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NFT Adoption Real Estate Pros and Cons

Pros and Cons of NFT Adoption in Real Estate: Evaluating Benefits and Challenges

May 10, 2024

As technology evolves, the quality of people’s life improves regardless of the sector or industry. New technologies in Medical and healthcare, pharmaceuticals, foods and supplements and  other sectors aim to improve human quality of life. That is the same thing in the blockchain sector. As blockchain technology evolves, innovative applications emerge to make things easier for people all around the world. Cryptocurrencies, DeFi, NFT are just a few out of many blockchain-based applications that are revolutionizing different industries. 

NFT or Non-Fungible Token is transforming the landscape of markets and particularly the real estate sector. It brings better liquidity by making property fractional ownership possible, as well as transparency and efficiency.

Even though NFT brings a lot of advantages to the real estate sector, there are still some risks and disadvantages associated with it. But before going through its pros and cons, let’s see what exactly a real estate NFT is.

What is Real Estate NFT?

Asset-backed NFT refers to tokenizing a tangible asset like a real estate property in a blockchain network. As an example for your better understanding, think of a luxurious villa in Emirates Hills. It costs around USD 10 million for an investor or a consumer to buy it. Obviously, it is out of most people’s capability to spend that much on such a property. However, by dividing the property into say 1000 shares and converting each share to one NFT, it would be viable for many investors to buy one or multiple NFT. Each NFT represents 1/1000 share of that villa and makes the owner entitled to receiving rental income as a pro rata basis. More importantly, it is most likely for such a property to grow in value over time, so does the NFTs! That would be a smart way to fractionally invest in the Dubai real estate market

Benefits of Converting Real Estate into NFTs

Tokenized Real Estate benefits

1- Better Liquidity

Traditionally, the real estate sector has been considered as an illiquid market for investment. High prices along with geographical limitations have been the main reasons for real estate illiquidity. By tokenizing properties, small-scale investors become able to invest in a fraction of a property rather than the whole lot. Furthermore, the market is not limited to investors who reside nearby, as investors from all around the world can approach the market within seconds. As such, more investors lead to better liquidity for the real estate market.

2- Lower Entry Barrier

As investing in a portion of a property becomes easily and securely possible, NFT is expected to lower the entry barrier for investors. Traditionally, people needed a substantial amount of money to invest in the real estate sector. Now, property-backed NFTs are accessible by paying as little as USD 200. 

3- Improves Efficiency and Transparency

All data along with the terms and conditions in regards to the ownership and authenticity of the NFT is stored in a shared ledger within the blockchain network. It is visible by all users and it can not be changed or replicated. Besides, smart contracts take care of all actions including money exchange, ownership transfer and executing terms and conditions. There are no intermediaries such as bankers and brokers in place. Hence, human errors as well as charges and fees are eliminated.

Challenges of Real Estate NFT

1- Lack of Regulation

Blockchain-based applications are not well-regulated yet. Even though some countries like UAE are working hard to legalize NFT and asset tokenization, it is still at its infancy. With lack of robust regulation and legislation, the risk of fraud and scam appreciates. As such, investors must pay high attention to invest in projects that are accredited by the local government. For further information on UAE regulation on asset tokenization, you may follow the link.

2- Security

Blockchain is immutable and reasonably safe. However, the risk of vulnerable activities such as scam projects, token theft, personal wallet hack and a lot more still exist. Besides, how smart contracts are developed and operated is quite important and must be considered with care.

3- Income Tax Challenge

There is no adequate and comprehensive taxation law for NFTs and its associated income. That makes it complicated for investors. Besides, different taxation laws in the countries where the NFT real estate project is executed with the countries where the investors are located, makes it more complicated.

Bottomline 

Blockchain and its applications such as NFTs have found their way to transform the landscape of all markets and industries. The real estate NFT brings a lot of valuable advantages to the sector, so governments across the globe can’t ignore it. Even though the industry suffers from lack of robust regulation, its associated benefits are forcing governments to regulate and legalize it. However, it takes time and in the meantime, you as an investor must be vigilant. IN order to safeguard your money, make sure to invest in the legitimate projects that are approved and accredited by the local government, where the project is located.