Tokenizing REITs: Bringing liquidity to unlisted funds!

Extracting your funds from a non-listed REIT can be a hustle and painful to your mental and financial health. The good news: there's hope on improvement!

A REIT explained. Real estate has long been touted as one of the most stable investments you can make. It offers cash flow for rentals, tax breaks, equity building, and a hedge against inflation. Among the more attractive options for investing in commercial real estate, including coliving and shared living properties, is the REIT, a real estate investment trust. A REIT is a company that owns, operates, or finances income-generating real estate. Modeled after mutual funds, REITs pool the capital of numerous investors. This makes it possible for individual investors to earn dividends from real estate investments—without having to buy, manage, or finance any properties themselves.

The REIT market represents more than $515 billion worth of properties in the EU alone. Each REIT is unique in its structure, investment strategy, targeted properties, management quality, and balance sheet safety, and an investor is advised to complete due diligence before investing in any specific REIT. There are many types of REITs, depending on the real estate they own or finance, and on the skills of the managers who run the company.

The quality of REIT management teams can be very volatile with large discrepancies in skills, motivation and interest alignment, and should be considered as a primary criterium for either joining a certain fund or not.

Another distinction between REITs is whether they are private or public. All public REITs must register with the local financial authorities for public trading. . These REITs file regular reports. Private ones, on the other hand, aren’t regulated.

Publicly-traded REITs can be bought and sold freely on stock market exchanges like NASDAQ and the New York Stock Exchange. Non-traded REITs, both public and private, are not as visible or easily accessible. That’s especially true with private REITs, which are only open to accredited investors, a designation reserved for those who meet certain income or net worth thresholds.

Once you invest in a REIT and receive shares in the company, your money may be locked up for a pre-arranged time period. Unlike publicly traded REITs, non-traded REITs are often illiquid, and can remain illiquid for up to eight years or more after the initial purchase date. Additionally, the board of directors of the REIT can stop distribution payments during this time, significantly harming investors in the process.

Getting your money out of a non-traded REIT can often be difficult and expensive and may involve legal means of recovering your losses. Once a REIT is closed to new investors, if the board of directors suspends the redemption policy, you have limited options available for selling your non-traded REIT shares. This can be extremely problematic if the value of the REIT begins to decline, and can cause investors to sell their shares on the secondary market at a discount, losing a substantial amount of their investment in the process.

What if there was a way to invest in high-end coliving projects that provide the antidote to the restrictions of investing in a REIT?

Let’s talk about tokenization.

What is Tokenization?

Tokenized real estate, or digital asset securities, are a game-changer in the staid, traditional real estate sector. Real Estate is more than a $300 Trillion dollar industry worldwide. Of that total, only about $10 Trillion dollars is genuinely available for investment. Most of the remaining $290 Trillion is held privately or via public securities, tied up in loans and deals, sometimes for up to ten years, leaving individuals unable to trade or liquidate their investment.

Using blockchain technology and smart contracts creates a new measure of liquidity and provides investors with the ability to not only trade without restrictions but enables them to diversify their investment portfolios by making their money available to reinvest.

Real estate tokenization is the process of converting the value of real estate assets into digital tokens on the blockchain to enable their digital transfer and ownership. The token represents the property with all of its rights and obligations can all be traded or held like any other cryptocurrency in a crypto wallet.

Most significantly, tokenized real estate is backed by a real world asset, adding a layer of solidness to the digital security.

Why REITS were Established

Today, however, blockchain technology has proven that there are efficient ways to offer REITs as an investment tool to “all investors” by lowering the investment threshold and unlocking a REIT’s inherent illiquidity.

When you invest in tokenized real estate, you become your own bank. The benefits are many.

• You decide when to trade your digital assets, allowing you to move your money out of the project if you so desire, and freeing it up for other purposes or investments.

• You are in control. No longer will a REIT’s management skills determine your investment success or failure.

• Conduct paperless peer-to-peer transactions that cut out all middlemen, including the banks.

• Apply extensive investor reporting and insights to manage your investment. Unlike your money invested in REITs, your investment in tokenized real estate is transparent.

• Benefit from security, compliance and full control over your investment across new asset classes while de-risking with low minimum investment thresholds.

Tokenizing a REIT

Real estate tokenization projects aim to reduce inefficiencies in the real estate market. Leveraging a digital world for real world assets creates a decentralized financial framework (DeFi) in which to generate peer-to-peer transactions. Here are some benefits.

• Market liquidity will increase. Tokenization will increase market liquidity subject to the number of new investors in the market and the function of using a secondary market to trade tokens (and cryptocurrencies) rather than buying and selling through realtors

• The potential for a larger—and global—client base. Changing the way in which we advertise and invest in tokenized real estate projects will bring a wider pool of investors, sometimes global in scope, who will be able to invest in large-scale vetted projects with a minimum investment and still reap the benefits of high returns that were traditionally open to only large institutions.

• Solving market inefficiencies. Tokenization resolves problems of centralized banks being the focus of an individual’s transactions. It allows for the unbanked to also make transactions. All information on a property, the value history of the asset, and any built-in compliance with regulatory obligations, are easily shared and complied with when using the immutability, transparency and security of blockchain.

A property held privately, an SPV (special purpose vehicle), can be created to represent ownership in a property and that ownership stake can then be tokenized on a blockchain. Such was the case with the tokenization of the St. Regis Aspen Resort, the first tokenization property in US history and which now backs the Aspen Coin currently traded on tZero.

When you buy tokenized real estate, you are putting your money into a fractional ownership of a specific property, fund or REIT.