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Turning Buildings into Digital Bits: The New Way of Real Estate
September 20, 2023
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Everyone's familiar with real estate. It's about buying houses, plots, and big buildings, and it’s a popular way many folks save and grow their wealth. The nice thing about commercial real estate is that it draws in both seasoned and inexperienced investors. It attracts investors like a magnet since it guarantees good returns and offers a variety of distinctive benefits that set it apart from other investment opportunities. But there's more to the real estate story. Some ways of investing are age-old, while some are super new, thanks to tech.

Direct Property Buying:

The classic way to jump into real estate is straightforward: buy a property. Whether it’s a cozy house or a commercial shop, once it's yours, there are two main ways to profit. Either you find a tenant and collect rent, or you wait for its value to go up and sell it. While this method gives you investment diversification, protection against inflation and all the profit, it also comes with challenges:

  • High Costs: Commercial properties often come with a hefty price tag, making them hard to access for most individuals.
  • Liquidity Hurdles: In the stock world, selling is often just a click away. But in real estate? Not quite. Finding a buyer can be a lengthy process.
  • Time consuming: Buying or selling involves many steps and people, which can cause delays and confusion. It often involves a lot of middleman such as lawyers, brokers, and banks.

Private Equity Real Estate (PERE):

Think of Private Equity Real Estate (PERE) as pooling your money with others to buy something much bigger. In this setup, a company gathers funds from several people, hunts for promising properties, jazzes them up, and aims to sell them later at a profit. When you invest with a private equity real estate group, you're tapping into their expertise and network. This means:

  • Leverage: You benefit from the firm's knowledge and tools.
  • Quality: You get a share in high-end properties, even if you couldn't afford one by yourself.
  • Income: These properties are rented out, which means you get a piece of that rental income.
  • Diversification: Real estate behaves differently from stocks, providing a buffer against big market drops.
  • Shared Goals: The managers earn when you earn, so everyone's aiming for success.
  • Time Savings: The firm manages everything, so you don’t have to.

But, it's often reserved for the richer crowd with high annual income and can be complex. Once you invest, your money might be locked in for many years & the fund is tied up. Managers charge for their services, which can eat into your profits. And not all real estate groups deliver the same results.

REITs – Mixing Real Estate with Stocks:

Merging real estate with stock market vibes, we have Real Estate Investment Trusts or REITs. These are companies that have a portfolio of properties. Instead of buying a property, you buy shares in these companies, much like how you'd buy stocks. The beauty of REITs is in their simplicity. You can invest in REITs with a small amount of money and a brokerage account. REITs let you spread your money over different types of properties. It's different from investing just in stocks. REITs give dividends, which means regular money for you. And they get special tax rules that benefit investors. Furthermore, once you invest, you don’t need to manage properties or deal with tenants. And most important of all, even with less money, you can be part of big real estate deals.

However, the trade-off is that market prices can be unpredictable. Changes in how people live and work can affect REIT values. Some REITs charge high fees which can eat into your profits. If interest rates go up, REITs might drop in value.

Tokenization – The Digital Revolution:

Enter the world of tech. Real estate tokenization is a fresh, techy way to dive into property. Using modern tech, properties are turned into digital tokens – tiny digital shares of right to a building. These can be traded online, opening up the real estate market in entirely new ways. With tokenization, barriers crumble. You no longer need deep pockets to start, and transactions become lightning fast. It's a new avenue, so there's a learning curve, but it holds a lot of promise.

The idea of fractionalized ownership of real estate is not a new one. REIT structures, which allow investors to buy shares in their operators’ real estate portfolios and to trade them like stock, have been around since 1960, and have brought liquidity to the inherently illiquid property sector. Tokenizing real estate takes the REIT model several steps further.

This process is a game-changer, and here's why:

Accessibility - Think properties are too expensive? With tokens, you can buy just a small piece of a property. Imagine an office worth $10 million. Now, you can buy a tiny part of it for just $1. Plus, you don't need to be in the same country as the property to own a piece. Consider an expensive commercial property in New York; once it's tokenized, anyone from around the globe can gain access to this property. However, to trade REITs, you need to have a brokerage and bank account, meaning the unbanked have no access.

Liquidity - Real Estate Tokens ( RETs ) can be bought and sold any time. RET can be traded globally by anyone with an online wallet, meaning you can buy and sell RET even if you do not have a bank account.  Trading these tokens on other markets makes buying and selling real estate easier, letting people trade whenever they want.. Meanwhile, REITs can only be traded at certain time and typically require T+3 days to settle.

Return - RET have higher returns by participating in Liquidity Pools. For example,most of those who bought CitaDAO’s  20SML0253 earned an annual return > 16% over last year alone, unlevered. On the other hand, REIT levered returns are typically < 10% per annum and as they are levered, is negatively impacted by rising interest rates.

Redemption - RET allows you to actually detokenise and redeem the title deed to the actual property at will. Take example from a successful Buyout offer of an Industrial property in Singapore, which was detokenized and brought off-chain. Meanwhile, REIT does not allow you to do so, even if you do an actual privatisation exercise to delist it.

Choices - For RET, you get to choose and select your own individual properties to form your own portfolio. However, REIT and property fund investors typically invest in a portfolio, where the quality of the assets may vary. If you buy into a REIT, you buy into the portfolio — the good, the bad, the ugly, whatever the REIT puts into it.

Real Estate Tokenization Challenges

Law Issues: When we turn real estate into tokens, the law sees them mostly as securities. This means they're like stocks or bonds. So, before selling, we need to check each token. If it's a security, we need a special document called a prospectus. If it isn’t, we sell in special cases, like only to rich investors. Also, selling might need a special license.

Regulatory environment: Right now, most countries don’t have set rules for tokens. They see them as just codes without real-world value. So, people don't have a legal way to connect them to real properties. Also, because this idea is new, many countries don’t have clear rules for it. This makes it hard for buyers and sellers because they don't know how to follow the rules.

Security Risks: Just like any online project, tokenization projects face risks like hacks. While blockchain technology provides security benefits, there is still a risk of cybersecurity threats, such as hacking or unauthorized access to digital wallets holding the tokens.

Detokenization Risks: Detokenization is crucial because it checks and confirms the true value of a token. By letting someone turn a token back into the real asset it represents, it shows that the token's value isn't just an idea, but is connected to something real. This builds trust, especially in the newer blockchain world. If you can't turn your token back into the actual asset, like a property deed, the token might become worthless. So, detokenization ensures that digital tokens are anchored to real-world assets, highlighting the practical side of blockchain in the real estate world.

The Future is Bright and Tokenized

Tokenization is creating quite a buzz, and for good reasons. It's flexible, inclusive, and tech-driven. For many, the dream of owning a part of a prime property seemed distant. But with digital tokens, it has become possible. The allure of easy access, liquidity, coupled with the promise of transparency, might make this method a go-to for the next generation.

The real estate world is vast and varied. From traditional property buying to the digital wonders of tokenization, there’s a method for everyone's taste and pocket. While the charm of owning a house or plot won't fade, innovations like tokenization are reshaping the landscape, making it accessible for all. If you've ever felt the pull of the property world, now might be the best time to dive in, learn, and find your niche.

About CitaDAO
CitaDAO.io is a Decentralized Finance (DeFi) platform for Real Estate to be tokenized on-chain, built on the Ethereum ecosystem. CitaDAO aims to solve the lack of liquidity, access limitation, and lack of composability in existing real estate ecosystem by creating interoperability with other DeFi applications/primitives that operate on the Ethereum protocol. Real estate token allows the community to diversify their portfolio on-chain to generate stable yield through real world assets that have constant liquidity through AMM — interested to learn more?
Follow us on Twitter: @citadao_io
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Or check out our website: citadao.io
Disclaimer: The information contained in this communication is based on sources considered to be reliable, but not guaranteed, to be accurate or complete. This communication should not be relied upon or the basis for making any investment decision or be construed as a recommendation to engage in any transaction or be construed as a recommendation of any investment strategy

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