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How Blockchain and Digital Assets can impact the real estate

March 8, 2022

 

Given the disruption of the financial sector and its subsequent extensive application across sectors, it is difficult to identify a sector that has not been touched by Blockchain technology. The use of blockchain-powered platforms has even disrupted the food supply chain business, retail, commodity mining, car manufacturing, pharmaceuticals and petrochemical industry - indeed, the list goes on. Furthermore, payments, remittances, and foreign exchange have all been affected by cryptocurrencies.

Neither is real estate immune to the effects of Blockchain technology. With offline real estate transactions frequently including face-to-face interactions between several parties, the use of Blockchain technology has made it possible to modify this. Assets such as real estate may now be tokenised and sold as a digital asset thanks to the development of smart contracts on blockchain platforms. By tokenising property, assets can then be traded, much like stocks on an exchange, and transactions can be done online - potentially 24/7.

 

Brief History of Blockchain technology in real estate

Real estate brokers and estate agents have been acting as intermediaries between the seller and the buyer since the 1910s. Having the agent assist with the property purchase helps the buyer and seller of a property create a degree of confidence. The agent is well-versed in the rules and regulations around real estate transactions. So, they can verify that the seller owns the property, and that the buyer has the necessary finances to purchase it. The industry still employs the same strategies and procedures today. The use of blockchain-powered platforms, on the other hand, is gradually but surely changing the process by introducing new ways to buy and sell real estate, enabling trading platforms and online marketplaces to support real estate transactions more comprehensively.

On January 9th, 2009, a group of people (or a single person - no one actually knows) operating under the identity, Satoshi Nakamoto, published the initial version of Bitcoin, as well as the blockchain database. Nine years later, in February 2018, America handled its first-ever blockchain real estate transaction in Vermont and was part of a Propy test experiment. Propy, itself, is a San Francisco-based company which allows anybody to purchase or sell real estate entirely online from any location on the planet. Its Blockchain technology tracks every stage of a real estate transaction, from first expressions of interest to signing an agreement and transferring ownership titles. BlocHome, based in Luxemburg, is another example of a company also using Blockchain technology. It buys property and then uses Tokeny’s platform to sell off slices i.e., tokenise the real estate for a little as €1,000 per investor.

Other aspects worth noting where Blockchain technology can be applied in the real estate sector include:

  • Smart Contracts
  •  - one of the most useful inventions that use Blockchain technology are smart contracts as these enable the automatic execution of transactions based on computer code, thus removing the need for human intervention. Since the real estate market deals with a large number of transactions it is an ideal use case for this technology. Smart real estate contracts enabled by blockchain-powered platforms can help to make the due diligence process more efficient as well as speed up the process and at a lower cost of buying and selling a property. Blockchain technology can be used to authenticate identities, confirm ownership of the property, highlight any planning or restrict any covenants that are relevant etc., all in a highly transparent manner.
  • Titles

 - land titles continue to rely on paper documentation and are vulnerable to loss, fraud and mismanagement. Blockchain technology offers the opportunity to replace old paper deeds with actual digital assets, tracking changes on a blockchain and so offering a secure shared source of truth for documents across numerous individuals and organisations. Blockchain technology has the ability to store and verify these critical legal real estate documents, and by utilising it will help by eliminating the risk of fraud and alteration of records in land entitlement.

  • Financing

 - due to extensive documentation and the participation of multiple intermediaries, property financing and payments have been slow and expensive. With all your key documents being stored on a blockchain there will not be the need to send a multiple of different documents to your bank or estate agent. It will be possible to access and verify credit checks, income and identification verification, debt-to-income ratios and much more by using Blockchain technology. Blockchains provide a system which increases and reinforces trust and reduces real estate broker dependency, meanwhile improving cost efficiency, accelerating transfers and opening up avenues for networking by creating a digital platform other entities can tap into.

Considerable discussion has taken place in the real estate sector about the potential use of Blockchain technology and the tokenisation of property ownership. To a great extent the challenge remains that, simply because you have tokenised a property, it does not necessarily improve the liquidity of the real estate. The concept of fraction ownership of property in the US has been around since the 1960’s when the first Real Estate Investment Trusts (REITs) were launched. The issue here is that typically REITs share prices trade at a discount to the actual value of the real estate (as at 1st Feb 2022, the REITs in the US traded at a discount of 4.9%) Would you really wish to tokenise a property only to find it, too, initially reduces in price and trades at a discount to its net asset value (NAV)? As we see more real estate being tokenised, together with greater clarity around those digital exchanges which can trade tokenised property, we may well see more investors being able to access real estate as an asset class, whereby improving the liquidity of tokenised property and thus narrowing any potential discount to NAV.

This article first appeared in Digital Bytes (2nd of March), a weekly newsletter by Jonny Fry of Team Blockchain