Blockchain Technology is Coming: Is the World of Real Estate Ready?
As cryptocurrency speculators have ridden the Bitcoin wave up (and down) over the past year, a different group of global professionals has come to realize the potential benefits of this technology: real estate investors, developers, operators, and service providers. Their shared cautious optimism has very little to do with the rise or fall of cryptocurrency prices, but instead comes from the promise of the underlying technology that fuels Bitcoin and its offspring: The Blockchain.
A Blockchain is a type of distributed ledger that operates via peer-to-peer. This means that every participant has his or her own copy of the ledger and there is no central record of account. Once recorded, ledger transactions cannot be altered and every copy of the ledger is identical across the network. The network and all constituent parts act as a database that records transactions generating an immutable audit trail for transactional activity. The network can be either completely open or open only to trusted counter parties.
Although still in the early stages of development and testing, Blockchain technology progress is gaining steam, and real estate professionals will be rewarded for getting on board sooner rather than later
What benefits could Blockchain provide to players in the Real Estate industry? Here are two areas that suffer from efficiency problems where Blockchain technology could be an effective solution:
Leasing and Technology
In owning and managing a commercial or residential property, there are a multitude of service and payment transactions that must occur between the lessor, lessee, and other third parties. Cash flow, appreciation, and tax information must be tracked, recorded, and verified, and compliance maintained. Therefore, managing properties and tenants, and enforcing the agreements around lease terms requires a better platform for consensus and reference as well as payments.
Placing contractual agreements on a Blockchain can structure secure cash flows and automate payments with real-time reconciliation. Automating these actions via rules-based business logic is often referred to as “Smart Contracts” in the blockchain community. The term Smart Contract is usually a misnomer, as these documents are not very smart on their own and are typically abiding by software code, not legal agreements. In essence, a written code automatically executes a transaction depended on various conditions, similar to an IF THEN Excel function. These smart contracts give blockchain technology the ability to grow beyond a decentralized database of cryptocurrency transactions and can fuel any type of value transfer. For example, the buyer, seller, and attorney could agree contractually to certain rent payment, collection, and ownership parameters within a contract. That contract would then be uploaded into an application that takes that language and creates software-coded rules to execute the terms. That business logic added into the smart contract then could enable split ownership and distributed rents. This would be facilitated by using applications that sit on top of a blockchain. That transaction data itself would be housed on the blockchain, and the full lease agreement document would be referenced off-chain.
Property research requires a significant amount of time where financials and legal regulations are concerned. For buyers, a large part of this effort is finding and verifying physical proofs of identity, ownership, etc. Since this is a manual task, the process is time consuming and human error and data loss easily occur. Searching for properties, vetting, and entering into terms of sale is an extensive and unnecessarily complicated effort that can discourage investment. For sellers, creating liquidity in a sometimes-illiquid market can lead to inopportune market timing and sales at below-market value.
The Real Estate Investment Trust was created to solve some of these problems, creating better liquidity and the ability to spread risk across various properties/developments, as one would investing in a mutual fund instead of a single stock. But what if this forced a marquee development to suffer a discount because it was lumped in with other developments that were producing smaller cash flows? By issuing fractional shares of a specific development, and leveraging the global network effect of a blockchain, a CRE investor could raise capital globally and at lower cost. A CRE seller could also find global buyers at a potentially premium valuation. Investment bankers would have a reduced, if not eliminated role, as the road show (process of shopping around the deal to potential institutional buyers) might no longer be necessary if a public token offering raises sufficient capital at the desired valuation.
Although still in the early stages of development and testing, Blockchain technology progress is gaining steam, and real estate professionals will be rewarded for getting on board sooner rather than later.
What should you look for at your company to evaluate if implementing a Blockchain is the right solution?
Shared Data - Blockchain is a technology for shared databases there is a need for a structured repository of information.
Opportunity for Disintermediation - Blockchain removes the need for trusted intermediaries no gatekeeper is required to verify transactions and authenticate the source.
Multiple Writers - Blockchain is a technology for databases with multiple writers multiple entities generating transactions that modify the database.
Absence of Trust - Blockchain is a technology for multiple non-trusting writers there needs to be a level of mistrust between the entities writing to the database.
Transaction Dependency - Blockchain provides value when there is interaction between the transactions created by the writers, meaning the transactions depend on one another.