What are the pros and cons of investing in tokenized property

Technology has impacted all aspects of our life significantly. Likewise, new technologies are improving the efficiency of all industries and markets as going forward. Blockchain, as a breakthrough to the digital world is doing the same thing and affecting several sectors and industries including the real estate market.

There are quite a few applications that blockchain has brought to the real estate sector. Asset tokenization is one of the most important applications through which blockchain makes the real estate market more efficient.

Let’s dive deeper and see what is a tokenized tangible asset, how a property can be tokenized and what are its pros and cons.

What is tokenized asset and how it works

A tokenized asset refers to converting an asset to a fungible or non-fungible token. All assets that have a value in the real world can be tokenized and stored securely in the blockchain network. Likewise, a property can also be converted to one or multiple tokens. To briefly explain the procedure, think of a AED 10 million luxurious apartment in Dubai Marina. This property can be divided to say 1000 equal shares and each share be tokenized to 1000 tokens. Each token represents a fraction ( basically 1/1000) of the apartment. The ownership, the authenticity and token trading history will be securely stored and maintained in the blockchain network. In terms of contract settlement conditions between two parties, entitlement for rental income and all other requirements, smart contracts will do the job with no need for middlemen like lawyers or brokers. That is basically how to fractionally invest in the Dubai real estate market.

Benefits of tokenized property

1- Lower entry barrier

Investment in the real estate market is one of the most popular investment methods across the world. However, it requires a substantial amount of money for an investor to enter into the market. By tokenizing a property, investors will be able to invest in a smaller portion of a property, so less money is needed. Hence, it becomes easier for more investors to enter into the real estate market.

2- Better liquidity

Property tokenization has lowered one of the major risks associated with real estate investment which is illiquidity. Less barriers for entering into the real estate market means more investors and more money. Property tokenization brings more investors, so more liquidity is expected across the market. Besides, the market is open 24/7 and investors from all around the world are only a few clicks away from buying or selling a property-backed token within the blockchain network.

3- Cost efficiency

Buying a property-backed token comes with lower cost in comparison with buying an actual property. Smart contracts that are well-developed in the blockchain network take care of all requirements such as a contract between buyer and seller, meet the contract terms, money transfer and transferring the ownership once the contract is settled. As such, there is no need for intermediary parties such as lawyers, brokers and banks. That would significantly decrease the cost of buying a property.

Risks of tokenized property

1- Regulatory and compliance

The most important risk of blockchain, tokens and crypto is the lack of regulation across the globe. Same for tokenized properties, there are no adequate regulations and legal systems. As such, at this moment of time, there is not enough legal protection for investors against fraud and scams. However, the horizon looks bright and more governments are considering legalizing the crypto industry.

2- Security

Blockchain network is relatively safe and secure. However the risk of vulnerabilities, security breaches and poor quality smart contracts still exist. The security of tokens and whether they are backed by an actual property, their fair value, the quality of smart contracts coding and many more security related subjects must be considered with care.

3- Tax complications

As mentioned earlier, crypto and blockchain are suffering from lack of regulation. That would cause adverse consequences on taxation, as a tokenized property is considered as a security that generates income However, there is no defined taxation law for income generated from blockchain in many countries across the world. Besides, holders of a property token might be living in a country that is different from the country where the underlying property is located. The differences between those two countries’ taxation laws cause additional complications. 

Wrapping up

We believe in the power of technology. Since two centuries ago, new technologies have found their way and made governments adopt their regulation accordingly. The future seems to be bright for tokenized property, as it brings lots of advantages for the real estate market as well as small scale investors. The risks that are associated with tokenized properties are serious, however proper regulation and legal systems are on their way to mitigate them.

At this stage, if you are planning to invest in tokenized properties, it is highly recommended to do your research with care. Make sure that the project and the property is real, smart contracts are working well, tokens are transparently pegged to a share of the actual property and the issuer has obtained the local government allowances and approvals. Good luck!