Exploring the Impacts and Dynamics of Property Fractionalization

The history of property tokenization goes back to almost two decades ago, with the introduction of the time-sharing concept. Time-sharing refers to selling a property, in most cases holiday properties, to multiple people, so they will have the right to use the property once a year or once a season. In other words by purchasing a time-sharing property the buyer would be entitled to use the property occasionally on an agreed time of the year.

Fractional property ownership has recently found its way to the investment world by introducing new concepts through different tools such as blockchain networks.

What is fractionalized property and how does it work?

The term fractionalized property simply refers to the process of dividing a property like an expensive luxurious apartment in Dubai Marina to multiple equal shares and putting the shares up for investors to buy. By purchasing one or multiple shares, the buyer will be the owner of a fraction of that apartment based on the number of shares under their ownership. In addition, they are entitled to receive passive incomes generated by renting the property out on a pro rata basis. The process of fractionalizing a property, however, needs infrastructures, robust regulations and a few intermediaries such as lawyers, brokers, attorneys, etc. 

Dynamics of property fractionalization 

• Less opportunity for small scale investors

Investing in the real estate sector in the traditional way, needs a large amount of money in the investor’s pocket. Small scale investors are not able to invest in real estate due to limited access to financial resources. Demand for investing in the real estate sector from a large number of small scale investors is one of the most important dynamics of property fractionalization.

• Mitigate the Liquidity Risk 

The most important risk associated with real estate investment is the liquidity risk. Several reasons such as high price, has made the property investment to be considered as an illiquid investment option. By fractionalizing a property, more investors are capable of making a fractional property investment, so the liquidity risk is well mitigated. We will discuss it further in this article.

Impacts of property tokenization on the real estate market 

• Less entry barrier

Property tokenization makes real estate investment easier than before by paving the way for small scale investors to enter into the market. It goes without saying that buying a penthouse in Dubai Marina is not affordable to most investors. However, if the same penthouse is fractionalized and divided into say 1000 shares, many investors will be able to step into the market and get a fractional ownership of a property in Dubai.

• Liquidity Improvement

Like outlined earlier in this article, fractionalizing a property brings more investors into the market. More investors means more money, so the market becomes more liquid. Besides, more people are able to purchase a fraction of an expensive property, so it is more likely for such a property to be sold easier and sooner. As such, the real estate market in general becomes more liquid when fractionally ownership becomes an option.

How property fractionalization becomes possible?

Even though there are quite a few reputable firms who are actively involved in property fractionalization, the best method is through the blockchain network. There are lots of advantages associated with fractionalizing a property within a blockchain network and converting the shares into tokens or NFT. In addition to the benefits associated with fractionalizing properties in the real world, blockchain adds extra values to the process. Property tokenization through blockchain, makes the whole process quite transparent. In addition, smart contracts in the blockchain network takes care of the whole process including money transfer between the parties, ownership transfer, etc. As such, the intermediaries like lawyers, brokers and insurance companies are eliminated and the whole process becomes very cost-effective. For further information about how blockchain has improved the property fractionalization process, you may follow the link and read more.

Bottomline

Property fractionalization has brought important advantages to the real estate sector. The concept improves liquidity of the investment and brings small scale investors into the market. In addition, property tokenization, which is basically fractionalizing a property within a blockchain network comes with even more benefits. The blockchain network not only improves transparency and cost-effectiveness of property investment, it allows inventors from all around the world to invest in popular destinations like the Dubai real estate market.

However, you must be vigilant, when deciding to invest in tokenized properties. It’s always a must to check if there are robust regulations and infrastructure to safeguard you and your investment. Also, carefully check all required legal and governmental approvals and allowances are in place for the project that you are planning to invest in.