As cryptocurrencies gain traction in the real estate market, fractional property ownership may become more popular.
The adoption of blockchain technology in the real estate industry is expanding to include fractional ownership of buildings and property developments. There is an argument to be made that tokenization is a net positive for the real estate space, from democratizing access to real estate investment to improving market liquidity.
Tokenization through fractional real estate investment is another example of the emerging “sharing economy” that appears to encourage crowdfunded ownership, a trend that could help to decentralize the global asset market across multiple sectors.
With Millennials, the first generation of digital natives, entering their peak spending years, the digitization of the real estate market may result in increased interaction from this demographic.
However, as with fractional ownership in general, tokenized real estate investing has its drawbacks. Because of the novel nature of the enterprise, financing options are frequently limited, resulting in less market liquidity and an overall flexibility deficit.
The first fractional offering
Fraction, a subsidiary of Hong Kong fintech firm Fraction Group, has received regulatory approval from Thailand’s Securities and Exchange Commission to trade tokens representing fractional ownership of physical and digital assets.
While the approval covers tokenized investments in both physical and digital goods, Fraction’s initial focus will be on fractional real estate investment, with an initial fraction offering (IFO) vehicle being used.
According to the company’s announcement in September, IFOs will make it easier for prospective investors to enter the high-end real estate market. IFO tokens will represent fractional ownership of luxury real estate listings for as little as $150, lowering the barrier to greater market participation.
Fraction listed its first property on its proprietary exchange platform in January, a condo unit in On Nut, Bangkok, Thailand. According to the company’s website, the process included total digitization of the title deed, fractionalization of property ownership, and offering tokenized ownership of these fractions via an IFO.
Josh Stech, co-founder and CEO of Sundae — a digital residential real estate marketplace platform — emphasized the market benefits of tokenization and fractional ownership. “Investing in residential real estate is one of the most significant opportunities for wealth creation, and unfortunately, it is only available to the wealthy,” Stech said, adding:
“The promise of tokenizing residential real estate on blockchain is that it will provide efficient and open access to the largest asset class in the United States, not just for younger people, but for anyone who wants to invest in real estate but does not have the funds for an entire property transaction.”
Tokenization, according to Stech, will lower the entry barrier for investors into fractional real estate investment by leveraging crypto and blockchain technology. “While real estate investment funds and platforms offer fractional investment opportunities, they are difficult to find, difficult to evaluate, illiquid, and only available to accredited investors,” Sundae CEO added.
A halting start
Real estate tokenization is still in its early stages and remains a niche market segment. However, industry insiders believe there is massive growth potential, with British accounting network Moore Global estimating that the tokenized real estate market could reach a $1.4-trillion valuation by 2026 despite tokenizing only 0.5 percent of the current global property market.
While the tokenized real estate space shows promise, there are a few major issues that must be addressed. Among the major roadblocks are a lack of liquidity, particularly in the secondary market, institutional hesitancy, and a lack of regulatory clarity.
According to Tal Elyashiv, founder and managing director of blockchain-focused venture capital firm SPiCE VC, tokenized fractional real estate ownership has a long way to go. Elyashiv explained to ULTCOIN365:
“I believe that in order to propel the real estate tokenization market, we will need to see some more institutional comfort level with tokenized assets, which I believe is on the way.” There is already an influx of institutional-grade projects on the market. In addition, the market requires innovation in the area of dedicated real estate platforms, which allow investors to invest in tokenized real estate assets without having to deal with the underlying blockchain complexity.”
According to the SPiCE VC founder, these dedicated platforms that deal in tokenized real estate assets are critical for improving market liquidity. Such platforms, according to Elyashiv, will make token-based real estate investing more intuitive.
Several notable examples
For the time being, tokenized real estate remains fragmented, with various projects offering their own somewhat limited platforms while navigating sometimes ambiguous regulatory provisions. However, there have been a few notable market developments.
Overstock’s regulated tZERO exchange platform began trading a security token representing fractional ownership of a luxury resort in Colorado in the summer of 2020. The launch drew record trading volume at the time, but the initial excitement was likely dampened by the market slowdown brought on by the coronavirus pandemic.
RealX, a fintech company based in Pune, India, launched a blockchain-based registry system in September to enable fractional property ownership in the country. TZERO also collaborated with real estate crowdfunding firm NYCED Group to tokenize $18 million in property.
Growing demand for fractional ownership may act as a catalyst for greater adoption of tokenized real estate. With Millennials establishing themselves as the world’s dominant consumer demographic, investment vehicles steeped in the sharing economy ethos may become even more popular in the coming years.
The current rise of the sharing economy appears to be due, at least in part, to a shift away from the ownership framework that characterized the older economic model. This preference for access-based services has contributed to the success of neo-businesses such as ride-hailing, content crowdfunding, and entertainment streaming services, among others.