Primior Team

Why Leverage Tokenization for Real Estate Portfolio Diversification?

tokenized real estate abstract

The real estate market is a great way to diversify one’s investment portfolio, but it also comes with its own challenges. The most prominent of all is the volatility when it comes to the market situation.

There are a number of factors that can influence the prices of real estate property, such as the location, future development prospects of the property, quality of the construction, interest rates, tenant demand, and tax rates.

Not to mention, the immense overhead and knowledge required to start investing in real estate in the first place makes it a huge challenge for beginners.

The solution, now, is to take advantage of tokenization in real estate to help offset some of the major challenges that real estate brings.

What is Tokenization in Real Estate?

Digital technology allows users to break down property ownership into smaller digital tokens – most prominently on blockchain.

This way, they can be divided into fungible tokens which make up part of a whole. Or, they can be traded as one singular unit in the form of an NFT.

Since owning the NFT is equivalent to owning the property itself, it allows a simple way to exchange property rights without having to go through the hassle of drawing up contracts from scratch.

Dynamic NFTs (DNFTs) update in real-time, reflecting the value of the property. So, if the owner changes the roofing or repaints the house and renovates the house, the NFT will also update in value based on the changes that are made.

Benefits of Tokenization Over Traditional Real Estate

Now, let’s take a look at some of the benefits that Tokenization offers over real estate:

Low Exchange Times

It could take months to complete a transaction when renting out or selling a physical property. However, with tokenization, property owners can exchange rights digitally within a matter of minutes.

The lack of intermediaries required also speeds up the process and takes away the risk of any unexpected delays as part of the process.

Fractional Ownership

It’s impossible to own part of a property through the traditional method. But with fungible tokens that are indistinguishable from one another, fractional ownership of property is made possible.

What’s more interesting is that it’s not just housing property that is available for investment. Hotels, commercial buildings such as malls offices, and hospitals can all be owned through the fractional ownership model.

This leads directly to the next benefit of tokenization:

Low Entry Cost

As of November 2023, the average cost of a house in the USA is $488,900. While the figure varies based on the region, it’s still very expensive for the average investor to enter the market. Tokenization offers a way for investors to diversify their portfolio with a much lower starting cost, which can be just a few dollars.

Reduced Fraud

One of the most significant benefits of real estate tokenization is being able to track each and every transaction on the blockchain. Moreover, data such as the square footage of the property can all be stored on the NFT, making it really difficult to draw up a fraudulent contract. This way, investors stay safe and can protect themselves from any fraudulent contracts.

The Future of Real Estate Tokenization

In 2024, the real estate tokenization market is valued at $3.8 billion and is projected to grow with a steady CAGR of 2.90%. By 2034, it is expected to be worth $26 billion.

Tokenization has been given a big boost with the participation of merchandise brands such as Nike in the growth of the market. But, tokenizing real-world assets remains a challenge, especially with something as sensitive and complex as property.

Scalability is one of the key challenges of real estate tokenization, considering the advanced tech required, and how complex it might appear to the common person in its current state.

Blockchain technology is still in its early stages, with a lot of possibilities left to explore. As it becomes more accessible and permeates the mainstream market, we can expect real estate to be one of the main benefactors of its growth.

And once it does, it’ll offer investors a great alternative to combat stock market volatility and inflation by putting their money in property.

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