Tokenization of projects: the future of investment in real estate

29 February, 2024by balize
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Real estate investment has been one of the most traditional and reliable ways to safeguard and grow capital throughout history. However, the real estate market has evolved significantly in recent years, and one of the most promising innovations in this area is the tokenization of real estate projects. This new approach is changing the way people invest in real estate and offers a number of advantages that revolutionize real estate investment.

Tokenization of real estate projects is a concept that combines blockchain technology, fractional investment, and liquidity in a single investment. In this article, we explain what exactly the tokenization of real estate projects is, how it works, its advantages, and how investors can take advantage of this revolutionary new form of investment.

What is tokenization in the real estate sector?

Tokenization of RWA (Real World Assets), which is what we do at balize, is the creation of a digital representation of a real or physical asset by transforming it into concrete and immutable data that identifies it and allows operations on it, without the limitations of the physical world and with the agility, security, and guarantees of the most advanced technologies, such as blockchain.

The tokenization of real estate projects consists of the digital representation of an investment in a real estate asset. To tokenize means to digitally represent a right or value that exists in reality to give it all the agility and security of being recorded on blockchain technology. This facilitates the entire procedure to be carried out in a very agile and secure manner, representing all changes that occur in reality, about that investment, in the technology itself. Blockchain allows optimizing traditional investment processes and facilitates their management, eliminating bureaucratic obstacles, reducing intermediation costs, and increasing the liquidity of investments.

Tokenization of real estate projects is based on blockchain technology, which allows the creation and management of secure and verifiable digital records. Investors can acquire tokens, which give them proportional rights over the real estate project. This means that investors can buy and sell tokens on secondary markets, providing liquidity to an investment that has traditionally been illiquid.

What is a token?

In the context of blockchain technology, a token is a unit of value created using cryptography that a private entity issues on a blockchain network. Bitcoins, for example, are a type of token, but other types of assets besides money (cryptocurrencies) can also be tokenized. There are tokens that serve to grant rights to their owners, data transfer tokens, virtual asset tokens, reward tokens, as a form of access to certain services, etc.

How a real estate project is tokenized from a legal perspective

From a legal standpoint, we emphasize that what is tokenized is the investment instrument in real estate and not the ownership right over the asset. Today, the technology exists to tokenize any real-world asset, but in Spain, the owner is only fully legally protected against third parties when their right is registered in the property registry, and for that, the right must be recorded in a public deed. Therefore, the tokenholder (the token owner) would not enjoy full legal protection. That's why at balize we always talk about tokenization of real estate investments and not the tokenization of properties.

The token represents a financial instrument such as a loan to a company, a bond, a company share, or other analogous instruments, the possibilities are multiple. At balize, we back this instrument with real estate assets, and the benefits proposed by these instruments are directly proportional to the profits generated from the exploitation or sale of the assets. Thus, the investor perceives returns as if they were the asset owner, without the burdens of being one.

Advantages of tokenizing real estate assets

Tokenizing real estate projects offers a number of advantages for investors:

Increased liquidity of the financial instrument

The liquidity that tokenization offers to the investor is a very important advantage, as it allows their title to be transferred in seconds, automatically, in a market that is currently under construction, which allows individual operation in 24/7 markets at a European level, almost instantly and with a significant reduction in operational costs.

Greater accessibility for investors and internationalization of investment

Tokenization democratizes access to investment because automating everything through smart contracts implies that the entry ticket to real estate investment can be much lower, in the case of balize starting from 10,000 €. Additionally, it allows investors from all over the world to participate in the real estate market, increasing the availability of capital and geographic diversification.

Increased transparency and security

The use of blockchain technology ensures that any transaction is recorded on this chain of blocks, which is what this new technology is about, minimizing the possibility of hacks and being much safer against cyber risks.

Cost reduction and transaction speed

Tokenization reduces the costs associated with real estate investment by eliminating intermediary commissions and administrative expenses. The process is similar to that of real estate crowdfunding but adds the benefits of blockchain, which avoids cumbersome bureaucratic barriers and the various costs typical of traditional real estate operations.

Legal security

There is already a regulatory framework that expressly recognizes the legality of tokenized financial instruments or those "represented in distributed ledger technology systems." This was essential to establish the rules of the game and provide legal security to this transformation. At the European level, the recognition of tokenized financial instruments is framed in Regulation (EU) 2022/858 of the European Parliament and of the Council of 30 May 2022 on a pilot regime for market infrastructures based on distributed ledger technology, which amends Regulations (EU) No 600/2014 and (EU) No 909/2014 and Directive 2014/65/EU (known as the Pilot Regime Regulation). At the national level, it is regulated by Law 6/2023, of 17 March, on Securities Markets and Investment Services, which expands the framework provided in the Regulation and records the willingness to accept and incorporate this new reality.

Tokenization: macro data

The market value of the tokenization of Real World Assets is estimated at 1.5 trillion in 2024 and is expected to have a compound annual growth rate of 63% for the period 2023-30, reaching 16 trillion in 2030, according to Boston Consulting. There are still few players in this sector both nationally and internationally. It is a complex sector, integrated into the realm of financial and investment processes and in conjunction with the forefront of technology. It represents a significant legal compliance and continuous update and improvement burden for companies, so we believe initiatives will not proliferate and there will be more quality than quantity. The financial sector is very insular and acts as a filter, only allowing companies that understand the implications of this phenomenon, share the idea of where we need to go, and are willing to collaborate with traditional financial entities to accompany them in this process of market optimization and streamlining.

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