Real Estate Tokenization

By Ilugo Victory Madu,ESQ.

Real Estate tokenization is the process of fractionalizing real property into tokens stored on a decentralized database. This decentralized database stores information like a digital ledger and is commonly referred to as blockchain.

The distributed ledgers on which real estate tokens are captured are validated by the blockchain network, synchronized and shared with all network participants almost instantaneously, permanently recording an accurate ledger of transactions generally accessible to the public.

Real Estate Tokenization solves the problem of very low income earners having to save for decades to own a piece of Real Estate investment as the Block chain system allows prospective investors within a certain class to “crowd fund” Real Estate investments and reap the same benefits as Big Real Estate Developers

Real estate tokens are similar to non-fungible tokens (NFTs), which are non-interchangeable units of data stored on a blockchain that can be sold and traded, with the exception that real estate tokens are generally tied to the value of a physical asset. A real estate token can represent, among other things:

Ownership of part of a real property
Ownership of the entire real property
An equity interest in an entity that controls real property
An interest in a debt secured by real property, or
A right to share in the profits generated by real property

Benefits of real estate tokenization
I. Lower barrier to entry
By facilitating investment in fractional portions of real property, real estate tokenization enables small-scale investor participation and lowers barriers to entry for retail investors. Lower minimums and smaller investment amounts can thus be leveraged to benefit from the potential high returns available to traditional real estate investments – which typically require significantly more upfront capital.

II. Ability to create liquidity
Real estate tokens are easily and securely transferable by way of blockchain technology, allowing investors to diversify their portfolios, minimize risk and create liquidity in the real estate market. Conversely, issuers are provided access to a wider pool of investors.

III. Lower transactional costs
Through automated processes and a permanent unchangeable digital ledger, blockchain technology has the potential to streamline investment transactions and lower transaction costs. As a result, investment transactions are generally completed faster and at a lower cost to the parties involved, facilitating higher returns for the investor. Tokenization also provides a host of other benefits, such as real time capitalization table tracking, improved accessibility and greater transparency for potential investors.

Key considerations regarding real estate tokenization

I. SEC Implications

Generally, the tokenization of real estate will be considered a security but currently there is no legislation that states Real Estate Tokenization as such as it still an emerging Area of Real Estate. It’s hoped that in due cause SEC shall issue guidelines to protect Real Estate Token holders under a separate class of Portfolio Investment.

II. Reconciliation with the Land Registry

Real estate tokenization requires reconciling the applicable transaction with the current system.

A real estate token will be required to reconcile the transaction with the land registration systems of the jurisdictions where the underlying real estate is located.

This writer Recommends an immediate amendment to the Land Use Act to Recommenclude Real Estate Tokens under the class of Registrable instruments through an E-Registry driven by Block chain Technology.

The future of real estate tokenization.

Tokenization provides a convenient and economical method of investing in real estate assets, but as a relatively new investment vehicle, regulators have yet to establish a consistent framework of rules that govern real estate tokenization.

The nature of the asset being tokenized impacts which regulatory frameworks will apply. Further, market confusion and knowledge gaps present challenges that must be overcome before real estate tokenization can be widely adopted.

Real estate tokenization has the potential to transform real estate investment by increasing liquidity in a largely illiquid asset class, lowering barriers to entry for retail investors and reducing transaction costs, but issues such as clear market regulation, reconciliation with land titles registries and the need for centralized reporting of transactions currently present issues for market participants.

Investors and real property owners interested in capitalizing on the trend of real estate tokenization should seek advice from experts including, legal, financial and real estate professionals.

Ilugo Victory Madu,ESQ.
Managing Partner
Maverick Partners
madupeter72@gmail.com
08087358308