magazine.<\/span><\/p>\n \u00a0<\/p>\n![\"\"](\"https:\/\/cointelegraph.com\/magazine\/wp-content\/uploads\/2022\/07\/magazine-Can-blockchain-technology-really-transform-real-estate-750x375.jpg\"){kind=spacer}
<\/p>\nWill everything be fractionalized?<\/span><\/h4>\n
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A market that dwarfs the cryptoverse<\/span><\/h4>\n
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<\/p>\nObstacles remain<\/span><\/h4>\n
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Positive regulatory developments in the U.S.<\/span><\/h4>\n
NFTs or simple tokenization?<\/span><\/h4>\n
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Raising up the world\u2019s poor<\/span><\/h4>\n
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Global disrupter or niche player?<\/span><\/h4>\n
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