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Blockchain Technologies in the Real Estate Market

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Эксперт
Игорь Захаров
CEO DBX Digital Ecosystem
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Digitalization is transforming the life of humanity. New technologies make many things and phenomena real, which in the middle of the last century people could only dream of in science fiction novels. They come to the established spheres of human life, the rules in which have been formed over many generations, and change them and make them simpler, clearer and more understandable.

Blockchain technologies in human life

One such technology is blockchain. It allows you to digitize any process and make it as transparent as possible for all stakeholders. Thanks to it, smart contracts appeared, which are gradually replacing usual paper contracts. They stipulate all the conditions, possible scenarios for the development of events that can change these conditions, and the mechanisms that guarantee the implementation of the contracts.

Smart contracts are no longer exotic. They are used in various sectors of the economy. With their help, both individuals and large corporations fix their agreements, making deals worth hundreds of millions of dollars. This tool allows you to automatically monitor the fulfillment of duties and observe the rights of all interested parties, completely excluding the human factor and cross-border issues. Transaction costs are significantly reduced both at the stage of preparing the contract and its execution. Therefore, experts know that most of the contractual relations will go into the blockchain environment in the foreseeable future.

In some sectors of the economy, this transition does not just make doing business easier, it also opens up new horizons of opportunity. One of them is the multifaceted real estate market (development, sale, lease, and commercial operation).

Traditionally, this market is famous for the complexity of legal formalities and procedures, regardless of the nature of the transaction. It has a high entry threshold because the cost of just one square meter of residential or commercial real estate in a metropolis usually exceeds the average monthly income of its resident.

How blockchain and cryptocurrencies solve real estate market problems

The key problem of the real estate market, despite globalization, is that it still has not become global. Most buyers and investors, as a rule, continue to look at the market within their country or city. For development companies and property owners, this is an artificial decrease in demand, which limits opportunities for the growth of their business. These problems are solved by smart contracts with tokens, another blockchain technology product. Those two combined eliminate the boundaries for the participants in the transaction, reduce transaction costs many times over and give them new opportunities.

To date, the number of crypto users worldwide exceeds 50 million people, and this number is exploding. All of them are potential clients. For the construction of a hotel complex in Dubai, it is possible to attract investments from Shanghai, New York and Tokyo. In the blockchain, borders do not matter, nor it depends on political sentiment. The user will consider your project solely in terms of investment attractiveness and decide, based on their situation, to invest 10 dollars or a million in order to receive a corresponding share of future income. The annual turnover of cryptocurrencies is approaching 2 trillion dollars, and this is clearly not the limit. Already now it is a significant financial resource, which is looking for application in interesting investment projects. The resource is readily available and cheap compared to traditional offline ways to attract investment, such as issuing bonds or bank loans.

What is tokenization, and what prospects does it open for the real estate market?

World history knows many examples of how entire industries appeared and rapidly developed thanks to the massive investments of ordinary people. With tokenization, we can expect a new construction boom around the world. As the technology penetrates the real estate market, experts predict its growth by 20–30%. Such a development model is better protected against the formation of “real estate bubbles”.

What is tokenization? This is the release of a token, a digital copy (certificate) of any object from the real world, including real estate. In a few lines of code, all the ‌information about it will be stored—the total area, various technical characteristics, who owns it, what cash flows it can generate, etc.---all that in the usual "pre-digital" form takes up huge folders of paper. 

Any transaction with tokenized real estate does not require the involvement of highly paid lawyers and realtors.‌ You can get the maximum information you are interested in about the property concerned, and in two clicks you can make an affordable deal, while its participants can be ‌in different parts of the world.

Types of tokenized assets that can be used in the real estate market

Currently, there are three types of tokens, depending on the goals pursued by the owner of the tokenized property.

NFT

The first and simplest one is a non-fungible unique token suitable for selling one property to one buyer. You just want to sell an apartment or commercial premises and understand that it is hardly of interest as an investment. Your potential buyer will want to buy it for personal use. You issue a token that contains all the information that is useful and necessary for the buyer, up to the view from the windows. You set a price on it. As soon as someone buys it, you will automatically receive money to your wallet, and the rights to your property will automatically transfer to the buyer with a record of the transaction appearing in the token and in the blockchain in which it was issued. The new owner of the property can resell it by putting the token up for sale again, right away.

Utility token

Being purely an investment instrument, it does not confer ownership or share of property, but only the income derived from it. The real estate can be of different types—a business or shopping center, a hotel complex, a camping site or simply luxury apartments on the first line of a prestigious resort that can generate a solid cash flow all year round.

Before the advent of tokens, your options were limited. You could put your expensive property up for sale and wait a very long time for a single buyer. Now you can tie any number of tokens to your property in a couple of hours. It all depends on what level of investors you want to attract to the transaction. For example, for a property with an estimated value of a million dollars, you can issue ten tokens of one hundred thousand dollars each, or you can issue a million worth one dollar. You can also put up for sale any amount you like, for example, only 30% of the total, thus reserving for yourself the rights to 70% of the income generated by real estate.

After the start of token sales, all information about transactions will be included in the blockchain. Most likely, in this case, one participant in the smart contract will be the management company which leases your property or operates it. The amount and procedure for its remuneration will also be public information at the time of the transaction. Issuing a token, it will be possible to stipulate the conditions under which token owners can make joint decisions about the future of the property.

Security

This is a digital analogue of securities that certifies ownership. It is suitable for selling one property (more precisely, its share) and the income received from it to many buyers.

Its closest analogue from the “pre-digital world” is the stock market. Each property is divided into any number of “share” tokens, and the owner determines the entry threshold for future co-owners. If we release few, the threshold will be high, and professional investors with large capitals can enter. Will there be a mass issue? This means that many amateur investors will come to you with amounts of tens and hundreds of dollars.

Tokens can be sold on specialized platforms at a fixed price. They can be listed on crypto exchanges as a digital asset, the value of which will be determined according to the classical exchange laws of supply and demand.

This is especially needed for development projects that are at an early stage of implementation and are experiencing funding problems. The tokenization of such a project and its listing on the stock exchange significantly expand the opportunity for finding investments. To attract financing for construction at an early stage, experts recommend dividing the emission of tokens into two stages. At the first one, closed presale, 5–10% of the issued tokens are offered to a predetermined closed circle of potential buyers. They are given the most detailed information about the construction, information about counterparties, details of the investment transaction, etc.

The principal goal of this stage is to attract the attention of professional investors, and, based on their reaction, evaluate the prospects for the second stage, a full-scale emission of tokens for an open crowdsale, and prepare the ground for it. Novice investors are more willing to invest in assets for which there is already demand.

The subtleties of real estate tokenization

Blockchain is a relatively young technology which is just penetrating the real estate industry. As with all markets, the first wave of players will benefit the most from new tools and their capabilities.

Blockchain platform developers tend to help developers and property owners with the tokenization of their properties. It all starts with an analysis of business goals and the selection of the best option for further actions—the most appropriate type of token, issue volume, etc. An independent contractor is also selected to verify the object, which will check how the declared characteristics correspond to reality, issue an opinion on the market value of the property and on its investment prospects, etc.

Platform specialists provide full legal support for the transaction and technical and marketing support until the tokenization goals are fully achieved. The participants in the transaction are guaranteed security, low transaction costs and the speed of transactions, since this is the very essence of blockchain technology.

For example, one of the first blockchain platforms in the world that actively promotes tokenization in the real estate industry is DBX Digital Ecosystem. To promote this technology, besides all the above, the company offers additional bonuses for developers and property owners. The main one is that the issued tokens will be listed on the Crypto Bang platform and the CEX cryptocurrency exchange, which guarantees access to the global market with tens of millions of potential buyers and provides additional opportunities for managing your assets and developing your business both online and offline.

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