Bit by Bit – Blockchain and the future of real estate

Bit by Bit – Blockchain and the future of real estate

You’d have a hard time turning your head without hearing someone, somewhere, talking about blockchain. Over the course of a year, Google searches for the term increased by 250%, governments are looking at ways to regulate the use of cryptocurrency, and supermarkets are trialling accepting payment with e-money. All in all, we’ve entered an era where the seemingly impossible is becoming increasingly probable. But just how affected will the real estate industry be by the blockchain and cryptocurrency movement? The answer, largely, depends on who you ask.

Blockchain

Richard Bradley, a director at Deloitte offers a simple-to-understand explanation of blockchain: You (a “node”) have a file of transactions on your computer (a “ledger”). Two government accountants (let’s call them “miners”) have the same file on theirs (so it’s “distributed”). As you make a transaction, your computer sends an e-mail to each accountant to inform them. Each accountant rushes to be the first to check whether you can afford it (and be paid their salary “Bitcoins”). The first to check and validate hits “REPLY ALL”, attaching their logic for verifying the transaction (“Proof of Work”). If the other accountant agrees, everyone updates their file…This concept is enabled by “Blockchain” technology.”

This decentralised ledger ensures that new information can be added, but existing or previous blocks can’t be edited or removed. “This is accomplished by using cryptography to link the contents of the newly added block with each block before it, such that any change to the contents of a previous block in the chain would invalidate the data in all blocks after it,” explains Arthur Iinuma, President and co-founder of ISBX. He goes on to explain that blockchains are consensus driven: “A large number of computers are connected to the network, and to reduce the ability for an attacker to maliciously add transactions on the network, those adding to the blockchain must compete to solve a mathematical proof. The results are shared with all other computers on the network. The computers, or nodes, connected to this network must agree on the solution”

Lisa Stanley, CEO of OSCRE International explains: The permanence of this ledger means it lives as a permanent record of activities between parties. These activities can include recording property transfers, asset digitization, HVAC system activities, occupancy of cubicles, or security access. Over time, this historical perspective can enable you to improve your decision-making, make decisions faster, and be shared with other emerging technologies, like artificial intelligence.”

That’s where the apparent fun starts. Many experts are claiming that blockchain will be the biggest shift seen in our generation. More than just a vehicle for a new currency or two, it’s being claimed that blockchain will change how we do business and go about our daily lives.

Applying it to business

While blockchain promises to have a far-reaching impact, not all businesses will see the same results or even be affected by the spread thereof. Iinuma holds the opinion that the types of businesses that will benefit from blockchain technology are those that possess specific qualities: Transaction-based, benefits from public scrutiny, benefits from history that can’t be rewritten, decentralization benefits the end user or customer.

Blockchain and real estate

Ian Church, Managing Director – Europe & Russia at AECOM, presents a few possible applications for blockchain within the commercial real estate sector.

  • Blockchain records who exactly acted in a particular way, and when. It provides a means of comprehensively tracking and ensuring the accuracy of information and can bring considerable value to procedures such as the registry of ownership title.
  • Blockchain could also have the potential to deliver highly efficient investment valuations using anonymised, comparable data. Complex, independent property valuations could become the exception rather than the norm, with elaborate financial due diligence and valuation procedures being replaced by a simple blockchain ledger.
  • The power of blockchain’s cryptographic technology to preserve history has the potential to significantly drive down transaction costs and even add transparency to the property sales process.
  • Allowing every operational transaction to be time-stamped, verified and allocated between tenants automatically, a live Service Charge reconciliation 365 days a year, 24 hours a day, all at the click of a mouse, is a powerful promise.
  • Blockchain is also revolutionizing physical access control systems by offering access via GPS enabled smartphones. This provides an unquestionable audit trail across worldwide property portfolios, accurately recording who was where, and when – letting the right people into the right locations.

According to Tom Bill, Residential Research Associate at Knight Frank, it’s time to start paying attention: “As national land registries start using Blockchain technology, now is the time to look beyond the hype and ask more profound questions about how it could influence buyer behaviour and pricing in real estate markets.”

The first shift to pay attention to is the rise in liquidity. Between lengthy transaction processes and having to find willing buyers when the time comes to sell, liquidity is notoriously absent in real estate. Sweden has already trialled using blockchain technology for transfers and according to Mats Snall, chief digital officer at the Swedish Land Registry: “It’s possible to shorten the process a lot, but one of the most successful aspects of the trial was security and the verification of contracts.”  

According to Bill, the second and far more influential aspect of blockchain technology comes in the form of tokenisation. “Enabling buyers to trade “units” in real estate online, the impact of this on markets and pricing is potentially far greater than removing frictions from the sale process,” he says. He cites the example of Estatechain – a marketplace for the tokenisation of property. “It plans to carry out its first transaction this year. Complex algorithms create an exchange through which vendors can sell tokens in residential property without needing to find a buyer. This is possible because investors pay for a finite reserve of tradable tokens on top of the value of the property itself: in other words, a liquidity premium. Though the technology determines the pricing of a transaction, this happens within the framework of quarterly valuations by a chartered surveyor,” Bill explains.

Is this necessarily a good thing? If you’ve been paying a bit of attention, you’d have seen that cryptocurrency is hardly stable. “It is not obvious that everyone wants a more liquid real estate market,” explains Professor Andrew Baum of the Said Business School at the University of Oxford. “If real estate traded more like a stock or a bond, prices might rise due to increased liquidity, but equally they might fall because of greater volatility and risks. The global banking system has survived over the last decade because it has not been forced to mark property assets to market.”

Claudine Cassar  Deloitte Digital Malta Leader, highlights yet another application for blockchain technology within property. She points to the beginning phase of any property journey: the listing.  

Through the use of blockchain technology, real estate listings can be decentralised, standardised, and globally accessible. While she is optimistic about the future of cryptocurrency and the blockchain, she’s cognisant of what needs to change: “Obviously there is still a long way to go until real estate exchanges totally transform the world of real estate as we know it. The technologies being used to power these exchanges are still maturing and there will be considerable shifts over the coming months and years. At the same time, legal and regulatory changes will be required in order to make all of this possible. Smart contracts based on the blockchain need to be recognised legally and become enforceable. Banking regulations need to change to include cryptocurrency transactions and lending. Governments will need to get involved to protect consumers.”

The bottom line

One thing experts agree on is the fact that blockchain has the potential to change how we conduct business. Werner Riekert of Traderly equates blockchain to the early internet-craze. In the same metaphor, he places bitcoin in the same position as e-mail. At its core, blockchain technology enables greater transparency and collaboration. These are attributes that can be harnessed by SMMEs and give them an advantage previously only known to large corporations. Given the fact that these businesses account for around 60% of South Africa’s GDP, that would be great news for the economy and market as a whole.

The changes are happening rapidly and many won’t be able to see it approach. Positioning yourself at the forefront of learning and technology means you’re able to take advantage of new information – and use it to build your wealth.

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