Examining the Role That Institutional Investment Can Play in Real Estate Tokenization
Real Estate which has been considered as an illiquid asset for a long time has been given a breath of fresh air courtesy the emergence of tokenization. For many years, institutional investors had an edge over individual investors due to the steep illiquidity discount associated with commercial real estate investment. Tokenization is the game-changer as it cuts the spread between illiquid real estate investments and publicly-traded investment vehicles by bringing the asset’s executable price close to its true value.
Institutional investment is beneficial for the sector as it brings a lot of credibility. Investors become more active in managing their respective portfolios and witness an optimization in returns. They can expect strong rental growth and appreciation in the property value.
However, factors like lower economic growth and uncertainty can affect institutional investment. Sometimes institutional investors can play the waiting game if project completion gets delayed due to lack of labour availability and the long wait for approvals which has a severe impact on sales.
Since they have a direct holding over the asset being tokenized, there is a better tradeoff between risk and return. The service of professional management can be availed by firms at a reasonable cost. Hence, apart from providing money, they render solid advice and help in networking.
The options of receiving funds are plenty with pension funds, hedge funds, mutual funds, and sovereign wealth funds part of the list. The relaxation of the rules in FDI (Foreign Direct Investment) and the rise in the number of real estate investment trusts are other factors contributing to institutional investment in real estate tokenization
Hence, there is an urgent need for an international framework unifying the laws prevalent in all countries. The tax structure also needs to be made common as most nations do not have clear tax laws encompassing cryptos. The volatility in the sector is high as prices change frequently.
While there is no doubt that real estate tokenization is a landmark solution to make real estate investments accessible to all, it has to deal with issues such as red-tapism and compliance with regulations. Hence, institutional investors would require a more transparent process to ensure operational efficiency.