Tokenization As A CRE Investment Vehicle

BOSTON, MA—Imagine owning a piece of the Empire State Building or the Prudential Center. Seems far-fetched? Not really. Due to tokenization, owning a piece of a major property has become a  viable proposition.

To state it simply, tokenization divide an asset into investable bites. In commercial real estate, this could be a property owner breaking down a building into shares, with each share holding a particular value. This value is then represented by tokens which can be subsequently traded.

Real estate tokenization has a cautious but optimistic outlook mainly because fractionalizing, or breaking up properties into sections, is not new. After all, REITs, which own and operate income-producing real estate, are also popular and have been around since the 1960’s.

Tokenization is made possible by blockchain, an ever-growing list of records, known as blocks, which are linked via cryptography. Each “block” contains the transaction data, the date/stamp plus a cryptographic notation of the previous block. Its value lies in the blockchain’s ability to validate and track transactions in real time without the use of a bank or another third party.

“Tokenization of real estate is a highly complicated process,” says Jude Regev, Founder and CEO of Jointer. “Currently, REITs provide liquidity to the funds but can be expensive for retail investors. After all, some REITs have a high minimum entry. However, tokenization will give investors the opportunity to invest in top buildings like the Empire State Building.”

If a real estate company is looking to raise $40 million, for example, four people will invest $10 million each plus try and get a private stake in the business. Because it is locked up in the transaction and due to the size of the investment, these investors may extract a premium on their funds. However, if the same $40 million project tokenizes a portion of its real estate capital, it can have up to 2,000 investors.

Still Cautious

With tokenization, most investors are educating themselves but are cautious to execute their monetary investment.

“Blockchain and the tokenized securities market have given access to the commercial real estate asset class,” says Regev. “Investors looking to diversify their portfolio can purchase tokens that represent a fraction of equity and income stream but major issues such as liquidity and risks have remained unaddressed.”

Some of the obstacles include a vulnerability to scams, false claims, liens and credit scams, knowing the seller has no incentive to act fair and trusting the dividends distribution. At times, there can be a lack of management, risk disclosure, conflicts of interest, limited liquidity and restrictive selling, Regev tells GlobeSt.com.

Even with the anticipation of high returns, it might take some time for the industry to fully trust using tokens or blockchains but Regev believes that tokenization will grow as more people realize it can deliver healthy financial returns.