With the advent of blockchains, a number of possibilities have surfaced when it comes to the ownership of commercial property. As a result, tokenized commercial assets are becoming more and more popular. But what is tokenization in commercial real estate and what should you know about it?
Tokenization in Commercial Real Estate
Essentially, tokenization is the process of converting ownership of a physical asset, such as a commercial building or property, into digital tokens on a blockchain. Each token then represents a small share of the property. Let’s consider a brief non-digital example in another industry.
The world of fine arts now allows investors to buy fine art but not all of it at once. After all, rare and highly sought after pieces can cost six figures or more. However, this investment becomes more accessible when you buy a “fraction” of that art. As the value of the art increases, so does your fractional investment. Tokenization in commercial real estate is similar but with that added convenience of digitized ownership.
How Tokenization in Commercial Real Estate Works
To start with, a commercial property would be selected to be tokenized. That property would then be appraised. Once the property is legally admitted for tokenization, tokens would then be issued on a blockchain. Each token represents a portion of that new asset.
Next, those tokens would be sold to waiting investors. An investor could buy one or multiple tokens in what would be a familiar, yet fully digital, marketplace. Those tokens could then be held, traded, sold or even leveraged, allowing for quick liquidity of an otherwise illiquid asset.
What You Should Know About Tokenization in Commercial Real Estate
It may seem like tokenization is a natural fit for larger investments such as commercial real estate. However, these aren’t NFTs or other tokenized assets that require nothing more than a bit of electricity and proof of ownership. Let’s consider some of the nuance of what you need to know when it comes to tokenization in commercial real estate.
To start with, tokenization lowers the bar a bit, allowing for more investors to buy in. This is the same as the aforementioned example of fine art. Fewer investors can benefit from the investment of single ownership but shared ownership creates opportunities for many.
An attractive factor when it comes to tokenization in commercial real estate is the matter of liquidity. It’s easier to sell your partial ownership instead of trying to liquidate the entire asset. This is made easier by the fact that your ownership would be digitized and could be quickly sold to another interested buyer.
There’s also the matter of absolute transparency when it comes to the buy/sell process. Blockchain automatically tracks and records all transactions. This allows for a clear audit trail when it comes to who owns what in a decentralized manner unique to blockchains.
Another obvious perk is that tokenization in commercial real estate reduces the need for the middleman. Brokers and banks are not needed for these transactions. That helps to reduce the overall cost of a buy-in or trade.
The Associated Risks with Tokenization in Commercial Real Estate
As with any investment, you should expect there to be risks involved and the tokenization in commercial real estate has many.
To top the list, blockchain is still evolving. It’s a relatively new tech and smart contracts could be vulnerable if the process is not well audited.
The “newness” of it all could also create a few adoption headaches in the marketplace. As an example, there could be liquidity issues in these early stages of the tech. A little patience and investor know-how is all that’s required.
With this new tech taking hold, you can be sure that it will catch the attention of government regulators who are putting the crypto world under a microscope. Security tokens must comply with security laws here in the United States as well as other potential laws abroad.
Guess what’s considered a volatile investment? You got it! The value of these digital tokens fluctuates quite a bit and often on a daily basis. This volatility is the downside of liquidity. Do we really want to bring knee-jerk market mechanics to the commercial real estate space?
Partial ownership via tokenization of a commercial property also ignores all the management aspects of that property. We cover these nuances in great detail on this blog, but it’s safe to say that building maintenance, occupancy rates etc. will not go away with digital claims to ownership of real properties.
A Quick Look at the Key Takeaways
Whether tokenization reaches the masses like REITs is still unknown, but what is clear is that you’ll still need to be strategic with your investment purchases and that’s looking at the underlying value – the commercial property. This would include investing in assets with solid valuation, good cash flow and overall appeal. Buying tokenized commercial real estate is a lot like buying real estate in general. Pay attention to the overall potential of the property before you invest.
You might also want to make sure that you are dealing with CRE professionals who are experienced in blockchain platforms. In fact, it might not hurt to consult with legal advisors and, perhaps, learn a little more about the process from tokenization specialists. A little knowledge goes a long way when it comes to protecting your money and portfolio.
Also, do keep in mind that this is not just a so-called “upgrade” in the CRE investment arena. Tokenization in commercial real estate is a new financial model. That means it comes with new potential risks and considerations. Make sure you know what’s expected from the ups and downs of this exciting new venture.
When it’s time for you to take your commercial real estate investments to the next level, we invite you to have a closer look at Quarem. Our industry-leading software brings reliable results in real time and can help you evaluate the strengths and potential weaknesses in your CRE investment portfolio. Just reach out today with any questions or schedule your free demo online.
