Real Estate Token: Concept, Regulation, and Market Volume

Private and intuitional investors alike use real estate investments in their multi-asset portfolios to reduce their total risks by the positive characteristics such as low volatility or correlation with other asset classes. However, investments in direct or private real estate also bear drawbacks such as high transaction costs, long transaction time, large volumes, low liquidity, or the need for real estate market expertise. Thus, the financial industry has developed various investment vehicles (open-end or closed-end funds, REITs, stocks, etc.) to lower the market entrance barriers for investors with lower investment volume and knowledge. The recent engineered product is a real estate token, a digital form of assets that is equipped with value, rights, and obligations. It enables the fractionalization of properties into small investment volumes using the Distributed Ledger Technology (DLT), and the trading, as well as the rent distribution, are organized in an automated process with Smart Contracts.Currently, the possibility to tokenize properties is limited so most projects use the indirect way through special purpose vehicles (SPV). This paper explains the most used concepts, recent developments, regulations, and a first market overview for the USA and Europe (Switzerland and Germany). We show the development of the primary and secondary markets after the tokens are issued by Security Token Offerings (STO).