GN Bajpai: Tokenize real estate to open up an attractive asset class

Investing in real estate bears some distinct advantages. Globally, since 2000, residential real estate investments have delivered high annual compounded growth rates across major emerging markets, including India. During the past decade (2012-2022), while inflation in India averaged 5.7%, housing prices appreciated at a robust 8.04% annually, delivering an over 2% real rate of return in capital appreciation, in addition to rental income. And these investments are fully secured by the underlying physical asset.

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Regional variations in returns tell an interesting story. Kochi leads with 10-year annual returns of 9.94%, followed by Lucknow at 9.11% and Bengaluru at 8.98%. Even metropolitan centres like Mumbai (6.71%) have shown positive performance. Home prices of grade-A properties in emerging locations have grown even faster than these blended averages, with periodic rent increases being the icing on the cake. With rental income taken into account, the returns-boost hovers around 3%.

Though residential prices sometimes stagnate in certain markets, historically, this asset class has hardly experienced downturns in India, making it one of the most stable investment options with a nearly negligible possibility of loss.

Despite these compelling returns, most retail investors remain excluded from meaningful participation. Barriers like high entry prices, illiquidity, complex documentation and ongoing property management requirements put this asset class out of their reach. This exclusion is particularly unfortunate, given the massive growth in investment awareness among Indian savers. Demat accounts for stock market investments surged to 185.3 million in 2024, with 46 million new additions, a 33% year-on-year increase.

Residential real estate is the largest asset class in India. Yet, while over 100 million individuals are estimated to participate in equity markets every year (directly or through mutual funds), just under a million participate in the Indian housing market. Innovation is the key to greater democratization of this asset class.

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How to democratize real estate ownership: The tokenization of residential real estate offers a transformative solution. By converting property ownership into tradable digital tokens on secured blockchain technology networks, we can address several longstanding challenges. 

Fractional ownership could be introduced by splitting properties (like stock splits) into affordable digital tokens, thus allowing investors to participate even with modest capital. This will boost asset liquidity enormously. Trading of digital tokens would obviate the long and cumbersome process of buying or selling physical property. This investment option will be an ideal blend of safety, liquidity and returns.

Transparency and security would be the hallmarks of this new approach, as immutable blockchain ledgers open to scrutiny will ensure that ownership records cannot be altered and thus fraud risk is minimized. Tokenization would thus use technology to empower the concept of fractional ownership and create an ‘alternate marketplace’ for such assets. Investors would be able to enter and exit their positions at will with ease and confidence.

The regulatory environment appears to be unfolding favourably. Reserve Bank of India deputy governor T. Rabi Sankar has indicated plans of exploring asset tokenization, beginning with government bonds. This signals a thoughtful approach to extending blockchain technology into the larger financial system. 

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More recently, India’s unified financial services regulator, the International Financial Services Centre Authority (IFSCA) based in Gift City, Gujarat, released a progressive regulatory approach document on ‘Real world asset tokenization’ for public comments.

Over half of India’s household savings are already invested in residential real estate. Tokenization can transform this static wealth into vibrant, transparent and marketable securities accessible to all investors, not just the affluent. With residential real estate representing the largest asset class globally—even larger than stocks, bonds or gold—its ‘risk-adjusted returns’ make it particularly attractive in uncertain economic times.

By attracting sticky long-term capital from Indian household savings, tokenization can help bridge gaps in the markets for rental housing, retirement homes, student housing and holiday homes, among other neglected segments.

Experts project that real-world asset tokenization will reach $50 billion globally by 2025. With the democratization of technology and a shrinking digital divide, India is poised to lead this transformation. The success of digital payment initiatives demonstrates our readiness. After Niti Aayog’s cashless payment promotion, digital transactions increased from about 55 million in August 2017 to over 60 million by December that year. Today, we lead the world in digital payments.

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An optimal balance between innovation and investor protection will be critical. The core principles of disclosure, fairness, market integrity and investor protection will have to be woven into tokenized assets, just as they feature in markets for traditional securities.

Residential real estate tokenization isn’t just about creating a new investment vehicle. It’s about multiplying investment options and democratizing access to an asset class that has consistently delivered value to those with a low savings surplus. It will also help bridge the gap between our housing stock and demand. The time has come to introduce this new product, albeit carefully.

The author is former chairman, Life Insurance Corporation of India and Securities and Exchange Board of India.