The tokenisation of real estate is a hot topic. It describes a process of digital fractionalisation that purports to confer substantial advantages on investors. However, despite these potential benefits, widespread adoption remains low. In this article, we will explore some of the reasons for the substantial gap between the promised land and reality.
Tokenising assets involve converting underlying assets into digital tokens on a blockchain. This provides for fractional ownership of what would otherwise be ‘lumpy’ asset classes such as paintings, racehorses, vintage cars and boats, to which a much bigger pool of investors could be attracted. Given both the size of the asset class and of the individual assets which comprise it, private real estate assets offer the ultimate opportunity for tokenisation, teasing the industry that the holy grail has finally been located. Buying and selling tokens will be quicker, cheaper and safer, delivering more liquidity and less idiosyncratic risk than the underlying bricks and mortar. What’s not to like?
Tokenisation is seen by some as part of the democratisation of finance, in the same way that (as populists argue) social media platforms have democratised discourse by giving everyone a voice while avoiding traditional media and publishing routes. And it is true that democratised investments can enable a wider cross section of society to participate in markets that have, historically, been the preserve of the very wealthy. In the USA, a company called Lofty has been established because ‘all but the very rich are unable to build wealth through real estate’. It signals to the market its role in facilitating financial independence by stating that “Lofty helps anyone lay a path to financial freedom with fractional real estate investing.” [1]. Using their platform, investors can purchase tokens that provide a fractional interest (from as little as $50) in a 150-asset portfolio across the USA. A lofty ideal, indeed.
Other examples abound. In Detroit, a company called RealT has tokenised residential property by issuing RealTokens, which function as digital securities. These are issued on the Ethereum blockchain offering investors access to underlying real estate in the city[2]. And as long ago as April 2019 the UK’s Land Registry completed the first digital transfer of a residential property (a semi-detached house in Gillingham). The sale and purchase of the asset was carried out on the HMLR blockchain prototype and took less than ten minutes from start to finish[3]. The technology to digitalise HMLR has been around for six years, but houses are still being bought and sold in the UK using the same paper-based conveyancing techniques that we were using in the nineteenth century.
There are many estimates of the current and future size of the market for tokenised real estate. According to the Boston Consulting Group[4], the global market in 2022 was $2.7 billion, but it will be a mindboggling $16 trillion by 2030. That might be regarded as optimistic! Despite growing interest, only about 0.003% of the world’s assets have been tokenized, with many companies facing challenges, according to Bloomberg. So, although we have been talking about this concept for years, the potential advantages seem compelling and the technology to support tokenisation is clearly here, why hasn’t it become mainstream?
There are two main factors hindering the advance of real estate tokenisation.
The first is demand. To date, there doesn’t seem to be the level of demand from investors to access real estate via this conduit. There is a substantial education gap with many investors unfamiliar with blockchain and tokenisation. This has led to hesitancy in take-up. This also means that some of the other purported advantages are not realisable. Until platforms are larger and we see extensive demand from investors, it is difficult to demonstrate that transaction costs really are lower and that there are any secondary markets for the tokens.
The second is security. There is clearly some apprehension amongst investors about the underlying technology. That blockchains can provide a tamper-proof and immutable ledger of property ownership records is often asserted as a statement of fact. Unfortunately, it isn’t (a fact). Attacks over the years have demonstrated that this is only partially true. Over $1.7 billion in cryptocurrency was stolen in 2023 ($3.8 billion in 2022),[5]
There are also concerns around the smart contracts that are required as the precursor to the blockchain record. Although these are generally regarded as fairly safe applications, they are a new technology. There is apprehension amongst some that malicious actors could hack them and prevent them from doing what they were designed to do.
Despite all this, there seems little doubt that the real estate tokenisation is set to grow. But in order to do so in a meaningful way, there has to be demand for it from those who would benefit the most. Smaller, even private investors, need to be ready to embrace this new world. That requires the growth of a trusted secondary market. Only once this is in place will the benefits of this radical concept really emerge.
This article was originally published in The Property Chronical 2025 Spring Issue.
In his new financial thriller, set in 2030, Neil Turner explores some of the security issues around a UK housing market where transactions and ownership are powered by blockchains and smart contracts. Digital Street is available from March 25th.
See also:
Baum, A (2021): Tokenisation – The Future of Real Estate Investment? Journal of Portfolio Management.1:260
Graham, L, and Baum, A. (2023): A Piece of the Action: Innovations in Fractional Ownership and Use of Space, SSRN 4927462
[1] www.lofty.ai (company website)
[2] Wernert, R. (2024): Detroit: A lucrative playground for daring investors. www.summit.io (company website)
[3] Tombs, L. (2019): Could blockchain be the future of the property market? HMLR.www.hmlandregistry.blog.gov.uk
[4] Kumar, S. Suresh, R. Liu, D. Kronfellner, B. and Kaul, A. (2022): Relevance of on-line asset tokenisation in ‘crypto winter’. BCG.
[5] The 2024 Crypto Crime Report, p.35. www.go.chainanalysis.com (company website)
