By: Michael Perantonis 2023

Blockchain technology.

Real estate has always been an attractive investment option for people looking to diversify their portfolios and generate passive income. However, investing in real estate can be a complicated process, requiring significant upfront capital and ongoing maintenance expenses. In recent years, the emergence of real estate tokens has opened up new investment opportunities and streamlined the investment process. In this blog, we will explore the concept of real estate tokens, their regulation, and market volume.

The Real Estate Token.

The Concept

The recent engineered product is a real estate token, a digital form of assets that is equipped with value, rights, and obligations. A real estate token represents a fraction of ownership in a property or a portfolio of properties. The token is created using Blockchain technology, which allows for secure and transparent ownership transfer. Real estate tokens can be traded on Blockchain-based exchanges, making it easier for investors to buy and sell fractional ownership in real estate properties.

One of the most significant advantages of real estate tokens is that they eliminate many of the barriers to entry that traditionally accompany real estate investments. Fractional ownership allows investors to participate in high-value properties that may have been inaccessible due to the high upfront capital required. Additionally, real estate tokens provide liquidity that is not typically available in real estate investments.

Tokenization and Cryptocurrency are related but distinct concepts.

Tokens can represent ownership in real estate, artwork, or other assets, and can be traded on a Blockchain-based platform. Tokenization refers to the process of converting physical or digital assets into digital tokens that can be stored and traded on a Blockchain or other decentralized ledger system. These tokens represent ownership or value in the underlying asset, and can be traded in a more efficient and secure manner than traditional securities or other assets.
While there is some overlap between the concepts of tokenization and Cryptocurrency, they are distinct concepts with different use cases and implications, as Cryptocurrency refers specifically to a type of digital asset that uses cryptography to secure transactions and to control the creation of new units, and can be used for a variety of purposes, such as online payments, investments, and as a store of value.

Regulation

The regulatory environment around real estate tokens is still developing. In the United States, the Securities and Exchange Commission (SEC) has been closely monitoring the space and has issued guidance on how real estate tokens may be classified. The SEC has stated that real estate tokens may be considered securities, which means they must comply with securities regulations.

The Council presidency and the European Parliament in 30 June 2022, reached a provisional agreement on the markets in crypto-assets (MiCA) proposal which covers issuers of unbacked crypto-assets, and so-called stablecoins, as well as the trading venues and the wallets where crypto-assets are held.

However, there is still some uncertainty around how real estate tokens will be regulated in the long term. The regulatory framework is likely to vary from country to country, making it important for investors to stay up to date on the latest developments.

Market Volume

The market volume for real estate tokens is still relatively small compared to traditional real estate investments. However, the market is growing rapidly, and experts predict that it will continue to expand in the coming years. According to a report by Deloitte, the market for real estate tokens is expected to reach $1.4 trillion by 2024.

One of the primary drivers of the growth in real estate tokens is the demand from investors for new and innovative investment opportunities. Real estate tokens offer investors a way to diversify their portfolios and participate in high-value properties that may have been inaccessible in the past. Additionally, the transparency and security provided by Blockchain technology make real estate tokens an attractive investment option.

Special purpose vehicles (SPV) in real estate

Special Purpose Vehicles (SPVs) are commonly used in real estate transactions to help manage risks, reduce taxes, and attract investors. An SPV is a legal entity created solely for a specific purpose, such as owning and managing a real estate property.

Benefits of SPVs in Real Estate

One of the primary benefits of using an SPV in real estate is risk management. By creating a separate legal entity for each real estate investment, investors can limit their liability to the investment. If something goes wrong with the investment, the investors' personal assets are protected.

Another benefit of using an SPV in real estate is tax efficiency. An SPV can be structured to take advantage of tax benefits, such as deductions and credits that would not be available to individual investors.

SPVs can also be used to attract investors. By pooling resources, investors can participate in larger real estate transactions than they would be able to individually. This can provide investors with access to more significant and higher-value properties, increasing the potential return on investment.

How SPVs are used in Real Estate

SPVs can be used in various ways in real estate. One common use is for the acquisition of a single property. An SPV can be created to own and manage the property, with investors contributing funds to purchase the property. The investors hold shares in the SPV, which represents their ownership interest in the property.

Another use of SPVs in real estate is for the development of a new property. An SPV can be created to own the land and oversee the construction of the property. Once the property is completed, the SPV can be dissolved or sold, and the profits distributed to the investors.

Security Token Offerings (STO)

Security Token Offerings (STOs) are an innovative way for SPVs to raise capital by issuing digital tokens that represent ownership of a real estate asset. The development of the primary and secondary real estate markets after the tokens are issued by STOs can significantly impact the value and liquidity of these assets.

Primary Real Estate Market Development

In the primary market, STOs can provide SPVs or real estate companies with access to a more extensive pool of investors, including those who might not have previously had access to traditional real estate investment opportunities. This can increase demand for real estate assets and potentially raise their value. Additionally, STOs can streamline the investment process, reducing the time and costs associated with traditional real estate transactions. This can make real estate investments more accessible and attractive to a broader range of investors.

Secondary Real Estate Market Development

In the secondary market, STOs can enhance the liquidity of real estate assets by providing investors with a more efficient way to buy and sell their tokens. By using Blockchain technology, investors can trade tokens peer-to-peer, eliminating the need for intermediaries and reducing transaction costs. Additionally, tokenization can allow for fractional ownership, making it easier for investors to buy and sell smaller portions of real estate assets. This can increase the number of potential buyers and sellers, further enhancing liquidity.

In conclusion:

This article is for informational purposes only and is not a substitute for professional advice from a licensed attorney, tax professional, or financial advisor.