BLOCKCHAIN USE CASES IN REAL ESTATE INDUSTRY
Blockchain technology affects the real estate sector in different ways. Although blockchain technology, as a public medium for conveyance without third party intervention, seems to be by its very nature a “next step” within the world of building contracts and real estate transactions. There is often a powerful tension between the basic foundations of these concepts and the features of blockchain technology. Around the world; startups, banks, governments, academics, and blockchain enthusiasts are working to overcome these tensions. We discuss three main use cases that stand out (Fibree-Industry-Report).
Real estate transactions
Blockchain applications often tend to focus on eliminating trusted third parties. In the case of real estate transactions, these middlemen have long been under scrutiny. They are considered slow, expensive, and ineffective. There is a difference depending on the specific legal framework, but in general, we observe applications that focus on banks, notaries, and land registries. Countries such as Sweden, the UK, the Netherlands, Estonia, Dubai, Ghana, and Georgia have developed applications to facilitate more efficient and smooth transaction processes.
The Georgian use case sheds light on the potential impact blockchain can have on real estate transactions. The Georgian National Agency for Public Registry (NAPR) has built a blockchain add-on to their existing system. In doing so, they want to guarantee the authenticity of a land title. Since February 2017 information on 2 million extracts has already been “authenticated” and stored in a public blockchain. For every title, a unique hash code is generated. These hashes are then uploaded on the Bitcoin blockchain. An identical hash on both the blockchain and the NAPR website confirms the authenticity of the title. After completing this proof of concept phase, NAPR is now moving forward to implement a new service they dubbed “TRUSTcontracts”.
By blending smart contracts into the transaction infrastructure, they aim to provide a digitally performant system that allows citizens to receive certified documents via a platform that bundles information now still siloed within the different government agencies. Smart contracts will allow the closing of an agreement between two or more parties, the registration of this transaction in the property register, and the transfer of the purchase price. Automating these steps should address financial risks or fraud associated with the registration of property when selling and buying.
Real Estate Tokenization
Real estate is the biggest asset class in the world. At the same time, it is also one of the most illiquid investments one can make. Generally, investing in real estate is hard to access, time-consuming, and capital intensive. Tokenization of real estate assets intends to disrupt these obstacles, by taking us from a world where a property is transferred infrequently like several years or even decades, to a new reality where hundreds of transactions are executed within minutes. Tokenization is a broad concept. It might refer to either representing shares in a real estate investment trust with tokens; using a unique non-fungible token to represent a single property, or converting a single property into e.g. 100,000 tokens. All these approaches of real estate tokenization could be more commonly referred to as the “digitalization of assets”. Once a real estate asset is represented by a digital token(s) and governed by the transactional rules of a blockchain, some friction of transacting between two or more parties could be considerably reduced.
Analyzing established co-investment solutions like REITs, syndications, or crowdfunding, we notice that certain features are important to investors: e.g. diversification, online convenience, and investor control. The problem is that these solutions have technical limitations. Tokenization offers investors a solution that allows customizable diversification, no investment lock-ups, transactional efficiency, low fees, online secondary market trading, fractional stakes, risk control, more transparency, portfolio automation, and last but not least higher liquidity since the tokenized assets have the potential to become exposed to a global economy. Higher liquidity doesn’t make sense in every market. Prime real estate markets, like San Francisco, have no liquidity problems. These markets have enough buyers for properties of any size. But in hundreds of smaller markets around the world, properties of a bigger size have only a few potential buyers.
Even though the real estate tokenization industry is still in the early stages, tokenized properties of various sizes and types are already coming to the online markets. So how big is the potential here? If we look at commercial real estate alone, globally it is valued at 50 trillion. Out of that, USD 2.8 trillion USD is considered professionally managed. If we project that in 10-year time, 1% of that value will be tokenized, that creates a market worth USD 28 billion USD.
Decentralized Infrastructure
Building a transactional infrastructure brings the question of harmonization again to the forefront. This could be considered as one of the first “lessons learned” by the real estate and blockchain community. Building a new infrastructure requires common standards and definitions. Blockchain is in that regard creating new momentum for international cooperation. Increased liquidity or seamless transactions require a legal framework that is based on uniform transaction information systems (sales and purchases as well as rentals) and improved transparency with digital property passports. Different blockchain-related organizations, such as FIBREE, are now leading the effort to create a decentralized infrastructure based on common standards for interoperability.
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