Real Estate Token: Concept, Regulation, and Market Potential

Private and institutional 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. One 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 directly is limited so most projects use the indirect way through legal entities. This paper explains the most used concepts, recent developments, regulations, and a first market analysis for the tokenized properties in the USA and Europe (Switzerland and Germany). The development on the primary and secondary markets is demonstrated after the tokens have been issued through Security Token Offerings (STOs), using empirical data points such as returns, standard deviation, skewness, kurtosis, and correlation. The goal is to compare the tokens with other asset classes such as stocks, bonds, and direct real estate.