Real Estate Tokenization

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Real estate tokenization is revolutionizing the traditionally illiquid world of real estate investing. The process involves converting ownership rights in a property into digital tokens on a blockchain. These tokens represent fractional shares of the property, allowing investors to purchase smaller portions of high-value assets. This opens up real estate investing to a wider pool of participants, increasing accessibility and potentially boosting liquidity.

Let's find out what is real estate tokenization in details and how to get all benefits from this process

Key Numbers about Real Estate Tokenization

$200 Million

value of tokenized real estate market

over 10%

average ROI of tokenized real estate

less than 1$

possible amount of initial investment using tokenization benefits

15 minutes

average period between registration on the platform and first investment

no

strict legal procedures on the client's side

641%

growth of tokenized treasury products in in 2023

Legal Opinion about Real Estate Tokenization

Ganna Voievodina

Manimama, CEO

"The world of real estate investment is changing rapidly, and tokenization is at the forefront of that transformation. This innovative approach presents complex legal and regulatory considerations. As a lawyer with specialized knowledge in real estate tokenization, I'm here to guide you through these complexities, ensuring a seamless and secure investment experience. Don't be left behind – let's explore the opportunities that tokenization offers for your portfolio".

Challenges in Traditional Real Estate Investment

High Barriers to Entry:

  • Substantial Capital: real estate often requires a large down payment (sometimes 20% or more of the property's value). Additional costs like closing fees, legal expenses, taxes, and insurance quickly add up. This can create a significant obstacle for those without abundant financial resources.
  • Limited Access to Financing: even when using financing, securing a mortgage for an investment property may be harder to obtain or come with less favorable terms compared to mortgages for owner-occupied homes. This further restricts access to the real estate market.
  • The Hidden Hurdles: beyond the obvious financial costs, less talked about barriers often play a role. Acquiring necessary knowledge about valuation, market analysis, and legal processes takes both time and effort. These less tangible investments can be as prohibitive as the upfront financial ones for those who lack the knowledge or resources to navigate them.

Lack of Diversification:

  • Single Asset Risk: traditional real estate investment often focuses on one property in a particular area. This concentrates your risk - if something negatively impacts the property's value or the local market, your entire investment could be affected.
  • Challenges Spreading Investment: to mitigate this risk with diversification, you'd ideally want to buy multiple properties across various locations. This demands a substantial increase in capital and management effort, out of reach for many investors.

Market Volatility:

  • External Forces at Play: real estate, unlike some other investments, is highly sensitive to external events. A downturn in the broader economy, a sudden spike in interest rates, or even a shift in the local job market can negatively impact your property's value and the rental income it generates. This susceptibility to outside forces makes it an inherently less predictable investment.
  • Emotional Toll: beyond the time factor, dealing with tenant disputes, chasing unpaid rent, or responding to emergency maintenance issues can introduce emotional strain and stress. For investors without a thick skin or a dispassionate approach, this may significantly offset the financial gains of property ownership.
  • The Illusion of Stability: while long-term trends have historically shown real estate appreciation, it's vital to remember that past performance doesn't guarantee future outcomes. It's essential to be aware of the cyclical nature of real estate markets and the potential for periods where values stagnate or even decline.

Illiquidity:

  • Complex Sales Process: selling real estate is a lengthy process. From finding a buyer to negotiating the price, dealing with inspections, appraisals, and paperwork, it can take months to convert the property into cash.
  • Difficulty Accessing Funds: this illiquidity makes it challenging to access your investment quickly in case of emergencies or sudden needs. You can't easily tap into a property's value unless it has been sold.
  • The Problem of Forced Decisions: illiquidity forces investors into "all-or-nothing" situations. Needing to sell property quickly, even in a less-than-ideal market, puts you in a reactive position. This weakens your negotiation power and can lead to accepting lower prices just to free up your trapped capital.

Management Overhead:

  • Hidden Time Investment: while the appeal of rental income might seem passive, the reality of landlording often involves a significant investment of your time. Advertising vacancies, carefully screening potential tenants, coordinating repairs, and handling legal compliance isn't always quick or easy. This 'hidden' time commitment can chip away at your overall profits and personal freedom.
  • Emotional Toll: beyond the time factor, dealing with tenant disputes, chasing unpaid rent, or responding to emergency maintenance issues can introduce emotional strain and stress. For investors without a thick skin or a dispassionate approach, this may significantly offset the financial gains of property ownership.
  • Delegating at a Cost: property management companies can alleviate much of this burden, but they don't work for free. Choosing to outsource the management means factoring their fees into your projected returns, which can reduce overall profitability.

Geographic Limitations:

  • Missing the Bigger Picture: focusing exclusively on local properties can blind you to more lucrative markets elsewhere. Areas with strong job growth, favorable tax environments, or emerging infrastructure projects may offer better ROI or lower barriers to entry.
  • Difficulty Expanding: even with substantial capital, geographically limited investing can hinder your ability to rapidly grow your portfolio. Concentrating in one area makes you more exposed to regional economic downturns and limits your capacity to take advantage of multiple growth markets at the same time.

Benefits of Real Estate Tokenization

Lowering Barriers to Entry

By representing property ownership with digital tokens, tokenization allows for fractional ownership. Instead of purchasing an entire property, investors can buy tokens representing a smaller portion, significantly reducing the upfront capital needed to participate.

Increasing Liquidity

Tokens can be traded on secondary markets or specialized exchanges. This provides greater liquidity compared to traditional real estate, where finding a buyer can take months. Investors can exit their positions more quickly if desired, providing financial flexibility.

Enabling Diversification

Tokenization makes it easier for investors to build a diversified real estate portfolio. By purchasing tokens representing different properties, investors spread their risk across various assets, locations, and market types.

Reducing Management Overhead

Many tokenized real estate platforms handle property management responsibilities, including tenant selection, maintenance, and rent collection. This relieves investors of direct landlord duties, especially for those without the time or expertise for property management.

Addressing Market Volatility

While real estate tokenization doesn't eliminate market volatility entirely, it can mitigate risk by enabling diversification. Additionally, the increased liquidity could reduce some of the dramatic price swings associated with illiquid real estate assets.

Expanding Geographic Reach

Tokenization removes geographic barriers, allowing investors worldwide to participate in promising real estate projects. This opens up access to a much wider range of real estate opportunities and potential investment returns.

Our Services

As a law firm specialising in serving tokenization projects, we are ready to offer a full range of legal services tailored to the unique needs of this rapidly evolving field, including:

Regulatory compliance

  • Support in the complex regulatory landscape of the tokenization and blockchain industry
  • Ensuring compliance with local and international legislation, including securities regulations, AML and KYC requirements

Choice of a jurisdiction

  • Researching and setting up the optimal corporate structure for tokenization projects with the right legal structure, appropriate taxes and investability

Support of token issuance

  • Drafting all necessary documents for token issuance and eliminating risks of token recognition as a security (if applicable)

Business structuring

  • Assessment of your structure, doing necessary research, further analysis and helping in empowering your plans

Marketing and advertising

  • Preparing marketing plan for your business
  • Advertising plan adjustment
  • Website creation

Real Estate Tokenization Use Cases

Real Estate Tokenization in Dubai

One of the projects was realization of real estate tokenization in Dubai. At the time, Real Estate Regulatory Authority forbid more than four investors in one real estate object. We offered our client perfect solution - every object will be owned and managed by Special Purpose Vehicle (SPV). SPV is a legal entity which owns real estate. So every token represents your shares in such a SPV. Then SPV hires special manager to make sure that property managed in the right way to maximize revenues from the property. Using modern and convenient platform every person can be shareholder and make money by receiving dividends.

During the investment period, in the event of a sharp change in market conditions, the manager raises the issue of selling the property. The average investment period is 3-5 years, after which, at the end of the investment period, the property will be sold and the investor's share of the proceeds from the sale (after deducting all relevant transaction costs) will be distributed among all investors in accordance with their ownership of the SPV (number of shares). At this point, the user's investment is considered redeemed (at profit or loss) and the SPV will subsequently be liquidated.

The essence of the Dubai model is as follows:
  • It is necessary to establish a Dubai company.
  • Company must have a license from Dubai Financial Services Authority (DFSA).
  • No person can hold more than 33% of one real estate object.
  • Users shall surpass strict AML/CFT procedures.
  • Investors make decisions regarding the property and receive income depending on the number of tokens they hold.

Real Estate Tokenization in USA

Manimama stands as a long-term and thrusted legal advisor of the fabulous property tokenization platform Binaryx. This is a marketplace where users can buy and sell their property tokens. Tokenization is a process of transferring ownership of real estate to blockchain. Each user can view and buy the objects that are already available for sale and/or put up his own fraction of tokenized property for sale. Data on the Marketplace comes from the blockchain and a system of oracles, providing users with all the necessary and up-to-date information, including ratings, historical performance, and expected returns of each tokenized property.

Any holder of property tokens can easily sell his tokens to other users on the Marketplace. Tokens are member units of a specific legal entity formed as a decentralized autonomous organization (DAO). This is a form of organization in which coordination is carried out without centralized control but using some automated algorithms (such as those implemented in smart contracts). Token holders will become the owners of the property owned by their DAO LLC, which has the property's title deed registered to it. DAO LLC has a separate property ownership and legal structure which protects members and holders of tokens.

Such business may operate in accordance with the SF0038 law, adopted in the state of Wyoming, USA, in 2021. It allows for the creation of companies with multiple co-owners from around the world, with ownership being formalized in a few clicks. For each property, a new legal entity (LLC) in the state of Wyoming, USA may be incorporated. By investing in the property, investors become co-owners of this legal entity.

When the property collects the full amount of investment, it gets transferred to the ownership of the registered legal entity. This way, investors become co-owners of this property. The ownership rights are recorded in a public and secure registry (blockchain). Each company is managed by a specific smart-contract and its address is public and included in the corporate documentation of each Wyoming DAO LLC. Any deals and transfers are done in accordance with US laws.

The essence of the USA model is as follows:
  • It is necessary to establish a DAO company in Wyoming or other jurisdiction which is.
  • There is no need to obtain any license.
  • Users shall surpass strict AML/CFT procedures.
  • Investors make decisions regarding the property and receive income depending on the number of tokens they hold.
  • Tokens may be sold on different platforms and exchanges without loss of their value.

Crowdfunding in real estate tokenization

Crowdfunding is a way of raising money to finance projects and businesses. It enables fundraisers to collect money from a large number of people via online platforms. Crowdfunding is most often used by startup companies or growing businesses as a way of accessing alternative funds. Crowdfunding is the licensed business all over the world and we can suggest many comfortable jurisdictions to incorporate a Crowdfunding platform.

Solution 1. Establishing an European company with a crowdfunding license.

According to art. 3 Regulation (EU) 2020/1503 on European crowdfunding service providers crowdfunding services shall only be provided by legal persons that are established in the Union and that have been authorised as crowdfunding service providers. According to art. 12 a legal person who intends to provide crowdfunding services shall apply to the competent authority of the Member State where it is established for authorisation as a crowdfunding service provider So, if you create a company in Europe, it's legally required to have a license in the country where the company is established.

Solution 2. Establishing a new local company with a crowdfunding license in Canada.

We suggest incorporating a new company in Canada in order to avoid falling under the EU regulation. By shifting a focus away from the European market, it makes possible to minimize regulatory requirements and operational risks while still capitalizing on the less strict Canadian regulations. The Canadian regulator allows us to work with clients outside of Canada and we can assist in launching such a company.

Solution 3. We are ready to create a digital platform for partial investment in real estate, which is based in Dubai (hereinafter referred to as the Platform/Stake). Using such a platform, the user can easily invest any amount in the property that is listed on the platform. UAE gives a variety of tools for incorporating an investment. For example, it can be a company registered with the Dubai International Financial Center (DIFC) and regulated by the Dubai Financial Services Authority (DFSA). Such company may obtain a crowdfunding license and support the incorporation of SPV (special purpose vehicle) for each property listed on the platform namaged by the Dubai company.

Why Work With Manimama?

  • Expertise in Blockchain and Digital Asset
  • Experience with Tokenization Projects
  • Comprehensive Legal Support
  • Tailored Legal Strategies
  • Regulatory Compliance
  • Risk Management and Dispute Resolution
  • Industry Connections
  • Confidentiality and Trust

If you need legal expertise for your tokenisation project, please do contact our legal team who can help you get your project launched.

Frequently Asked Questions

  • What is real estate tokenization, and how does it differ from traditional real estate investments?
    Real estate tokenization is the process of representing ownership of a property (or portfolio) through digital tokens on a blockchain, allowing for fractionalized ownership and easier trading compared to traditional whole-property investments.
  • What are the potential benefits of tokenization for both investors and property owners?
    Investors benefit from increased liquidity, lower investment barriers, and potential diversification, while property owners gain access to a wider pool of capital and can streamline the sale process.
  • How is the secure storage and management of digital real estate tokens ensured?
    Secure storage of tokens typically involves a combination of specialized cryptocurrency wallets and custody services, with the exact security measures depending on the platform and specific token.
  • How does real estate tokenization impact property valuation?
    Tokenization can potentially make valuation more transparent due to increased data availability, and the fractionalization may lead to a broader range of valuations based on individual token prices.
  • What are the risks involved in investing in tokenized real estate?
    Risks include market volatility, regulatory uncertainty, potential technology failure, and the inherent risks associated with the underlying real estate asset.
  • Where can investors find and participate in real estate tokenization offerings?
    Investors can find offerings on specialized real estate tokenization platforms, through some security token exchanges, or directly from companies issuing the tokens.

Client Feedbacks

"Having worked at Manimama OU for the past two years, I can confidently affirm that its legal expertise in fintech is unparalleled".

"Manimama is not just a legal advisor. They are thrusted partners who support us during 3 year while tokenisation of real estate all over the world".

"If you seek a law firm that combines deep knowledge with a dynamic approach, Manimama OU stands out as a prime choice."

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The content of this article is intended to provide a general guide to the subject matter, not to be considered as a legal consultation.