Understanding Real Estate Tokenization

Real estate has always been a wise way to diversify investments. With the evolution of technology and the emergence of blockchain, innovative investment techniques have emerged, offering new perspectives. This is particularly the case with real estate tokenization. What is it about? How does it work? For you, myLIFE shares an interview with a Luxembourgish expert in real estate tokenization, Mr. Scheuren.*

Tokenization is a process that involves representing a real asset (an item, a property, a right, etc.) in the digital world. More specifically, it involves registering an asset and the rights associated with it on a “token,” which will be recorded and exchangeable on a blockchain. This topic was generally covered in the content “What is tokenization?”

We will now focus on real estate tokenization. To shed light on the subject, we met with local expert Jean-Paul Scheuren, co-founder and CEO of the company LetzToken.

Hello Mr. Scheuren, can you explain to us what your activity consists of?

I am the co-founder and CEO of the company LetzToken, which specializes in tokenization. It is a “one-stop shop,” a single point of contact, aimed at facilitating and optimizing investment in real-world assets, such as real estate, using blockchain technology. To achieve this, we have developed the BlocHome platform, which tokenizes real estate properties and thus democratizes access to property ownership.

Real estate tokenization is a form of tokenization. It involves dividing a real-world asset, such as a property, into multiple tokens.

What is real estate tokenization exactly?

Real estate tokenization is a form of tokenization. It involves dividing a real-world asset, such as a property, into multiple tokens. Each token is a digital representation of a part of a property or a portfolio of properties. It can, for example, take the form of a share granting rights to a fraction of the ownership or represent a debt.

At BlocHome, in concrete terms, a securitization company will purchase a building. It will be registered at the land registry as the owner of this building. It will then determine the number of shares that need to be issued to cover the purchase of the property and related expenses. If the total amounts to €7,990,000 and a share is worth €1, it will issue 7,990,000 shares, which will be represented by as many tokens on the blockchain.

These can then be purchased by investors who will become shareholders of the company owning the building and will be able to benefit from a share of the rental income generated by the real estate.

Why go through a company intermediary?

It is the company that is registered as the owner of the building because most land registries around the world do not consider tokens recorded on the blockchain as an official representation of property ownership. It needs to be registered in a land registry to be recognized. This is why we go through a company intermediary and use the vehicle of securitization.

With tokenization, there is no need for a property manager or a general assembly of co-owners. Token holders are registered as shareholders in the shareholder register, and the company is managed by the board of directors. All decisions are made by the shareholders during general meetings (acquisition of new properties, equipment, etc.).

The investor is subject to a KYC/AML check to prevent illegal activities and ensure that each investor complies with regulatory obligations.

Explain to us how it works?

First, you need to register on the platform that tokenizes real estate assets. To do this, the investor is subject to a KYC/AML check (editor’s note: KYC for “Know your Customer” and AML for “Anti-Money Laundering”) to prevent illegal activities and ensure that each investor complies with regulatory obligations. The identity will be verified, as well as the place of residence, the origin of their funds, etc. It’s like a classic banking onboarding, but digital.

The goal is to create the digital identity of the investor. Once this is verified and validated, it becomes possible to decide the amount the investor wishes to invest and to buy tokens on the platform accordingly.

On BlocHome, for example, one token is equal to €1.60, and it is possible to invest from €1,000 or to take a subscription of €50 per month. In the latter case, the investor gradually builds their portfolio while benefiting from the rental income generated by the property.

Subsequently, the buyer can continue to acquire tokens to increase their real estate portfolio, decide to sell them on the secondary market, or convert them into euros.

How can one buy or sell tokens?

Buying and selling operations are carried out on specialized tokenization platforms, such as BlocHome. The investor community accesses investment opportunities and can directly acquire or sell tokens. Transactions are automatically executed on the blockchain thanks to what is called a “smart contract.”

This is an algorithm that defines the conditions under which operations must take place: terms of buying and selling tokens, payment of rental income, etc. All actions are executed autonomously on the blockchain, without human intervention. This reduces the number of intermediaries, limits costs, and significantly decreases the risk of errors.

Are these operations secure?

Yes, particularly thanks to the blockchain technology used behind tokenization. It is a form of decentralized, transparent, and secure database. It allows data to be recorded, exchanged, and accessed through an immutable history of operations. It is shared across a network on multiple computers and managed by users who ensure that the operations carried out are sound. Thanks to it, transactions are secure, and one can know the number of tokens in circulation, track exchanges, know how many tokens are in the possession of investors, etc.

Property becomes accessible to a wider audience, as it is now possible to purchase only a portion of a property with a reduced capital.

What are the advantages of real estate tokenization?

I see several advantages compared to a traditional real estate purchase.

First, tokenization democratizes real estate investment. Property becomes accessible to a wider audience, as it is now possible to purchase only a portion of a property with a reduced capital. This allows, for example, access to high-end properties previously reserved for large investors. You can thus benefit from rental income, proportional to your investment, without having to deal with property management.

The liquidity of assets is another positive point. Since these are tokens that are exchanged and not the real estate itself, the assets are more liquid and easily transferable, as it is sufficient to go through a platform to sell or buy tokens from the community.

This simplifies the process and reduces costs. By accessing property without having to go through a real estate agent or a notary, the number of intermediaries is reduced, which speeds up procedures and reduces fees.

The taxation is advantageous, particularly for Luxembourg residents. Since these are shares, the capital gain from the sale of tokens is in principle not subject to tax, provided in particular that the tokens have been held for more than 6 months and less than 10% of the company’s capital is owned, which is generally the case. It is recommended here to seek advice from an expert on the subject for more details on the regime that applies to each situation.

Tokenization finally allows, at least in theory, access to an international market, as it is possible to invest anywhere in the world without having to travel. It is thus an additional way to diversify one’s investments and reduce exposure to risk.

The main point of attention is to ensure the seriousness of the project leader offering real estate tokenization.

What are the limits or risks associated with real estate tokenization?

There are none! No, I’m kidding. The main point of attention is to ensure the seriousness of the project leader offering real estate tokenization. A thorough audit is necessary to verify the procedures in place and to ensure that the shareholder register accurately reflects what is recorded on the blockchain. Human errors are still possible, but they are very rare, as operations are automated.

The complexity of tokenization is an aspect that is often underestimated. The concepts of blockchain, token, or smart contract remain difficult for the general public to access. It is necessary to find an operator who masters the technology and creates interfaces that will help popularize and simplify access to all operations. The goal is for everyone to be able to invest. It should be as natural as checking one’s bank accounts or making a transfer.

The third aspect concerns regulation. There are many new regulations emerging. They aim to control issuers and secure operations. However, some aspects are not yet 100% clear, particularly regarding the tax treatment of certain income or the applicable legislation depending on the nature of the tokens. With BlocHome, for example, the MiCA (Markets in Crypto-Assets) regulation does not concern us, as we operate like an investment fund. We are subject to the prospectus law, under the same conditions as a fund. Therefore, it is necessary to be very attentive to legislative developments in this area and adapt.

Isn’t there a danger associated with the use of these technologies?

In my opinion, the technological risk is quite low. The “digital wallet” where tokens are stored is generally very secure. With the system we use, in case of loss or theft of one’s phone and thus access to their wallet, we have proof that the person owns tokens. There is tracking thanks to the blockchain. Especially today, no one uses the blockchain without rigorous identity verification. We can thus destroy the old lost tokens and issue new ones. This is the advantage of the “security token” and the standard we use. Everything is tracked and secured.

To conclude, do you have any advice for those who wish to get started?

My main advice is to thoroughly check the seriousness and credibility of the entity offering the tokens. You should always ask yourself who are the individuals or entities behind the project? In which country are they located? Are they regulated and by whom? Are the projects viable? Before committing, it is imperative to research online, look for reviews, to ensure that the entity is reliable. Seeking expert advice is highly recommended if you are a novice.

For more information on the subject, feel free to check our content: What is tokenization?; Understanding blockchain; Cryptocurrency, bitcoin… how does it all work?

* Content translated from French by the BIL GPT AI tool