Fractional Ownership is Bad for the US Retail Investor
Fractional ownership of real estate offers three primary benefits:
- Liquidation Premium
- Opportunity for Foreign Investment in US Real Estate
- Real Estate as a Wealth Generation Vehicle
While these elements may benefit existing real estate owners, the tokenization of real estate ultimately disadvantages retail investors and reduces real estate accessibility as a wealth-building tool.
Liquidation Premium
The transition of an asset from private to public ownership represents a one-time liquidation event. Once public, the asset's shares already reflect this liquidation premium in their price.
This dynamic mirrors the stock market's IPO process: retail investors who purchase shares post-IPO capture no additional value from the liquidation premium. Furthermore, private investors must now compete with public investors for real estate acquisitions. This competition disadvantages private investors who intend to maintain private ownership, as they face opposition from public investors seeking to generate returns through asset liquidation.
Opportunity for Foreign Investment in US Real Estate
The substantial appreciation in US real estate values over the past decade largely stems from foreign investors seeking stable returns in US dollars and the American economy. Streamlining this access for foreign investors will intensify demand for US real estate while supply remains constrained.
Consequently, US real estate prices will continue their upward trajectory, creating additional barriers for domestic retail investors, particularly as foreign investors demonstrate a willingness to accept lower returns on investment.
Real Estate As a Wealth Generation Vehicle
Traditionally, real estate has proven an effective wealth-building tool through three key mechanisms: elimination of rental costs, mortgage interest tax deductions, and principal reduction benefits. However, fractional ownership through tokenization fails to deliver any of these advantages.
Current tokenization efforts focus exclusively on debt-free assets, as incorporating debt significantly complicates the blockchain mechanics of tokenization. Consider a scenario where 20% of a building becomes tokenized across 20 different digital wallets - ownership tracking becomes immediately challenging. This fragmentation poses particular problems during potential foreclosure scenarios, where notifying fractional investors proves exceptionally difficult.
In Conclusion
The tokenization and fractional ownership of real estate will ultimately impede domestic investors’ ability to build wealth through property ownership. The combination of liquidation premiums and increased foreign investment will drive real estate prices higher, limiting access for future generations seeking wealth creation through property ownership. Fortunately, since tokenization currently applies only to debt-free assets, widespread adoption faces significant barriers in the near term.
