Tuesday, March 19, 2024
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Blockchain Technology – Future of Real Estate Investing

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By: Mr.  Ankur Grover, CTO, Frxnl

Fractional Ownership brings the concept of shared economy to real estate. This model allows a group of retail investors to co-own a high-quality asset by pitching in smaller amounts. For instance, a high-potential retail property worth Rs 10-20 crore, which was previously only accessible to HNIs can now be democratised by allowing an investor to pitch in as low as Rs 10-25 lakh and co-own such assets for greater yield. While India is already starting to embrace this model of ownership, the adoption of blockchain technology will scale it to much greater heights very soon.

Blockchain technology – the future of real estate investing

Blockchain makes the entire process of fractional investing trust less by negating any involvement of any 3rd party or middleman. Instead, it is grounded on creating a decentralized, autonomous system by allowing complete transparency. This makes everyone checkers and guardians of the system and almost does away with any chances of fraud.

On-chain fractional ownership of properties is achieved through ‘tokenization’, which allows investors to exchange cryptocurrency or government-issued currency for shares or ‘tokens’ of such quality assets.

What makes on-chain tokenisation so secure?

Transparency – The premise of blockchain technology is that every transaction is automatically recorded on-chain in a way that it is publicly available yet immutable. Any user can easily trace the provenance and the history of a token. This level of transparency allows a user to guarantee the authenticity of any token.

Operate on smart contracts – ‘Smart contracts’ allow automatic execution of certain tasks but only if some predetermined conditions are met. For instance, in a real estate transaction, a buyer automatically gets the title papers, but only if they pay the agreed amount, thereby protecting both buyer’s and seller’s interests. The fractional ownership platforms are built on smart contract-enriched blockchains, which means that without any time loss or human intervention, a financial function can be automated in a very secure way, eliminating changes of manipulation or fraud.

While the security benefits cannot be overstated, here are some other reasons why the blockchain technology is bound to invigorate the real estate industry:

More liquidity – The digital tokens make the process of buying and selling much easier, which will give a much-needed comfort to owners of traditionally non-liquid real estate. This way, tokenization can contribute to additional liquidity in the real estate market and provide a range of investment options to smaller investors as well. Moreover, its bound to change our interaction with real estate, from a multi-generational property ownership to an outlet for lucrative investing.

Faster, Cheaper Transactions – By completely removing the involvement of intermediaries, the transaction process gets more cost efficient and can be automated with smart contracts, making it much faster & efficient than the traditional way.

Property Management – Smart contracts can also help streamline the process of managing tenants and rent payments. On-chain KYC/ investor due diligence, document registration, timely rent collection and other applications make property management smarter.

Adoption of the technology in India – a $5 billion industry by 2030

In a fractional ownership model, an SPV is created that owns the real estate asset with the title records and other documentation in its name. Investors own shares in this SPV in proportion to their investment amounts. Any returns from this asset are distributed proportionally. This way, fractional ownership is quite straightforward and is well within bounds of the current legal and regulatory framework.

On-chain tokenization of real estate assets still has some way to go, there is active conversation around defining the legal and regulatory framework, and reports of the RBI soon launching the digital rupee (legal tender in digital form) on a trial basis. Moreover, the rate at which India embraced cryptocurrency shows a lot of optimism in its formalization. Once done, tokenized assets on-chain will make access to real estate as simple as investing in the stock market.

Frxnl is building an innovative ecosystem that will allow Asset Managers & Developers tokenize their assets post due diligence, and investors will be able to trade these as digital tokens. The compliance-ready system being built by Frxnl would be implementing standards for seamless issuance &transfer of tokens across global jurisdictions on a blockchain based architecture. With the presence of an on-chain validator, the investor profile will automatically be assessed against the compliances issued by any jurisdiction, allowing them to only look at properties that they are eligible to invest in. Frxnl is also looking at leading asset digitization and supporting an efficient cross-border exchange of securities.

The fractional way of investing is emerging rapidly and will be a $5 billion market by the year 2030 in India.

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