How fractionalized property investment and tokenization are sculpting the future of the real estate industry
Gimme a Brick · Feb 10, 2022 · 6 min read
Although not a new concept, fractional ownership has become a popular business venture in recent years for a number of reasons. One major reason is that it reduces the financial burden for a single investor or property owner. Now who wouldn’t want that? But you might be wondering why else someone would be interested in owning a fraction of a property. With the emergence of blockchain technology within the real estate industry, we are now seeing just how fractionalized property investment can be. Now let’s explore some of the pros and cons of fractionalized property investing and why it is becoming ever more relevant in the crypto world.
So what’s the deal with fractionalized property investment?
Fractionalized ownership is a situation in which a group of like minded people own a commercial property together and become fractional owners. Purchasing an asset and dividing the expensive cost into multiple parts allows people to participate in new opportunities at a fraction of the cost usually required. For millennials, this is music to your ears! In this day and age, with the cost of property skyrocketing as we speak, it is almost impossible for the average investor to buy their own residential property without a mortgage, let alone a commercial building on their own! With fractionalized ownership, a seemingly impossible idea suddenly becomes attainable.
Fractional property investment is kind of like property crowd-funding. Typically, a company will first purchase a property that they believe will grow in value. Then they’ll divide the cost of the property into shares and sell those sales to investors. Investors will earn income from the rent charged to those using the property and they can also gain capital returns when the property is sold or if they choose to sell their shares. The cost of the shares will rise or fall depending on the appreciation of the property’s value.
Now let’s take a look at more of the benefits of fractionalized property investment…
As mentioned earlier, fractionalized property investment is a great way for young investors to get into their first home. There is a lot involved when taking on a property for the first time. With fractional ownership, other investors can help out with the prospect of a good return and there is a lot less monetary stress. This ties into another advantage which you don’t typically see in traditional property investment: lower entry costs. By splitting the cost of a property into shares, investors can gain exposure to properties for a small initial outlay. You don’t need to save a large deposit or take out an investment loan, which is a huge relief for many.
Another benefit of fractionalized property investment is that it offers liquidity. Unlike traditional property investment, investors can cash out their investment at any time by selling their shares to other people. They can even receive a return proportionate to the increase in value of the property! If the shares are on a blockchain system and are in the form of tokens, investors can sell them on relevant and regulated exchange platforms if they choose to.
… (tokenization) opens the doors for average investors to get a slice of the pie
Diversification is another major benefit of fractionalized property investment. When you spread your investments around, it limits your exposure to any one type of asset. Diversification is designed to help reduce any potential volatility of a portfolio over time and also allows investors to diversify their funds across a wider portfolio of properties. The idea of buying shares across a wide range of properties for a relatively small initial investment could be a major game changer for those looking to get involved.
This brings us to another benefit: access to institutional-quality assets. “Institutional-quality” real estate generally refers to properties of sufficient size and stature that gain the attention of large national or international investors. These properties are usually reserved for only the highest calibre investors, also known as “institutional” investors. If, however, the owners of these institutional-quality assets decide to tokenize them, this opens the doors for average investors to get a slice of the pie and invest in properties they’d never be able to afford before. With fractionalized ownership and tokenization, people can purchase affordable tokens representing portions of properties all around the world with just one click.
The tokenization of real estate is kind of like fractionalizing property, digitally
Another benefit of fractionalized property investment is that, with the use of blockchain technology, it is a relatively hassle-free investment. The tokenization of real estate is kind of like fractionalizing property, digitally. Tokenization involves converting a real asset into several digital tokens and selling them on a digital platform or marketplace. The people who purchase these tokens then “own” a portion of the asset (more on that later). These assets could be a portion of real estate, shares in a company owning real estate, participation in a real estate investment fund, and so on. By using a blockchain system, there is increased trust, security, transparency, speed and traceability of data.
Naturally, there are also a few drawbacks…
One of them being the fees. In order to finance the substantial startup costs and administrative effort that it takes to present a property to investors, it is normal for sponsors to charge fees. The fee amount and type can vary from one deal to another, but their presence makes a fractional investment more expensive than alternative investments.
Another possible disadvantage could be the uncertainty of a new market. With the concept of blockchain being relatively new and complex for some, not everyone has adapted to this emerging system yet. Some might even be a bit wary of real estate fractionalization or tokenization right now because they are hoping to see more evidence of successful cases first. A final thing to consider when you engage in fractionalized property investment is that there is no actual ownership. Typically, investors own shares in a property rather than owning the property itself.
The future looks bright for the blockchain and real estate industry
With the pros and cons considered, it would be wise to do thorough research before engaging in any investment opportunity, traditional or modern. Each individual investor should perform their own due diligence on any property before committing capital. As with anything, the ratio of risk to reward should be carefully weighed up. That being said, the future looks bright for the blockchain and real estate industry. More and more companies are realising the benefits of tokenization and are deciding to switch over to systems that provide greater efficiency. We may see a rise in international fractionalized property investment as long as property owners continue to tokenize their properties and open up investment opportunities to a broader audience.
Author: Lorraine Tashjian