How Tokenization Adds Liquidity to Distressed Real Estate

Distressed real estate refers to properties hampered by weak demand, deferred maintenance, or impaired loans. These assets often remain on the market for months because few buyers can deploy large lump sum capital quickly.

Real estate tokenization addresses this problem by splitting asset ownership into many blockchain recorded tokens that can transfer more frequently than whole property deals. This process potentially narrows the illiquidity discount that often affects rundown properties, according to research by the Bank for International Settlements as of 2025.

Academic work published by the Bank for International Settlements in 2025 reports that investment minimums have been observed to drop to roughly 50 US dollars once a building is tokenized. This attracts retail participants who would typically not appear at traditional property auctions, as detailed in a working paper from the Bank for International Settlements.

By widening the pool of potential bidders, platforms state that they can recapitalize assets sooner and avoid fire sale pricing.

Market evidence is still limited, but case studies of tokenized residential rentals show how a median of 254 token holders can replace a single buyer. Each investor receives prorated rent and potential price appreciation in samples studied up to 2021, according to research hosted by PMC.

Because transfers can settle on chain with near real time finality, secondary liquidity can appear even when local mortgage credit is constrained.

Liquidity Mechanics in Distressed Property Markets

Tokenization addresses a central barrier for distressed properties: ticket size. Platforms list tokens at face values below 100 dollars, enabling the fractional ownership documented in early United States samples from 2019 to 2021. Subsequent case studies reported as of 2025 by the Bank for International Settlements confirm this trend.

Once issued, tokens can enter secondary venues such as platform operated bulletin boards or decentralized exchanges. Researchers studying early United States samples from 2019 to 2021 observed that about 5 to 15 percent of circulating tokens changed hands monthly. Ownership cycled roughly once per year on average, as reported in a 2023 article in the Journal of Banking & Finance.

Continuous trading removes weekend and holiday gaps that slow deed transfers, since tokens can trade at any time. For distressed assets whose condition can deteriorate over time, faster price discovery may support earlier intervention by new capital or management.

Programmable smart contracts can route rental income to investor wallets automatically, which may reduce reconciliation delays. These delays often deter small investors who are wary of slow quarterly statements. The cash flow rules are coded at issuance, which can provide more predictable distribution schedules for token holders.

Fractional tokens also permit partial sales of ownership interests. Existing owners with capital needs can sell a portion of their interest while retaining exposure to future cash flows. In principle, this lowers insolvency risk without requiring a full sale of the property.

Operational Benefits Beyond Liquidity

Blockchain based settlement can synchronize transfers of tokenized ownership interests and cash, reducing the fail to deliver risk that can occur in paper based escrow. Settlement on a shared ledger also creates an automated audit trail and immutable ownership records that can simplify later verification.

Smart contract governance allows sponsors to embed hard rules, such as buyback triggers or other programmable controls, directly into code. Reserve account outflows for maintenance can be visible to all token holders in the same block, which can support transparency during workouts of distressed assets.

Platforms also cite potential cost savings, since automated cap table updates replace some manual notary filings and automated rent distribution reduces the need for mailed checks.

At the same time, the Bank for International Settlements notes that sourcing and related fees for tokenized real estate deals still hover around 10 percent of transaction value in case studies reported as of 2025, according to its working paper on real estate tokenization from the Bank for International Settlements.

Investor reach can extend geographically when ownership is tokenized. Remote investors can purchase exposure to properties in distant, credit constrained counties with fewer bank branches, as documented in Bank for International Settlements research. This can be done without opening traditional brokerage accounts tied to local markets.

Enhanced transparency can also support pricing of risk. Immutable ledgers record every prior token trade, which in principle limits the scope for side letter agreements that often complicate distressed negotiations in private equity real estate.

Shock Resilience and Market Data

Liquidity in distressed property markets often falls after natural disasters or macroeconomic shocks. A 2025 working paper from the Bank for International Settlements reports that trading in tokenized properties rose by about 35 percent cumulatively over the two days after a natural disaster.

This effect was conditional on platform buyback options, suggesting that tokenization can preserve liquidity during stress when such backstops are present.

Those voluntary buybacks demonstrate a trade off: they support token prices during shocks but shift insolvency risk onto operators’ balance sheets. Where no buyback backstop existed, the same study found that post shock trading in the sample fell between about 6.5 and 18 percent.

This indicates that liquidity benefits may depend on platform level guarantees rather than on tokenization alone.

Credit constrained regions also show faster growth in token issuance. Counties with fewer bank branches saw issuance volumes in tokenized real estate rise more quickly than the national average in Bank for International Settlements data reported in 2025.

This suggests that tokenization can partially substitute for missing small loan capacity in some markets.

Daily prices of real estate tokens are influenced by crypto asset sentiment alongside property fundamentals. This linkage was observed in a 2019 to 2021 sample of 173 United States real estate tokens, according to an empirical study in the Journal of Banking & Finance.

This shows that price discovery still leans on crypto native liquidity rather than on property level data alone, creating additional volatility channels for landlords already managing stressed cash flows.

Investor concentration appears modest across the same 173 token sample, as researchers observed broad ownership among small investors, although investor portfolios themselves are not yet well diversified.

The Bank for International Settlements also notes that tokenized projects often focus on undervalued areas with weaker economic fundamentals, where traditional listed real estate vehicles have limited presence.

Regulatory Landscape

Under the Howey test that United States courts use to classify investment contracts, many real estate tokens are treated as securities. The U.S. Securities and Exchange Commission permits certain exempt offerings via Regulation D.

However, resale of these securities can remain restricted to accredited investors in the structures discussed in Bank for International Settlements work, which limits the liquidity advantage that sponsors promote as of 2025.

SEC Commissioner Hester Peirce stated in a 2025 interview with Reuters that "tokenized securities are still securities", emphasizing that securities law obligations continue to apply. As a result, Know Your Customer checks, custody rules, and disclosure duties remain in force when real estate interests move onto blockchains.

Secondary trading venues that list tokenized real estate therefore need to implement account level gating and compliance controls. These requirements contrast with open decentralized finance pools, which often allow permissionless access at the protocol level.

Internationally, the Financial Stability Board noted in 2024 that many purported benefits of tokenisation, including improved liquidity and broader access, have not yet been proven at scale. The report also states these benefits may not be unique to distributed ledger technology.

Furthermore, the report identifies structural risks such as liquidity maturity mismatches and legal uncertainty around tokenised claims on real assets.

In the United States, fragmented state level property recording systems require ongoing intermediaries and legal coordination for property title locks, according to a 2023 bulletin from the Bank for International Settlements. This fragmentation limits the scope for fully on chain transfer of real estate titles and maintains a role for traditional registries.

Risks and Caveats

Liquidity maturity mismatch is a central concern for tokenized real estate. Tokens can be traded nearly instantly, yet underlying buildings and land cannot be sold or refinanced as quickly.

This exposes platforms to redemption runs and potential fire sales if many investors seek to exit at once, as highlighted by the Financial Stability Board in its 2024 report on tokenisation.

Price gaps between token markets and broker opinions of value can widen during periods of stress. If tokens trade at a substantial discount to appraised prices, refinancing negotiations with traditional lenders can become more difficult.

This may force sponsors either to buy back tokens or to sell the physical asset at a lower mark in stressed scenarios.

Operational complexity can rise when distressed assets require new capital. If a major repair is needed, such as replacement of a heating system, hundreds of token holders may need to approve additional funding or accept dilution through new token issuance.

Smart contract voting can accelerate decision making, but low participation rates can still delay essential work.

Tokenization also does not address structural governance issues such as moral hazard. A 2023 bulletin from the Bank for International Settlements notes that economic incentives around property maintenance and information asymmetries between sponsors and investors remain present regardless of ledger design.

Intermediaries continue to play a role in coordinating interests.

Outlook

Early research and case studies indicate that real estate tokenization can attract smaller capital flows to troubled or credit constrained properties. In some cases, it can keep trading activity open when local lenders reduce exposure.

This liquidity can matter for owners facing balloon payments or deferred taxes on distressed assets.

At the same time, high sourcing fees, legal frictions, and links between token prices and broader crypto markets limit expectations that tokenization alone will transform outcomes in distressed real estate.

Evidence so far, as of 2023 to 2025, points to incremental efficiency gains rather than a fundamental redesign of property finance.

If authorities adopt common standards for digital title systems and settlement assets, a key question will be whether platforms can scale token issuance without relying on operator balance sheet backstops.

For investors, underlying property quality and local market fundamentals remain the main drivers of long term performance. Tokens primarily change how ownership stakes are structured, distributed, and traded.

Sources

• Cornelli, Giulio et al. "Tokenisation of real estate." Bank for International Settlements, 2025.
• Swinkels, Laurens. "Real Estate Tokenization." PMC, 2023.
• Kreppmeier, Julia et al. "Tokenization in real estate markets." Journal of Banking & Finance, 2023.
• Financial Stability Board. "Tokenisation of financial assets." FSB, 2024.
• Bank for International Settlements. "Tokenisation of assets." Bank for International Settlements, 2023.
• Reuters Staff. "SEC's crypto mom says tokenized securities are still securities." Reuters, 2025.