Real Estate has always been an integral part of the society and contributes the most to the economy as the industry occupies a huge segment in the market. The term real estate has a broad definition and covers a wide range of items from properties, land, buildings, air rights above the land and underground rights below the land. It also refers to producing, buying and selling real estate. Over the years, many people have been infatuated and are involved with real estates, whether it be investing, buying, or renting, real estate can be a very profitable business. However, as profitable and enticing as it sounds, real estate has a few problems that have only gotten more obvious as time wears on.
Problems with the current real estate markets
Real estate markets are usually affected by two major problems, and they are:
Costly and Slow
Real estate transactions require several third parties to be involved. These include but are not limited to valuers, agents, lawyers, bankers, auditors and brokers. Not only will the entire process take a long time, but all these middlemen will surely eat into the profits of the sale process. In the end, when everything is said and done, the entire ordeal will no doubt be quite heavy on both cost and time. This is disregarding the fact that real estate properties themselves are pricey investments and are likely to only get pricier as urbanization continues to grow globally.
Illiquid, private markets
Since properties are not transacted frequently, there is no public market for real estate; all properties are transacted privately between a willing buyer and a willing seller. This brings about two problems. Firstly, since real estate markets are private, it operates by a case-by-case basis, meaning that there is a lack of efficient price discovery. Every real estate sale process must be evaluated individually and only has comparable sales in the same vicinity as valuation references. This points to the second problem which is that real estate is closely tied to its geographical location. This is because property buyers whether as homeowners or as investors, take into account location preferences such as proximity to work and school etc. This has resulted in most real estate sales being localized. Unless the potential return of investments is significant, it is unlikely that sellers will gain interests from buyers outside their region. This severely limits demand potential.
HyperDAO Fractional Investing
Fractional investing has been gaining traction in recent years. It enables investors to invest in a portion of a property, as opposed to an entire property. This allows the investor to reap the benefits of owning a property without a hefty upfront deposit and the ongoing hassle of covering expenses. The biggest advantage of fractional investing is the low barrier to entry when compared to traditional property investment. Investors can own a share of a property for a very small initial outlay instead of the usual 10-20% of a property’s value as initial deposit.
Tokenization of real-world assets perfectly solves real estate’s biggest issue, illiquidity. It has enabled the permissionless and borderless access to real estate investing using blockchain. Through HyperDAO’s NFT system, the ownership of the property is now represented by the ownership of the token, and transaction costs are now reduced to just the gas required to send the NFT over to another address. Tokenization is made possible through HyperDAO’s smart contract wrapper that can be applied to any ERC-20 token and enables rental income (in the form of stablecoins) to be distributed to token owners automatically. Furthermore, here are some use cases for real estate’s tokenization.
Rental income sharing
Investors can now invest in income producing assets such as rental properties from all around the world. Essentially, when an income producing is tokenized as an NFT and has a predetermined value, it can be divisible again by generating an equal amount in ERC-20 fungible tokens. By holding this ERC-20 tokens that represents a portion of the NFT, the token holder now has rights to the cash flows generated by the rental asset. The rent from tenants is collected by a third-party property management service. The rental income, after accounting for operating costs is then exchanged for stablecoins through HyperDAO’s platform and distributed directly to holders of the ERC-20 tokens tied to the NFT property using smart contracts.
The ERC-20 tokens generated by HyperDAO’s portfolio of NFTs which are backed by real-world assets can be combined to form an income generating basket of properties. This will allow a smart-contract REIT (Real Estate Investment Trust) to be created. REITs are particularly useful for investors who want to mitigate risk by diversifying their real estate investments globally. The REIT is also tokenized which makes it convenient for trading and transacting. The REIT can be made up of whole asset-backed NFTs (which in this case, would not require ERC-20 sub tokens) or portions of asset-backed NFTs (which would mean it comprised of different ERC-20 sub tokens of NFTs); this offers tremendous flexibility and customization for investors. In this way, REIT owners have the rights to the cash flows generated by multiple properties instead of just one.
Blockchain’s permissionless and borderless nature has allowed digital assets to thrive. With blockchain, anyone can freely transact and trade any digital assets at any time of their convenience, from any part of the world, and without the need of centralized third parties who impose unnecessary restrictions. This is made possible with the standardization of cryptographic tokens such as ERC-20 (fungible) and ERC-721 (NFT) on the Ethereum network. Just as how blockchain have spurred the development of thousands of digital assets exchanges, both centralized (such as Binance and Coinbase) and decentralized (such as UniSwap and Kyber Network), tokenization of real-world assets has made NFT marketplaces possible. Imagine a decentralized exchange filled with different asset backed NFTs trading 24 hours a day, 7 days a week. This will effectively solve the liquidity problem faced by investors in traditional real estate or art markets.