Analyst, Emerging Technology, Citi Ventures
Tokenization digitizes the way people and organizations track ownership, using distributed ledger technology (DLT), or blockchain, to transform how we own and transact things such as debt, equity, or property. Tokenization has recently become a popular topic of discussion within the real estate (RE) industry, suggesting that it provides major opportunity and potential for property owners and investors. Through issuing blockchain tokens backed by real estate assets, property owners can unlock value in new and innovative ways.
When asset-backed tokens first arose, the technology’s primary use cases focused on creating digital representations of commodities such as gold and oil. In 2019, we saw increased momentum in the tokenization space, with real estate-backed token projects gaining traction as some of the most substantial token offerings.
Real estate tokenization projects aim to reduce inefficiencies in the real estate market.
Vehicles that seek to make the market publicly tradeable, such as real estate investment trusts (REITs), already exist—however, while they provide some liquidity they are costly to set up and typically hold a basket of properties rather than a single building. In order to participate in development projects for a specific property, investors typically must meet high investment minimums, and once they do they are locked into long-term commitments that are not easily redeemable for cash.
Leveraging the advantages of asset-backed tokens, real estate tokenization can improve the current market through low investment minimums, enhanced liquidity, and market democratization.
To comply with current securities laws, property is often tokenized by registering the asset to a corporate entity then tokenizing the company. For example, a REIT can be created to represent ownership in a property and that ownership stake can then be tokenized on a blockchain. Such was the case with the tokenization of the St. Regis Aspen Resort, as discussed below.
Regulatory concerns initially stunted the growth of tokenization projects in the US. As the tokenization ecosystem has advanced, however, millions of dollars in real estate tokenization projects have surfaced, leading to deals of both large and small amounts. Notable developments include:
Real estate corporations partner with tokenization platforms to develop their issuances before launching a deal. These platforms perform a variety of tasks, including issuing and managing tokens, onboarding clients, embedding compliance, and/or providing a secondary marketplace where the tokens can be traded. Prominent players involved in real estate tokenization projects include:
Real estate tokenization is becoming increasingly advanced and its growth potential is massive. In the coming years, billions of dollars in real estate are expected to be tokenized. Players involved in former deals, such as Elevated Returns—owner of the St. Regis Aspen and proponent of its tokenization deal—are looking to further disrupt tokenized real estate.
Moving forward, continued enthusiasm for tokenization projects will likely motivate many vendors and investors to enter the space and drive further marketplace growth. With the creation of new liquid secondary markets, banks could explore opportunities such as lending against tokenized real estate assets.