According to the World Bank, the global real estate market is worth $217 trillion, out of which 75% is residential property. The global real estate market makes up more than half the value of all mainstream assets in the world. An emerging technology, blockchain, could transform the way we buy and sell real estate by doing away with the hidden costs and inefficiencies of our housing markets.
Given the blockchain’s disruption of financial services, it’s hard to find a segment that has not been influenced by the technology.
Cryptocurrencies have made a strong impact on payments, remittances, and foreign exchange. Initial coin offerings (ICOs) have challenged stock investing, startup loans, and venture capital.
Real estate hasn’t escaped blockchain disruption either. Previously, transacting high value assets such as real estate exclusively through digital channels has never been the norm. Real estate transactions are often conducted offline involving face-to-face engagements with various entities.
Keeping track of who owns what pieces of land is still a low-tech affair, involving mountains of hand-signed documents, envelopes, and couriers. That is, if a country is lucky enough to have a functioning land registry—the World Bank estimates that 70% of the world’s population lacks access to land titling. Getting everyone to agree on every stage of a property transaction, and to record it permanently somewhere, is a feat of security, coordination, and trust.
Blockchain, however, opened up ways to change this. The introduction of smart contracts in blockchain platforms now allows assets like real estate to be tokenized and be traded like cryptocurrencies like bitcoin and ether.
A BrickVest study found that more than half (56%) of real estate investors believe that the sector will adopt blockchain technology for transactions but only a third (31%) think it will be common business practice to do so given the prevalence of established gatekeepers such as trustees and notaries (the research carried out online with 101 property investors in November 2016).
Key decisions at all stages in the property life cycle – from financing, constructing and buying, to leasing and occupying assets – rely on the availability, accessibility and reliance of robust verifiable data. However, key challenges in relation to better data capturing and management have given rise to discussions around the potential of blockchain for a wide range of industries, business models and operating processes.
Real estate is a highly regulated industry and real estate transactions must be recorded in a government ledger to be recognized and enforceable by all. Traditional systems ensure integrity of information by putting it in the hands of entities they trust. In the U.S., courthouses and city halls are charged with the safekeeping of land deeds. The UK entrusts the responsibility to the government-controlled Land Registry. In less developed countries, tribal and cultural leaders draw the lines. Should any of these entities turn corrupt and decide to change the records, there’s little the affected people can do to prove them wrong. In contrast, blockchain protects information from tampering by making it public knowledge.
“If we have a blockchain approach … then it cleans that whole process and streamlines it,” says Sheila Botting, national real estate and construction leader at Deloitte Canada.
What is Blockchain?
Blockchain is a distributed ledger system that maintains a continuously growing record of transactions, or blocks, where each block is linked to a previous block and cannot be altered or reversed once it is added to the chain, and which does not require a central administrator to guarantee the veracity of any transaction. It is essentially a technological solution to the issue of trust in a record or transaction. Blockchain is the underlying technology behind bitcoin, which is a digital token that allows one party to pay another anywhere in the world for goods and services, in some ways like cash.
Just like a dollar bill, a bitcoin, once used, permanently passes to another person and cannot be reused or unilaterally withdrawn. With a dollar bill, this is because the bill physically passes to another party; with a bitcoin, this is because the transaction is etched in the public ledger and cannot be undone. Blockchain technology eliminates situations akin to receiving a blank check where there is no value in the underlying account or paying a seller for land that he does not own.
Furthermore, because the transaction itself is secure, the cost of the transaction can be significantly lower when compared to traditional payment methods such as credit card payments, international remittances, or any situation where there is a third party guarantor.
What are Smart Contracts?
A smart contract is a computer protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract. Smart contracts allow the performance of credible transactions without third parties. These transactions are trackable and irreversible. Smart contracts were first proposed by Nick Szabo, who coined the term, in 1994. Proponents of smart contracts claim that many kinds of contractual clauses may be made partially or fully self-executing, self-enforcing, or both. The aim of smart contracts is to provide security that is superior to traditional contract law and to reduce other transaction costs associated with contracting. Various cryptocurrencies have implemented types of smart contracts.
How will Real Estate benefit from the blockchain?
(1) No Intermediaries
Brokers, lawyers, and banks have long been part of the real estate ecosystem. However, blockchain may soon usher in a shift in their roles and participation in real estate transactions. New platforms can eventually assume functions such as listings, payments, and legal documentation. Cutting out the intermediaries will result in buyers and sellers getting more out of their money as they save on commissions and fees charged by these intermediaries. This also makes the process much quicker as the back-and-forth between these middlemen gets cut.
(2) Blockchain, Smart Contracts, and Commercial Real Estate
Negotiating leases and enforcing lease terms are two difficult areas in real estate contracts that can be simplified with the use of blockchain technology. Currently, lawyers add value through the customization of leases, since no two are the same. However, the current process is complex and costly, and would benefit from standardizing leases through the codification seen in smart contracts. This way, creating, executing, and redlining a lease during negotiations could all be executed on one document, while the ledger records each change to the lease.
With smart contracts, all parties will be able to work off of one document, which eliminates countless back-and-forth emails and protects against stealthy changes. Standardizing leases is not a new idea, and it is common for brokers and lawyers to use templates. However, this is potentially the first time that leases will be written in programmable code using if-then statements rather than convoluted prose. Contracts in the former leave less up to interpretation, and in turn would make contracts easier to enforce.
Real estate is a continually changing industry, as technology continues to affect the way we do business. Everything from the introduction of crowdfunding sites, to analytical platforms like Compstak, to even the changing retail landscape due to e-commerce, all allow capital to flow into our industry because of technology. Embracing new technology is a choice, but if you choose not to adapt, you may find yourself in the same situation as a brick-and-mortar store that refuses to offer an experience or online platform.
(3) Fraud Protection
Smart contracts can also help eliminate real estate fraud. False listings, forged documents, and rental scams will all be nearly impossible when digital ownership is linked directly to a property on the blockchain. In the U.S. we have problems with more elaborate fraud and scams involving listings, but in poorer countries, the fraud is sometimes much more straightforward. Someone simply gets into a database and changes records. Now they own someone else’s land. Recording final transactions to a blockchain makes is nearly impossible to tamper with them.
The success of any business depends on transparency between the buyer and the seller. Since all the information in Blockchain remains accessible to the buyer and seller and if any change gets stored in the ledger, both the parties can view it and thus, it ensures transparency between both the sides.
(5) Fractional Ownership
With the increasingly prohibitive cost of real estate, many have been looking for alternative solutions. In 2015, the Seattle Times reported on a trend of pairs of couples purchasing larger homes as a group to afford a place to live in Seattle’s high-priced market. Across the country, the New York Times likewise reported on groups of friends who were effectively purchasing fractional shares of a property to afford homeownership. By allowing fractional ownership, the blockchain also lowers the barriers to real estate investing. Typically, investments would require significant money upfront in order to acquire property. Alternatively, investors could also pool their money to acquire bigger ticket properties. Through the blockchain, investors would simply have to access a trading app to buy and sell even fractions of tokens as they see fit. In addition, fractional ownership would also help them avoid managing the properties themselves such as maintenance and leasing.
Already, startup firms including Brickvest and Property Partner are said to be looking into non-blockchain methods to make fractional ownership a reality. Investopedia reports the firm ATLANT is building a platform based on blockchain technology and will allow property owners to tokenize real estate assets and let buyers purchase a percentage stake in a property.
Another application could be similar to the U.K. government’s “shared ownership” program. The program helps first-time buyers afford a home purchase by “staircasing” the purchase. Buyers purchase a fraction of the property and pay rent on the remaining value, gradually buying more equity as they are able.
But to make it work, governments need to adopt the technology and update government legislation.
Land registries around the world are interested in blockchain because they suspect that the technology could enable the ‘almost instant’ transfer of property ownership in a secure way. Mr. Troy Griffiths – Deputy Managing Director, Savills Vietnam believes “blockchain has the capacity to revolutionise land transfers”. One of the world’s oldest land registries, HM Land Registry in the UK, called it a “highly ambitious objective” that would require the most “far-reaching transformation in their 150-year history”. Earlier this year, HM Land Registry announced plans to create a virtual ‘digital street’ to test the new technology.
In 2016, Vermont enacted House Bill 868 that provides for the enforcement of transactions using “blockchain technology” by providing a presumption of admissibility in a judicial challenge.
And earlier this year, Arizona went even further and enacted House Bill 2417 recognizing blockchain signatures and smart contracts as an electronic record and Senate Bill 1084 requiring governmental agencies to allow the use of electronic records or electronic signatures, including for the transfer of real estate.
The U.A.E. is one of the fastest growing economies in the world, and is aspiring to become a global technology hub. That’s why it’s no surprise that they are actively adopting blockchain technologies, particularly in Dubai. According to a plan by the Smart Dubai Office (DSO), blockchain technology will be used for all government documents by 2020. This is particularly important for the real estate sector. The Dubai Land Department – the government arm responsible for the registration and organization of real estate in the emirate – is now processing and implementing all transactions on a blockchain. The ultimate goal will see all Dubai properties recorded on a blockchain within 2-3 years.
Sweden’s land registry authority ‘Lantmäteriet’ has also been testing a way to record property transactions on a blockchain. Since last June the body has been testing a way to record property transactions on a blockchain using ChromaWay’s consortium database product – postchain.
Deloitte’s Netherlands branch is working with the city of Rotterdam to create a prototype for recording lease contracts on a blockchain. In conjunction with the Cambridge Innovation Center (a real estate services firm based in the US), the project will focus on developing a platform for managing housing transactions. The area is one being explored by several startups, with the Rotterdam trial representing the latest effort to bridge the real estate industry and blockchain.
But while property owners in modern Western democracies more or less take for granted that the ownership of land can be figured out, that’s not necessarily true in other parts of the world. Blockchain proponents frequently point to the work of Peruvian economist Hernando de Soto, who argues that people in many countries suffer when unclear ownership makes it hard to sell or borrow against real estate. And poor documentation can make it easier for corrupt officials to redistribute land to their allies.
The Ukraine government announced in December 2017 that it has entered into a partnership with BitFury Group Ltd (which produces equipment for mining virtual currencies) to launch a platform for registering land titles. In the context of adding transparency to its real estate market, it also widened the potential investor base by passing legislation allowing foreign ownership.
“The majority of countries in our world have the following issue: people just losing properties because of someone changing records in a database,” says Valery Vavilov, CEO of blockchain startup BitFury.
The Republic of Georgia was the first government to use the bitcoin network to validate property-related government transactions, in a project with blockchain startup BitFury to transition the registration of new land ownership records on its blockchain system.
The Russian government is to begin testing a blockchain-based land registry system early next year. According to a draft resolution published by the Ministry of Economic Development, the Federal Service for State Registration, Cadastre and Cartography (Rosreetr), the Federal Tax Service and the Government of Moscow will assess the trial through July 1, 2018. The ministry will submit and release a final report on the trial by Sept. 1.
Factom, a startup based in Texas, has launched a Blockchain-powered tool called harmony for tracking loan related documents. Factom in association with Epigraph is creating a blockchain based record keeping solution for the Honduras Government which is tamper proof.
In the U.S., velox.Re, a company based in Orange County, California, is working with the the Cook County Recorder of Deeds on a pilot project to to store the county’s property records on the blockchain. “It can greatly reduce fraud, reduce transaction friction, and cut down on closing costs,” said Ragnar Lifthrasir, the CEO of the company, in an interview with Fast Company.
In Canada, both Ontario and Manitoba have outsourced the management of their registries, which is likely to signal further investment in technologies such as blockchain.
Pilots and experiments with the technology are also being undertaken in Ghana, Brazil and India. In Australia, the New South Wales state government has sold management rights to its land title registry for AUS$2.6bn (£1.5bn), placing the ownership mechanism for the state’s residential real estate in the hands of a hedge fund.
A New Wave of Startups
Startups in different regions are working with local governments to leverage the technology to track real estate ownership.
Propify is the first real estate marketing solution operating on blockchain. The start-up curates, qualifies and publishes real estate content via an ecosystem of platforms that is unique to Propify. Founded in Australia with offices in California, the company is currently undergoing its initial coin offering (ICO).
Rentberry was not established as a blockchain company, the rent-bidding platform has quickly shifted gears by selling BERRY tokens. Rentberry’s goal in the coming years is to “make both landlords and tenants enjoy a fully decentralized rental experience that includes open and transparent application process, crowdsourced security deposit network, instant rent payments, internationally valid tenant and landlord scores, to name a few.”
ShelterZoom is a New York-based offer and acceptance real estate solution built on Ethereum. According to Elite Agent, the start-up is currently completing beta testing in Australia and will formally launch in the coming months.
RealtyShares are accepting bitcoin as payment to lower transaction fees and to open the investment to international investors who often have to deal with complicated traditional structured instruments.
Propy – a Palo Alto California-based blockchain startup announced the launch of a pilot project in collaboration with the City Clerk’s Office of South Burlington, VT to utilize blockchain technology to record real estate conveyance documents.
Secretary Michael Schirling. Additionally, Propy, contracted with Ukraine’s e-government agency to serve as a duplicate official ledger facilitating the $60,000 Kiev apartment sale in September 2017.
A Kenyan real estate company will early this year introduce a new way of land acquisition that is seeking to eliminate hidden costs. Land Layby Kenya Ltd, a Kenyan leading real estate and fintech company, operating in 4 other countries is set to launch the minimal viable product (MVP) for Africa’s first multinational Blockchain powered land registry early 2018.
A startup called Bitland is working on a blockchain pilot program in Kumasi, Ghana, in an area where land transfers generally need to be approved by a local chief and officials from the central government. But recording the final transaction to a blockchain makes it harder for any of those parties to tamper with those records later on, says chief operating officer Elliot Hedman.
Blockchain puts real estate on a new footing. If it has the potential to increase liquidity and reduce costs, some significant barriers for investors are removed. Perhaps the biggest impact of blockchain on real estate could be establishing property ownership rights in countries that either lack a centralized land registry or where the registry is at risk of fraud or otherwise not generally trusted. Having titles on property that unambiguously and immutably assert ownership rights is vital. It enables the release of significant amounts of capital into the economic ecosystem as mortgage lending becomes viable.
The powerful checks and balances inherent in blockchain by virtue of its distributed nature makes it ideal for unlocking economic development in markets where trust in governing bodies may be lacking. Efficiency and speed considerations could improve the industry in the very short term, and fractional and incremental purchasing programs could expand ownership to new markets. In the long run, this technology could very well change the nature of the business, though regulations and the industry itself will have to change before that becomes a real possibility. In the meantime, blockchain technology remains an exciting and promising opportunity for businesses and homebuyers.
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