Security tokens — the future of real estate investing

by | Jun 17, 2022 | Medium

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The real estate market has become increasingly inaccessible to the average consumer. Not only have the prices of real estate risen dramatically over the past few years – setting the barrier to entry quite high – but the process of obtaining the required capital has become more difficult as well. For consumers, real estate has become too expensive and financially unfeasible to invest in, forcing them to pass up on a potentially sound investment. 


Luckily, real estate Security Token Offerings (“
STOs”) offer a great solution. Through the adoption of Blockchain technology, STOs open the door to virtually anyone to invest in real estate. This article will further elaborate on the current obstacles, and why one should consider investing in real estate STOs instead. 

 

Current barriers

When investing in a property, there are quite a number of costs that exist in addition to the total sum of the property. Such additional costs include registration fees, notary fees, mortgage fees, interest rates, and taxes on the property. It is not only costly, but also a lengthy process as it can take months to complete – from finding a property, borrowing money from a bank to finally getting the property ownership notarized. 

 

Furthermore, the current real estate market is known to be illiquid. Great lumps of money are invested in properties, money which cannot be used unless the property is resold. If a real estate owner decides to sell the property, then they need to sell it in its entirety, a process that can be very lengthy as well. Finding the right buyer with the desired offer may take some time, and different factors which delay the process may be met along the way. Cases in which property owners are in desperate need of money, often result in the owners having to sell their property at a lower price and potentially paying additional fees.

 

In addition to the monetary issue, there has been a change in how some people think about being tied to a property and being responsible for managing it. A lot of people switch careers or move around, and therefore don’t want to be attached to a specific property in a specific place. Having to manage the property, manage potential tenants, or deal with all the additional costs that occur throughout the years such as maintenance costs, makes acquiring property less appealing as well.
 

Lastly, there has been an influx over the past years of real estate investment companies investing in residential properties. This is partly a result of the COVID-19 pandemic, which showed that investing in a residential property is safer than in shops or offices. These funds are both national and international and have the capital to invest in huge apartment blocks and subsequently rent them out. This limits the number of properties that are on the market for the average consumer to purchase. It also raises the prices and makes the market more inaccessible. 

 

The benefits of real estate STOs

In light of the aforementioned obstacles, there are many reasons why consumers are considering investing in real estate STOs. To be able to explain what the benefits of investing in such STOs are, it is important to understand how they work. 

 

When a company wants to tokenize a specific real estate project, it must first set up an entity (often an SPV) that will hold the real estate asset. When issuing the security tokens, the company actually tokenizes the debt or equity that is linked to that asset. This is an important distinction, as the tokens do not represent fractional ownership of that asset itself. If it would represent fractional ownership of the asset, then the same admin burdens would apply, defeating the purpose of tokenizing. The investors can then choose to buy the tokens at a set price and enjoy part of the economic value that is generated. The issuance of the tokens is done by using Blockchain technology, meaning that the transactions are both transparent and secure. 

 

STOs allow consumers to invest only a fraction of the real estate price, a portion that can then be gradually expanded and reinvested. Instead of having to put all of their money into one property, consumers can choose to diversify their investment by purchasing ‘slices’ of different projects through different STOs. This allows them to spread their risk, not having to put all their eggs in one basket. 

 

Real estate STOs not only allow consumers to invest with a smaller amount of capital, but they also allow them to save money on costs and the amount of time spent on admin. As mentioned before, buying a property comes hand in hand with spending money on additional costs. However, when a company issues real estate security tokens it will incur fewer costs and can immediately embed these into the tokens, splitting the costs amongst the investors according to the size of their holding. It is no longer required to pay the full amount, but only the fragment of costs that is proportional to the number of tokens that the consumer owns. Needless to say, a lot of time is saved when investing in real estate tokens as the responsibility of the process and admin lies with the issuing company. The latter leads to another benefit STOs introduce, i.e. the management of the property can remain the responsibility of the issuing company as well. The token holder may still benefit from the rental income, and even the potential surplus value once the property is sold, without having to be involved in any way. 

 

Lastly, it is worth mentioning that a lot of the building complexes that generate steady income proceeds tend to be owned by investment companies. Tokenizing these companies would offer consumers the possibility of investing in these types of buildings that are generally unreachable as well as being a part of a new community of token holders. When token holders no longer wish to possess their tokens, they can go ahead and sell their tokens on the secondary market. The swift option of selling their tokens is a great solution to the current problem of illiquidity that the real estate market faces. 

 

It is safe to say the real estate STOs introduce a lot of new benefits to the real estate sector, and present a great new way of investing. 

 

 

Written by Nefeli Maroulakis, Legal Advisor at 2140 Consulting

 

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