Finance and Accounting

Tokenising real assets: Exploring digital innovation in investments

Tokenisation is swiftly revolutionising the real estate industry with its innovative approach of converting tangible real estate assets into digital tokens on blockchain platforms, thereby enabling digital ownership and facilitating the fractional trading of property shares.

Understanding the process of real estate tokenisation

There are mainly three aspects to real estate tokenisation - fragmentation, blockchain technology and smart contracts. 

Fragmentation is the primary purpose of tokenised real estate. Whether it's a residential or commercial property, its value and ownership can be divided into multiple real estate tokens, each symbolising a distinct fraction of the property, complete with its corresponding entitlements and responsibilities.

Blockchain technology plays a pivotal role in real estate tokenisation, forming the fundamental infrastructure of this process and furnishing a secure and transparent foundation for the storage and transfer of tokens. It not only streamlines the real estate tokenisation process but also opens up new opportunities for investors and transforms the way we approach property investments.

Finally, the specific terms of agreement of each of these tokens are enclosed within a smart contract through lines of code, enabling swift and automated transactions whenever the contract's conditions are satisfied. There are provisions within these codes for executing the contract, and all transactions are traceable and irreversible.

Individuals or entities who acquire a real estate token associated with the property thus become owners of it, assuming responsibility for any potential losses it may incur as well as gaining a share in any profits generated during ownership.

Benefits and challenges

Real estate tokenisation presents an exciting opportunity for both investors and the real estate sector, but it comes with its own set of benefits and challenges.

• It brings enhanced liquidity and accessibility to the real estate market. Real estate, traditionally has been characterised as an illiquid asset class because of the costly and time-consuming procedures involved in property transactions. Tokenisation effectively tackles this by enabling investors to transact in fractional ownership stakes, substantially bolstering market liquidity.  
• It also encourages inclusivity by empowering small investors to acquire fractional stakes in valuable assets, making high-end properties attainable and opening investment avenues to a more diverse demographic.  
• Blockchain technology transactions increase transparency and trust among investors and reduce the risk of fraud. You can eliminate intermediaries with automated smart contracts and simplify your transactions. Clearer transactions allow greater traceability and regulatory efficiency.

Although real estate tokenisation holds the potential to reshape the real estate investment landscape, offering numerous advantages, as discussed above, it comes with its fair share of obstacles and difficulties.

• There is a lack of a standardised regulatory framework governing the market as it varies widely by region and is still evolving. Navigating these hurdles can be complex and time-consuming.
• While blockchain is generally secure, there's always a risk that smart contracts may be susceptible to security breaches and potential exploitation, which can erode investor confidence and impede the growth of the tokenised real estate market.  
• Also, the lack of a centralised reporting mechanism with standard practices and protocols across different tokenisation platforms may affect transparency and pose challenges for regulators to oversee and ensure compliance within the market.
• The real estate industry, investors, and institutions may take time to fully embrace tokenisation as traditional practices and mindsets can resist change. It may help educate the investors about the benefits and risks involved, as it represents a relatively new and complex investment environment.              

Despite these challenges, real estate tokenisation and blockchain stands on the brink of transforming the industry, providing a marketplace that is not only more transparent and efficient but also accessible to a wider audience. As technology advances and regulatory frameworks evolve, the true extent of its potential will become more apparent and widely adopted.

For enterprises aiming to venture into tokenised real estate, it is essential to establish partnerships with experienced professionals who can provide invaluable guidance through the intricacies of this investment avenue, as effectively manoeuvring through the obstacles and capitalising on the prospects within this market demands a comprehensive grasp of technology, legal ramifications, and prevailing industry trends.

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How can Infosys BPM help with real estate tokenisation?

Infosys BPM's Digital Finance Service encompasses a comprehensive digital strategy for leveraging blockchain technology in tandem with in-house and partner products, cutting-edge robotic process automation (RPA) solutions, over 20 AI-driven business solutions, and digital operations. Using technology and access to skilled resources, we empower our clients to embrace the core transformations required to revolutionise their operations.