Blockchain in real estate
Having fought for years to be taken seriously as an emerging technology, blockchain is finally starting to get the recognition it deserves. The technology is already being utilized across a number of industries, with prominent use cases emerging frequently. Given that blockchain’s initial aim was to offer a better alternative to the traditional financial system, it is not surprising that many see the technology making its biggest impact in the financial services sector. This year’s hottest blockchain trend, decentralized finance (DeFi), is yet another sign that the technology continues to gain traction in the sector.
However, while blockchain’s financial applications have, perhaps deservedly, been hogging the limelight, the technology has also been quietly making inroads into a number of other industries, including supply chain management, healthcare, entertainment and retail. In this piece, we’ll explore a sector that comes up less frequently in discussions about blockchain’s disruptive potential: real estate.
Real estate problems today
The real estate sector is an important barometer of the strength of a national economy. Housing starts, house prices and existing home sales are closely monitored indicators that can give clues about the economic health of a country or a region. To appreciate the importance of the sector to the global economy, one only has to look back at the 2008 global financial crisis, which was triggered by the burst of the US housing bubble.
In order to prevent another potentially catastrophic property bubble burst, the real estate industry needs to improve its transparency, eliminate bad sales practices, adopt stricter rules on mortgages, reign in risky derivative trading on secondary markets and promote better property investment schemes. Fortunately, blockchain in real estate can help the sector address these challenges and create new growth opportunities for the industry.
How can blockchain help the real estate industry?
Several points noted in the previous paragraphs already give us a good idea of how blockchain in real estate can be used in this space. In many ways, the real estate industry can be viewed as a part of the broader financial sector. This means that blockchain’s original value proposition is largely applicable to real estate. Apart from that, the technology can greatly improve transparency, regulatory compliance and consumer protections across the industry.
Now, let’s take a closer look at what blockchain has to offer.
Processing real estate transactions
Revolutionizing online payments and the remittance sector was among the first and most prominent use cases for blockchain and real estate. This translates perfectly to real estate, where blockchain’s core strengths could be utilized for handling the billions of dollars changing hands on commercial and residential property markets every day. The technology’s trustless nature allows for direct transactions between sellers and buyers, without the need of an overseeing institution verifying the validity of those transactions. The process can be further bolstered by implementing smart contracts, which ensure that a seller-buyer transaction will only take place if certain conditions are met
Transparency and secure storage of transactional records
The fact that blockchain in real estate is able to eliminate the need for external supervision of transactions already hints at its immense potential to improve security across the real estate sector. This potential becomes even more evident after taking into account the other core features of the technology – its immutability and decentralized nature. For one, all members of a blockchain network share one, easily verifiable transactional history, which guarantees transparency across the entire network. On top of that, records that have been stored on the blockchain cannot be changed. The combination of these features allows for blockchain to serve as a single irrefutable point of truth, which can greatly benefit fraud detection and prevention, data storage, regulatory compliance and due diligence.
Cutting out the middleman
Third-party validators of transactions are not the only intermediaries risking to become obsolete if blockchain achieves widespread adoption across the real estate sector. Title companies will be among the affected, as blockchain-based systems will be able to automatically guarantee the legitimacy of the transfer of title. Blockchain platforms capable of connecting sellers and buyers directly will also eliminate the need for real estate agents, thus removing the burden of hefty property commissions from the equation.
The real estate market could benefit greatly from joining the rapidly growing tokenization trend. Tokenization refers to the issuance of blockchain tokens acting as the digital representation of an asset or a fraction of an asset. This process can be applied to any physical asset, from fiat currencies and stocks through precious metals and other commodities to fine art and luxury items. Real estate is no exception.
Tokenizing properties can bring greater liquidity to the sector, increase transparency and make investment in real estate more accessible, among other benefits.
How can blockchain be implemented in real estate?
Blockchain’s potential to transform the real estate sector is undeniable. That said, it is up to real estate companies and blockchain developers to figure out how best to utilize the technology’s unique properties for the benefit of the sector. Here are a few ideas, some of which are already being actively explored.
Shared real estate database and blockchain-powered marketplaces
Division of real estate
The case for real estate tokenization becomes much stronger when considering that it can enable people to buy a fraction of a building or other type of property. This fractional ownership would make investment in real estate much more accessible to retail investors. By owning a part of a property in the form of tokens, an investor will be entitled to a share of the income that property generates through lease, as well as a portion of the proceeds from a future sale.
Efforts to open up the sector to smaller investors have had success in the past. Having been around for decades, real estate investment trusts (REITs) and other property investment schemes offer ways for investors to pool their resources to tap into income-producing commercial real estate. In those cases, however, returns are tied to the overall performance of a particular REIT or fund, which may have a portfolio that includes underperforming properties. The tokenization approach would allow for a much more focused investment.
Among the companies pursuing that approach is RealBlocks, a New York-based startup, whose platform enables investors to acquire fractional interest in properties.
Meanwhile, another New York-based startup, Meridio, is working on enabling owners to offer digital shares in their commercial properties
We can take this concept even further, as tokenization could spark the emergence of secondary markets, where investors would be able to trade property tokens. This would bring more liquidity to a notoriously illiquid market. Best of all, unlike some derivatives traded on the global financial markets today, property tokens would be underpinned by tangible assets and their value would be determined by the real-world performance of those assets.
As we’ve so far demonstrated, there are many ways in which the power of blockchain in real estate can be harnessed for the benefit of the real estate industry. Hopefully, we’ve also made a strong case for why it should be harnessed. Being such an important part of the broader economy, real estate requires reliable mechanisms to ensure that the sector is in good health. At the same time, fresh ideas and approaches can contribute greatly to revitalize an industry that has seemingly reached peak levels of maturation.
We believe that blockchain technology can help on both fronts and we are looking for partners who share that belief. We have a proven track record of consulting and working on blockchain projects in a wide range of industries, including, as mentioned earlier, real estate. So if you dream about shaking up the real estate industry, we would love to hear from you! We are prepared to provide you with assistance every step of the way! You can reach us at [email protected].