Traditional Real Estate Investment vs. Asset Tokenization on Blockchain: Let's analyze how the differences impact

With this article, we aim to assist users who are interested in the project but have limited knowledge in web3 and real estate matters, to understand and evaluate the differences between tokenization and possible alternatives. We are all aware that, for various reasons, traditional real estate investment comes with a high entry threshold, both financially, legally, and to some extent technically.

Acquiring a rental property often requires the signing of a mortgage, impacting property margins. Additionally, investors must face complications such as tenant management, property maintenance, tax payments, and ensuring legal compliance. There are alternatives that allow real estate investments simply by pooling capital: private investment initiatives that require a certain degree of relational trust and a substantial amount of capital due to the limited number of participants, typically ranging from five to ten participants or alternatively, there are more institutional initiatives called Real Estate Investment Trusts (REITs), which are fractional models of real estate investment.

Fractional Investment Models: REITs and Tokenization

REITs allow investors to buy shares in real estate companies that own, manage, or lease income-generating properties. The income is then distributed in the form of dividends, providing a stable source of cash flow for investors. The Covid-19 pandemic has dealt heavy blows to various economic sectors, but the real estate market has shown remarkable resilience, unlike the financial crisis of 2008. In 2020, REITs were initially overlooked due to lower yields compared to global stock markets. However, despite general uncertainty, real estate assets continue to generate strong cash flows, especially through long-term lease contracts.

What is a REIT?

REITs, short for Real Estate Investment Trusts, are companies that own or finance real estate intended for leasing in various sectors. In Italy, they are known as SIIQs (Società di Investimento Immobiliare Quotate). Listed on major stock exchanges, they offer several advantages to investors.

Asset Diversification:

REITs invest in a wide range of real estate segments, including offices, apartments, warehouses, shopping centers, and others. In the United States, the listed real estate market is the world's largest, with a market capitalization exceeding $1.4 trillion.

Business Model:

The business model of REITs is straightforward—they lease properties to generate income, which is then distributed to shareholders in the form of dividends. With the requirement to pay at least 90% of taxable income to shareholders, many REITs exceed this percentage.

Advantages of REITs:

REITs offer liquidity and diversification, with strong markets and high returns. Their stock exchange listing allows diversification without the limitation of illiquid markets. The dividend yield, around 2.7% in the USA, surpasses the average of the S&P 500 and Treasury yields.

Considerations:

however, it is necessary to consider the taxation of dividends and the sensitivity of the real estate market to interest rates, especially in a context of restrictive monetary policies.

Future Potential:

REITs are currently the asset class with the highest returns, and their potential seems unstoppable. With over a third of global wealth tied to real estate, the global commercial real estate sector is worth $33 trillion, representing a third of the world GDP. There is still untapped potential according to the size of the real estate sector.

Tokenization represents the blockchain alternative to REITs, offering several advantages, including:

Investing in a single property instead of a fund: Tokenization allows investors to buy and own a specific fraction of a real estate unit, enabling more direct control over their portfolio.

• Voting rights and governance over the property: Blockchain enables more active involvement, offering investors the opportunity to participate in key decisions regarding the property.
• More frequent dividend payments: Tokenization allows more regular dividend payments compared to the traditional payment cycles of REITs, improving cash flow for investors.
• Lower operational costs and management fees: Reduction in administrative burdens and management fees, as smart contracts and blockchain simplify operational processes.
• Lower minimum investment: Tokenization allows a lower minimum investment compared to REIT shares, making access to real estate investments more democratic.
• Representation of investments through tokens: Investments are represented by tokens that can be easily bought and sold within seconds, improving the overall liquidity of assets.
• The main income is guaranteed by the natural appreciation of the square meter value of the property following renovation and energy efficiency improvements. Through high-end tourist rentals, it is possible to ensure a constant income flow while waiting for the property to be sold. Additional income possibilities can be realized by leveraging the potential of real estate NFTs, which finance reforestation projects linked to carbon credits or the development of energy communities (a topic we will delve into in upcoming articles).

The main income is guaranteed by the natural appreciation of the square meter value of the property following renovation and energy efficiency improvements. Through high-end tourist rentals, it is possible to ensure a constant income flow while waiting for the property to be sold. Additional income possibilities can be realized by leveraging the potential of real estate NFTs, which finance reforestation projects linked to carbon credits or the development of energy communities (a topic we will delve into in upcoming articles).