4 Reasons Why Real Estate Tokenisation Will Never Work

4 Reasons Why Real Estate Tokenisation Will Never Work

There have been perhaps hundreds or even thousands of attempts to tokenize real estate, yet none of these projects has taken off.

Yes, there are a few examples of semi-success with tokenisation like Lofty or Realt but their success is nowhere near where their ambition was when they started.

The are four main problems with tokenized real estate: 

1. Tokenization offers no real benefits compared to REITs

Yes, governance can be better and token holders have the power to oust bad managers however at what cost? Managing a large fund benefits from economies of scale versus managing one property. Moreover, REITs are publicly traded and thus they also have protections for shareholders.

Another point is that REITs offer deeper liquidity in secondary markets and thus better price discovery. Tokenized properties are too small, sometimes as small as $200k and it can even be easier to sell a whole property than sell tokens of a property. REITs don't have any of these problems.

2. Tokenization is not scalable

For every property that is tokenized a limited company must be formed as an intermediate layer. It is this limited company that is actually tokenized and not the property itself. This comes from government law that doesn't allow tokenized properties. Moreover, every state in the US has their own separate laws. You need to get a licence for every state you operate in.

3. Managing tokenized property is expensive

Managing tokenized properties scattered across different cities, states and countries is a nightmare. You need to employ local managers and 10-15% of your rental income goes to them.

4. You cannot use leverage or take mortgage with tokenized properties

One of the reasons real estate has produced so much wealth for many people is leverage. When I take a mortgage with a 10% deposit, in effect I am 10x levered. So as an example, if I put down a $10k deposit for a property worth $100k, if house prices go up by 10% to $110k, my profit is $10k or 100% on the money I put in, versus 10% profit if I had bought the whole property without a mortgage. Even for REITs, you can use margin to buy funds with interest rates as low as 5% on Interactive Brokers. That's something you can't do with tokenized properties.

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