The world of property is changing fast, and it is important to stay up to date on all the innovations in the space. The blockchain and cryptocurrency realm is slowly changing the way many markets work, and the property industry is no exception. With these innovations, there will be many new opportunities that you should be aware of as an investor.
One such opportunity relates to the use of non-fungible tokens (NFTs) as a way to sell fractional ownership or debt on a property. This use case has been examined by the Land Registry in the United Kingdom, with a pilot conducted in 2019.
What are NFTs?
Non-fungible tokens or NFTs are tokens issued on a blockchain, similar to a cryptocurrency such as Bitcoin. However, unlike a cryptocurrency, they are not “fungible,” meaning that each token is unique, rather than being identical and interchangeable with each other. This means that they can be used to identify a unique item, either real-world or digital.
Currently, NFTs are mainly used to sell digital art. Because digital art is so easily copied, it is difficult to tell which copy is the authentic “original.” Therefore, up until recently, digital art hasn’t had a collectable value. However, with NFTs, digital art can be attached to a unique number stored on the blockchain. The token can be sold to pass on ownership of the digital collectable, and provenance can be assured.
NFTs for fractional property ownership
But just because NFTs are mainly used in the digital world, doesn’t mean they can only be used for digital assets. NFTs can be used to represent ownership of physical items or real estate too. An example of this could be fractional ownership. Homeowners could sell part of their property to a large number of small investors by issuing tokens on the blockchain. Investors could hold these tokens and receive a rental income for doing so, profit split on capital appreciation upon sale or both.
This could also allow people to buy and sell fractional ownership in rental properties, potentially in a liquid market without a middle-man. This would open up the world of property investing to many more people and create better options for those that need to unlock equity without borrowing or moving.
But it isn’t just ownership that could be affected. So could borrowing. In the future, it may be possible to borrow by issuing NFTs backed by ownership of your property. Individual investors could then buy an NFT representing a small part of the debt. Holders of the NFTs would then receive repayments via the blockchain in proportion to how much they lent out.
What are the disadvantages?
When dealing with new technology, there is always a level of potential risk. It is important to look at the downsides as much as it is important to examine the potential advantages. While NFTs could offer a solution to unlocking capital in a property, where would the legal right to control the property actually reside? Could an NFT token holder force someone to sell his or her home if the holder owned enough of the tokens? This would put those living in the property at an unacceptable level of risk. On the other hand, if the property isn’t actually controlled by the token holders, could the residents remain in the property forever? This would prevent the investors from ever benefiting from the capital appreciation.
In terms of investment real estate, would NFTs be much different than the crowdfunding sites that allow you to invest in property? These sites have had mixed success, and many have closed down, causing issues for investors. It remains to be seen if NFTs would actually avoid such middlemen, as there would need to be someone managing the property. For this to be overcome, there would need to be a decentralized mechanism for appointing such representatives.
Finally, NFT mortgages might come with their own set of issues. If a borrower falls into default, who can collect on the debt? It would be a problem if each creditor could collect individually, both for the lender and the debtor. On the other hand, if only one party can collect, this would make these type of mortgages not much different to peer-to-peer lending platforms and, therefore, susceptible to the same problems of centralization.
As with anything new, NFTs in the property space will have to work through a number of issues. That said, there is a great deal of potential as well. While widespread adoption of these technologies may be sometime away, we all need to be aware of them so we are ready to take advantage of them.