Real estate as an investment is not very liquid, composable or accessible, writes Joel Lin of CitaDAO. Can tokenization and DeFi transform this market?
Real estate has been heralded as the holy grail of bringing real-life assets on chain. More so than stocks, bonds and other assets. Real estate today suffers from a lack of liquidity and high transaction costs. As a result, since the advent of Ethereum and smart contracts, many have dreamed of the benefits of tokenized real estate. There has been much discussed and written about the challenges of having accurate title and deed, and the benefits of recording such data on the blockchain.
Yet, despite the rapid growth of decentralized finance (DeFi) and the emergence of tokenized gold, U.S. dollar and other real-world assets, tokenized real estate remains elusive. Are the promises of tokenization true, and is real estate still the holy grail? To answer that question, we evaluate the benefits that tokenization can bring to real estate and assess whether these benefits have been realized thus far.
As a real estate industry veteran with over a decade of experience, I have seen many efficient real estate structures. However, having crossed over as a DeFi degen, I see tokenized real estate as being more capital-efficient than traditional real estate structures, with three key benefits: (1) accessibility, (2) composability and (3) liquidity.
One of the wonders of DeFi has been the ability for anyone to access high-quality new real estate opportunities efficiently in a fair manner. Crypto has democratized access to closed markets, and we have seen ordinary average Joes buy art NFTs at a launch price of US$1,000 that has grown to US$500,000, most notable of which is a project called Bored Ape Yacht Club. This would have been unheard of just a year ago in the extremely closed art market.
We see DeFi opening access to the closed elite ecosystem of today, and believe the same could happen in the real estate market. Whether it is a premium shophouse in Singapore or an office building in London, DeFi will open up access to the walled garden ecosystem where opportunities are typically reserved for professional funds.
Tokenized real estate will enable anyone to participate in the growth of high-quality real estate without the hassle of the bureaucratic paperwork that is the bugbear of today’s real estate universe, where opportunities are only accessible to a closed network of investors.
This leads us to #2, composability. In order to be fully composable, these tokens must be bearer assets that can be held in your own hardware wallet. These tokens should not be custodied by third-party centralized parties paying lip service to the “tokenization” effort while subjecting you to counterparty risks.
To enable true composability, real estate tokens need to be true bearer asset tokens that can be redeemed for title and deed without having to seek permission from a third-party counterparty. The right to redeem the title deed must be enforceable by the existing legal framework. It will be challenging for any real estate tokens to gain traction if they are not protected at the most basic level by the legal system.
Once this level of trust, integrity and authenticity is achieved, we will be able to leverage real estate tokens to build more use cases with other DeFi projects, which will naturally result in an increase in the value of tokenized real estate. Some of these potential use cases include reverse mortgages, indices, futures, options, real estate-backed stablecoin and many more.
Just as Ethereum paved the way for financial innovation, expect tokenized real estate to open up numerous possibilities that we cannot even fathom today.
Lastly, one of the most enduring challenges for real estate is the lack of liquidity, which limits the ability to unlock equity efficiently. On average, assets are held for five to 10 years with little opportunity to unwind positions without incurring significant penalties.
This makes real estate inaccessible to liquid capital, depressing demand and the corresponding fair value of the property.
However, by leveraging DeFi innovations such as the decentralized exchanges (DEX) and automatic market makers (AMM), we will be able to unlock 24/7 liquidity for real estate token holders, capturing the once elusive liquidity premium in the process, and enhancing the value of real estate on-chain. With DeFi, real estate tokens can easily transact with little friction, low slippage and low transaction fees 24/7.
Now as we assess the current landscape of real estate tokenization projects. We have seen the sale of an apartment in Ukraine by Propy and tokenization of the prestigious St. Regis Aspen resort. Algorand claims there is now a large amount of tokenized real estate, and there is now also RealT, with numerous tokenized assets mostly based in Chicago and downtown Detroit.
Despite these efforts, tokenized real estate still remains a niche market and has not yet reached its full potential. One of the reasons why many of these real estate tokenization projects have not gotten as much traction as they should have is due to the ponzinomic projects such as Terra’s Anchor as well as other projects that lured users with unsustainable yield expectations.
For unsuspecting users looking for low-risk passive income, projects like Anchor turned out to be picking up nickels in front of a freight train. Given this experience, truly sustainable yield farms backed by real estate may finally have a chance to get the attention it deserves and lead the next growth cycle in the DeFi universe. Nonetheless, much work is still needed for tokenized real estate to achieve its full potential.
For real estate tokenization to be successful, it has to unlock better value for real estate on-chain than what can be offered today. DeFi — with its promise of capital efficiency through better accessibility, composability and liquidity — is the holy grail.
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