Real Estate Tokens: People can now buy a “sliver” of a property buy buying NFT tokens. But is it all that it seems? Real Fund Tokens CEO José García Caballero explains why this is both a good and bad idea.
The promise of value offered by tokenizing any type of real asset is too juicy to pass up. And if we apply it to the real estate sector, offering “pieces” of real estate it would be a massive industry.
But let’s start at the beginning, remembering some basics.
Tokenizing is issuing, using a blockchain, digital files representing real assets.
What are the advantages of tokenizing real assets?
-Tokens replace paper certificates.
– It can be fractionalized into small portions of the asset.
– A single master document.
– Possible exit strategies for the investor.
– Ease of issuance and acquisition of tokens representative of the security.
– Liquidity of the asset.
– Ease of transmission in secondary markets.
Anyone who truly understands what a token is, can doubt the advantages of its use. The future of investing in real assets lies in tokenization, I have no doubt.
But let’s get to the issue that has brought us here: the tokenization of real estate assets.
Real estate: Is it possible to tokenize it?
A real estate asset can be, we all know, an apartment, an office building, a commercial premises, a square meter of industrial warehouse or a piece of land.
The commercial claim to say “we tokenize real estate assets” is the most frequent, but are these assets being tokenized? The answer is: NO.
I don’t know of any real estate project in which the property itself is being tokenized.
What is the reason? Very simple: in most countries there is a land registry, where it is noted, with legal certainty, the existence of the properties and who owns them.
So far, these registries are not accepting the existence of these tokens as a valid means of representing the property. Therefore, we could theoretically issue an NFT (non-fungible token, ideal to represent a real estate asset) that represents an apartment in a building.
It could have the corresponding documentation that accredits it included within the token as metadata. This means that we would be creating a second record of the existence of that property. The holder of the token, at its birth, would be the owner of that property, and we could corroborate that information, even in the property registry of the place where that apartment is located.
Now, the owner of the property transmits the token to a buyer who, technically, is the new owner of the property. However, this transmission does not have access to the land registry, where it will continue to appear as the owner who coined the NFT.
Real estate tokens: Double registration
There is, therefore, a double registration that inevitably entails legal uncertainty for the holder of that NFT. At the moment, the most legally effective way to prove ownership of a property is the land registry.
It could happen that there were bona fide transmissions of the property through the sale of the NFT. And, that the current holder of the token (that is, the last one who paid for that token) found that his house has been seized … by the Tax Agency for example. Perhaps this was for an unpaid debt of the first holder of the NFT.
It is true that you could go to the judge to explain that you have the NFT, that it is a third party in good faith. But who would want to get into that mess?
So companies that say “we tokenize real estate assets” or “first apartment represented by an NFT marketed in Florida” are not telling the truth.
If this is so, then what is being tokenized? Basically, two things:
• The shares or participations of a company that owns a property.
• Debt linked to a property.
Is it advisable to invest in real estate tokens?
A real estate asset is, by definition, a generator of rental income and / or profits (or not) for capital gains of value of the same. Owning any of these tokens gives you economic rights (interest, dividends) on the fruits of the existence of the property, but not ownership of it.
Thus, real estate assets are not being tokenized, no matter how much companies in the field make this claim.
If our tokens represent stocks or debt, the characteristics of the investment are substantially different from those of the property. If we own shares in a company, there is a business risk of the exploitation of the property, Also, we must accept the fact that we are minority partners in a company and, therefore, we will be at the mercy of what the directors of the company and the shareholders want to do. In the case of debt, the risk is clear: we are responsible for the debt if there is non-payment.
The person who buys tokens of real estate businesses (not real estate) should be fully informed of what they are buying. And commonly, this isn’t happening.
Real estate tokens: For now, no.
I write this piece from Spain. Here, investment in shares or participation represented by tokens, in whatever the sector, at the moment has serious limitations in terms of its transmissibility. So for now, in general, I advise against it.
There are other ways to invest in fractions of real estate businesses. These include participatory financing platforms or crowdfunding or more traditional vehicles such as real estate investment funds.
On real estate crowdfunding, a layer of blockchain is put in the form of tokenization, so that it adds more benefits and improves participatory financing. I have no doubt that, as soon as adoption (and legislation) evolves, crowdfunding and tokenization will go hand in hand.
Something we have here in Spain is called a Socimi. In English it is a real estate investment fund. It is a traditional real estate investment tool. Some say that they are safer and more liquid, if this is true, why invest in tokens?
Tokenization versus traditional investing
A Socimi is a company listed on regulated markets in which the share price depends – among other factors – on the value and income of the properties in which it invests. In a nutshell, they have juicy tax benefits.
Here’s the rub. Tokenization allows you to invest in THIS company, THIS property, in THIS street and city. The buyer feels an affinity with the investment and the promoter company.
Conversely. it’s hard to feel part of a community when you invest in SOCIMIs. Investing in a Socimi is like investing in a bank: you don’t know what they are actually doing or what they are investing in. Yes, we know what managers and directors earn. I have read annual reports and valuation reports of several Socimis.
You might assume that Socimis have less risk than investments in tokens representing real estate projects. It’s like saying they have less risk than a crowdlending platform because it offers more guarantees. But let’s remember the stock of the largest Socimi in Spain fell by 50% in 2020. Surely many investors suffered serious losses. I did not see articles in the press warning of the serious risk of investing in them.
The Need for Community
I have no objections to the existence of these companies; they do have tax benefits. But there is a growing and thriving generation that does not want packaged products from banks or real estate funds. They want products they understand. They want to participate via DAOs, telegram channels or discord, and feel part of a community.
It goes without saying that any responsible token investor must make a good analysis of the profitability/risk/liquidity equation and maintain adequate diversification criteria (product, geographical, company …) to limit possible losses.
Thus, the question in terms of risk lies not in which real estate investment vehicle you want to enter, whether that be with token or not. But you need to understand the business, the returns and the risks in which you are going to incur and, after analyzing them, make a rational decision.
In an ideal world, tokens are the digital representation of a real estate business. That business can be good or bad, but it could improve the investing by introducing the advantages of operating on a blockchain.
The tokenization of the value generated by real estate projects is in a sprouting-seed moment. It is an unstoppable trend, which will come, without any doubt, to revolutionize the way in which real estate is invested in.
In the future, the hope is that tokenization will provide a more democratic way to buy real estate, with more transparency and liquidity.
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