How To Own A House With Little Capital — Property Fractionalisation Explained
Are you interested to invest in real estate but do not have the capital to get you started? I was in the same position as you until I found that I can have a fraction of ownership of a property. This term is called Property Fractionalisation.
This concept is not entirely a new idea. In fact, it has been conceptualised in the UK. However, the idea of fractional property ownership is not quite taken off in Malaysia as a result of regulatory issues.
What is Property Fractionalisation?
Property fractionalisation simply means that the asset, in this case, real estate is divided into portions or shares. The title or deeds are also legally divided into shares.
With that being said, multiple owners can have access to that same property at various times during the year. For instance, one apartment ownership is divided into 1/50th ownership.
How Is Blockchain Technology Used In Real Estate Tokenization?
Real estate investment is widely known as the safest investment that anyone could ever make. However, there are also the downsides — high capital required and oversupply of houses in Malaysia. When there is an oversupply of properties, it is hard for owners to dispose of or sell off the existing real estate properties. As a result, this has exacerbated the issue of property overhang in Malaysia.
In recent years, the blockchain industry has been booming and will have a significant impact on the real estate industry. Blockchain technology has made it possible to tokenize illiquid real estates such as houses, apartments and properties and represent them on the blockchain. We call it Real Estate Tokenization.
Blockchain technology has changed the real estate scene with the introduction of real estate or asset tokenization. Some areas that can be improved using blockchain are issues such as raising capital and property rights.
Using the same concept of property fractionalisation, the blockchain helps to convert the ownerships of these real estate properties into digital tokens that can be bought or sold by prospective investors. The tokens can be from residential units to commercial spaces. The real estate will exist as a blockchain-based digital token with every token representing direct ownership of the property.
The idea is that the technology will detect undervalued properties that are expected to have high investment returns. Then, these properties will be divided into theoretically fractions or shares. Prospective investors can then view the fraction prices and make an informed decision whether they are interested to buy.
It works almost like stocks listed on Bursa Malaysia where investors can buy or sell. But in this scenario, investors will have ownership over a property instead of a company or a business. The fractions value will also fluctuate according to the independent valuation carried out on a regular basis. It will either increase or decrease depending on the demand and fair market value of the property.
This concept of tokenization has turned property investment from an illiquid asset to an asset that is extremely liquid. Now, investors do not have to crack their heads trying to figure out when they will manage to sell off their property or fork out thousands as capital for their property investment.
Can You Make Money On Fractional Ownership?
Depending on the terms of the agreement, all owners may earn a share in the proceeds of rental income.
With this blockchain-based digital token, investors can also earn when there is an appreciation in the value of the fractions. Plus, there are no other unnecessary costs to consider as compared to setting aside a portion of the money as the overhead of a physical property.
In addition, tokenized assets can be sold only in one centralized marketplace, thus, allowing investors to find their desirable investment much more easily.
Exchanging these digital tokens reduces transaction costs such as processing fees. Investors can buy or sell the digital token and invest in properties without incurring closing costs.
Is Part Ownership Of Property A Good Idea?
Shared ownership is an affordable way to get a stake in a property when you do not have a large capital to afford or can’t borrow enough to buy outright on the open market.
How To Tokenize Real Estate?
1. Identification of Assets — The company will evaluate the real estate assets. Typically they will look for undervalued assets with high investment return potential.
2. Smart Contract — A smart contract will be generated in compliance with the security laws and regulations.
3. Generate Token — The company will generate the suitable type and quantity of the tokens to be listed on the exchange platform.
4. Market To Investors — It is the time to list on the exchange and market to prospective investors.
5. Support — Lastly, the company will provide any technical support or clarifications required by investors.
The traditional path of real estate investment comes with challenges. For instance, illiquidity, high processing fees, high capital required and even overheads. With tokenization, these issues can be solved. Investors are now given more freedom and choices to invest in their favourite properties.
If you are worried about the security of blockchain real estate, do not worry.
Asset tokenization is completely decentralised — which means a high-security level and no one has full control over the database records. Since there are no intermediaries aka “middleman” involved, you can expect a more speedy process and fewer investment requirements needed such as no loan applications.
Disclaimer: Invest at your own risk. The information and publications are not intended to be and do not constitute financial advice, investment advice, trading advice or any other advice or recommendation of any sort offered
