Problemswith the current real estate markets
Real estatemarkets are usually affected by two major problems, and they are:
Real estatetransactions require several third parties to be involved. Theseinclude but are not limited to valuers, agents, lawyers, bankers,auditors and brokers. Not only will the entire process take a longtime, but all these middlemen will surely eat into the profits of thesale process. In the end, when everything is said and done, theentire ordeal will no doubt be quite heavy on both cost and time.This is disregarding the fact that real estate properties themselvesare pricey investments and are likely to only get pricier asurbanization continues to grow globally.
Since propertiesare not transacted frequently, there is no public market for realestate; all properties are transacted privately between a willingbuyer and a willing seller. This brings about two problems. Firstly,since real estate markets are private, it operates by a case-by-casebasis, meaning that there is a lack of efficient price discovery.Every real estate sale process must be evaluated individually andonly has comparable sales in the same vicinity as valuationreferences. This points to the second problem which is that realestate is closely tied to its geographical location. This is becauseproperty buyers whether as homeowners or as investors, take intoaccount location preferences such as proximity to work and schooletc. This has resulted in most real estate sales being localized.Unless the potential return of investments is significant, it isunlikely that sellers will gain interests from buyers outside theirregion. This severely limits demand potential.
Fractionalinvesting has been gaining traction in recent years. It enablesinvestors to invest in a portion of a property, as opposed to anentire property. This allows the investor to reap the benefits ofowning a property without a hefty upfront deposit and the ongoinghassle of covering expenses. The biggest advantage of fractionalinvesting is the low barrier to entry when compared to traditionalproperty investment. Investors can own a share of a property for avery small initial outlay instead of the usual 10-20% of a property’svalue as initial deposit.
Tokenization ofreal-world assets perfectly solves real estate’s biggest issue,illiquidity. It has enabled the permissionless and borderless accessto real estate investing using blockchain. Through HyperDAO’s NFTsystem, the ownership of the property is now represented by theownership of the token, and transaction costs are now reduced to justthe gas required to send the NFT over to another address.Tokenization is made possible through HyperDAO’s smart contractwrapper that can be applied to any ERC-20 token and enables rentalincome (in the form of stablecoins) to be distributed to token ownersautomatically. Furthermore, here are some use cases for real estate’stokenization.
Investors can nowinvest in income producing assets such as rental properties from allaround the world. Essentially, when an income producing is tokenizedas an NFT and has a predetermined value, it can be divisible again bygenerating an equal amount in ERC-20 fungible tokens. By holding thisERC-20 tokens that represents a portion of the NFT, the token holdernow has rights to the cash flows generated by the rental asset. Therent from tenants is collected by a third-party property managementservice. The rental income, after accounting for operating costs isthen exchanged for stablecoins through HyperDAO’s platform anddistributed directly to holders of the ERC-20 tokens tied to the NFTproperty using smart contracts.
The ERC-20 tokensgenerated by HyperDAO’s portfolio of NFTs which are backed byreal-world assets can be combined to form an income generating basketof properties. This will allow a smart-contract REIT (Real EstateInvestment Trust) to be created. REITs are particularly useful forinvestors who want to mitigate risk by diversifying their real estateinvestments globally. The REIT is also tokenized which makes itconvenient for trading and transacting. The REIT can be made up ofwhole asset-backed NFTs (which in this case, would not require ERC-20sub tokens) or portions of asset-backed NFTs (which would mean itcomprised of different ERC-20 sub tokens of NFTs); this offerstremendous flexibility and customization for investors. In this way,REIT owners have the rights to the cash flows generated by multipleproperties instead of just one.
Blockchain’spermissionless and borderless nature has allowed digital assets tothrive. With blockchain, anyone can freely transact and trade anydigital assets at any time of their convenience, from any part of theworld, and without the need of centralized third parties who imposeunnecessary restrictions. This is made possible with thestandardization of cryptographic tokens such as ERC-20 (fungible) andERC-721 (NFT) on the Ethereum network. Just as how blockchain havespurred 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-worldassets has made NFT marketplaces possible. Imagine a decentralizedexchange filled with different asset backed NFTs trading 24 hours aday, 7 days a week. This will effectively solve the liquidity problemfaced by investors in traditional real estate or art markets.