How Real Estate Tokenization Will Go Mainstream

Real estate was first tokenized almost five years ago in 2018, but it hasn’t yet crossed the chasm into a mainstream form of investing in real assets.

The Regis Hotel was the first piece of real estate put on the blockchain, but other tokenization projects like this $30m Manhattan condo were pulled following a lack of demand.

Does real estate even need tokenization and what’s changing to make it happen now? 

The trade-offs for liquidity in REITs

Real estate offers many benefits for investors like cash flow, inflation hedging, and diversification to other assets. But despite this - there's one major drawback - the lack of liquidity.

You might be thinking, "what about REITs?". 

Well, that's partially true, real estate investment trusts (REITs) offer liquidity during trading hours but introduce many drawbacks that limit their returns and suitability for real estate investors. 

By investing in REITs, you can expect lower returns, high correlation with the broader stock market and limited transparency of the underlying real estate holdings.

Private real estate offers the contrary. High visibility, low correlation and tangibility, but without the liquidity. 

Investment Characteristics of REITs vs Private Real Estate

So how could you have the benefits of private real estate and REIT-like liquidity?

This is the mission we're on at HoneyBricks. Leveraging blockchain technology to bridge all the historical benefits of private real estate with better liquidity. 

How can this be done? Tokenization.

Syndication and tokenization in private real estate

The primary investment path for everyday investors to access private real estate is through syndicated investments. 

Syndicated investments are where you pool smaller amounts of capital to access bigger and normally higher quality investments in commercial real estate. This is where the biggest opportunity for tokenization exists.

Through the use of smart contracts running on blockchain technology, tokenization allows a radically better investment experience.

By tokenizing a syndicated investment, the ownership rights become digital securities, making them a tradable financial product running on the blockchain. 

These digital securities can then be coupled with other smart contracts to offer a new paradigm for improved liquidity, reduced costs, better compliance and instantaneous settlement.  

Syndicated vs Tokenized investments

Changing technology, investing behavior and regulation

Changing market dynamics can create big opportunities.

When you combine breakthrough technology, new investor behavior and evolving regulation - a new landscape evolves. This is happening in tokenized securities.

The most exciting thing is the exponential growth of the digital security market and associated tooling, which has created a new infrastructure for applications to be built on top of.

iPhones were released in 2007 and sold 500 million units over the next five years, creating the app store and fertile ground mobile app development. 

You’re seeing something similar play out with blockchain technologies in real estate. 

More fiat on-ramps, off-ramps, custodial solutions and general innovation - with the learnings and insights from the traditional financial market that developed over 100s of years.

Crossing the chasm

Geoffrey Moore's classic - Crossing the Chasm - outlines five classes of mainstream adoption.

These are the different groups that you must educate and support to reach mainstream success.

• Innovators: pursue new technology and appreciate the benefits of being early
• Early Adopters: see the potential and are happy to deal with teething issues
• Early majority: driven by sense of practicality
• Late majority: wait until something has become an established standard
• Laggard: simply don’t want anything to do with new technology

Today in 2022, Bitcoin has crossed the chasm - institutions driven by practically are adding the asset to diversifying holdings and it's regularly in mainstream media.

Ethereum is getting there. A significant talent drain from more traditional technologies and capital flowing into the space are creating opportunities, but the tooling is still early. This is because the infrastructure and plumbing is still undergoing rapid innovation, and yet to reach the point where simplicity is its focus.

Real estate tokenization isn’t far behind, but today is working with the innovators. You can tell by a lot of the messaging focused on blockchain, crypto, and the brave new world of ‘decentralized finance’.

This will change in time as the benefits of being faster, cheaper and more efficient are proved out.

But finding traction with early adopters won’t equal success. Success is made with the majority, not with the innovators.

Real Estate Tokenization Adoption Curve

What's next?

Mainstream adoption of private real estate tokenization won’t be linear and this will disappoint some.  But companies and industries are not built overnight, and we are in a multi-decade wave in the application of blockchain technology.

Becoming competent in investing in tokenized securities will help you better identify opportunities to deploy capital and grow your wealth.  

Likewise, asset owners that get ahead of the curve and tokenize their real estate won’t only be differentiated in a crowded market, but you’ll also be better equipped to take advantage of the technology to reduce costs and achieve higher returns.  

So how will private real estate tokenization go mainstream? 

It’s a staircase - innovators, early adopters, the chasm, and then the early majority.

The biggest barriers today for our industry to move from innovators to early adopters is two fold; educating the market with real proof points of why tokenization in real estate makes sense, and secondly navigating the changes in regulation, technology, tooling, and consumer behavior.

The best way for you to learn and follow this development is to be part of the HoneyBricks community.