Hotels
June 13, 2023

Tokenisation of Real Estate: The Future of Fractionalised Assets

Real estate has always been considered  a smart investment option, offering individuals a tangible asset that appreciates over time. In fact, it is commonly agreed that between 25% and 40% of your net worth should be allocated to real estate. However, the immense capital required to purchase real estate limits access to this investment opportunity, making it largely accessible only to the ultra-wealthy. But what if there was a way to make investing in real estate accessible to all? The answer lies in the tokenisation of real estate. Tokenisation breaks down a physical asset into tradable digital securities. The concept of tokenisation involves the allocation of digital tokens, often based on blockchain technology, which represents a share of an underlying asset, offering investors access to fractionalised ownerships in assets such as real estate. In recent years, tokenisation has been identified as the golden ticket to wealth creation and is emerging to become one of the most uncomplicated and lucrative options for investing in the real estate market.

Why Fractionalised Assets?

The tokenisation of real estate enables the creation of fractionalised assets, which permits virtual ownership of an asset in small, manageable fractions. Fractionalising assets democratise access to the real estate markets, enabling individuals to invest in a small share of a high-value asset, which they would not have been able to buy alone. According to a report by Knight Frank, the global fractional ownership market was valued at $5.39bn in 2020 and is expected to continue growing to $8.92bn by the year 2025. By acquiring tokens backed by real estate, investors have many of the same legal rights as traditional owners, including the ability to receive rental income, earn a share of the profits, and own a fractionalised ownership of the real estate asset. Thus, tokenisation is essentially an opportunity to invest in large and notable properties that were only accessible to a select few.

Traditional Real Estate vs. Hotels

The purchasing of real estate to use as Airbnb’s for rental income is becoming increasingly popular, the barriers however  to break into the market for entry-level buyers remain extremely difficult. This trend has had a significant impact on a global housing crisis that signified that this might not be the sustainable way forward. But how can we generate passive income from this market? When we think of hospitality, we typically associate it with holidays. However, what if you could generate revenue from the hotels where you spend your vacations? In the past, this sector was exclusive to the mega-rich and wealthy. But with the advent of tokenisation, fractionalised backing of hotels is now possible, offering increased revenue opportunities and lowering the entry barrier to the hotel industry. This advancement also provides reputable hotels with access to attractive investment prospects. Tokenisation offers the chance for a more diversified range of investors to gain access to these assets. For example, a hotel can be tokenised into 10,000 digital shares, enabling investors to acquire small shares of ownership, such as 10 or even 1000 shares in potentially one of the most prestigious hotels on the globe. Platforms like Azqira are some of the first to open the doors to the world of hospitality real estate, giving people from all over the globe an opportunity to buy in at their own comfort level. This innovative approach increases investor access to higher-quality establishments, thereby ensuring that the people with more significant representation in a hotel's ownership have the same hopes of earning or making a profit as the common stakeholders.

Value of the Market

The future is looking bright as tokenisation in the real estate market is predicted to become a multibillion-dollar industry. A research report by Swiss investment firm, Mata Capital revealed that as of 2021, tokenised real estate was estimated to be worth around $22 billion globally; by 2025, this figure is expected to skyrocket to an astonishing $5 trillion. This growth trajectory reflects the infinite potential of the tokenisation industry and its significant opportunities to unlock value in the global property market. When it comes to The Hospitality Industry, the trend we are seeing has a similar growth projection with a $4,107.60 billion market value in 2020 predicted to grow to $9,950 billion by 2028. A study done by The Security Token Market in 2022 found that an overwhelming 89% of security token transactions happened within the real estate sector, completely dwarfing every other category.

Predictions

There is no doubt that the tokenisation of real estate has disrupted the traditional dynamics of property ownership, driving innovation in the sector. As this technology continues to progress and we see global adoption increase, the standardisation of tokenisation regulations is set to push this technology and enable these types of investments to become increasingly mainstream. Tokenisation will continue to evolve considerably, enabling smaller but interested businesses or people to put their feet into the property market. Similarly, the tokenisation of real estate will allow people to access more significant, and therefore, more valuable properties that would be too expensive or too overwhelming to buy a share.

Why Blockchain?

Blockchain technology has emerged as the most viable option for tokenisation due to its ability to provide secure, decentralised and transparent transactions. The security of token transactions is paramount, and blockchain's distributed ledger can provide that. With information stored across multiple nodes, it becomes virtually impossible to hack even a single entry. Additionally, blockchain smart contracts enable automatic execution and streamlining the tokenisation process. The transparency provided by blockchain technology ensures a clear audit trail and reduces instances of fraud, thereby encouraging trust in the tokenisation process. Notably, the emergence of Ethereum's ERC-20 token standard has become the most popular for the creation of new tokens due to its interoperability with other services and the ecosystem of smart contracts that it enables. In summary, blockchain's ability to provide security, transparency and streamline the tokenisation process makes it the best option for businesses exploring tokenisation as a new way to raise funds or create digital assets.

Disadvantages of Tokenised Assets

Despite the hype and potential benefits of tokenised assets, there are several significant disadvantages and barriers to entry that cannot be overlooked. Firstly, the market for tokenised assets is relatively new and untested. This creates a high risk for investors who may suffer losses due to market fluctuations. In addition, the current lack of standardisation and interoperability across various platforms and networks can create significant challenges for businesses looking to leverage tokenised assets. This can lead to fragmentation within the market, which may limit the overall growth of tokenised assets and their adoption by investors. Lastly, regulatory uncertainty remains an issue in many jurisdictions, making it difficult for companies to navigate the legal and compliance landscape when dealing with tokenised assets. Given these challenges, it is clear that the tokenised asset market still has a long way to go before it becomes a mainstream investment option.

As the world races towards a digital tomorrow, it is logical to assume that tokenisation of real estate will become the mainstream industry norm. Tokenisation empowers fractionalised assets, enabling investors to break down a large asset into small financially accessible fractions that they can own. With the rise of blockchain technology, this cutting-edge innovation has become a reality, unlocking access to global investment opportunities that were previously unattainable. Tokenisation of real estate is a game-changer that has significant potential in not only achieving financial goals but also democratising the real estate industry.