BY NAVITAS CAPITAL
While cryptocurrency already achieved widespread notoriety with extreme value growth, business blockchain applications for the real estate vertical are still in their “first inning”. Operators, owners and investors are now starting to learn about the technology and what strategies to consider for leveraging blockchain.
To help gain a greater level of clarity around those difficult questions, we summarized our research and key findings of this paper into a few key takeaways:
Key takeaways for real estate executives and practitioners
Real estate is ripe for blockchain adoption due to its size, fragmentation, multi-party transactions, and illiquidity.
Cryptocurrency wealth is real (Market cap of ~$250B as of August 2018) and offers a significant new source of capital looking for investment opportunities, not unlike investors under the EB-5 visa program.
Blockchain has the potential to unlock liquidity in certain real estate assets by allowing investors to freely trade previously illiquid positions, while simultaneously providing long-term committed capital for owners. This represents the largest opportunity in real estate as it can lead to a liquid secondary market.
2019 will be the year that large commercial assets become ‘tokenized’ and traded via blockchain based compliance platforms.
Blockchain will enable secure digital identities for investors.
Future blockchain adoption will not eliminate the need for third party service providers; instead it has the potential to automate workflows and accelerate transactions.
Until critical underlying industry data is digitized and structured, blockchain powered applications will have limited use cases and adoption.
Clear government regulation for cryptocurrency and blockchain platforms is required to allow for more institutional adoption.
Leading real estate players will likely need to embrace blockchain technology within their operations (a la the internet in the 1990s), or risk being left behind competitively.
How can Blockchain help real estate operators ?
Given its size, lack of digital infrastructure, transaction complexities, and illiquidity, the real estate industry stands to greatly benefit from blockchain’s value proposition of helping digitize and exchange assets in a decentralized and secure manner.
Blockchain’s inherent trust mechanism can be a compelling concept for reshaping businesses and transactions that are traditionally bogged down by inefficiencies. As such, the $200T+ real estate asset class – from landlords, to service providers, to data providers and others – needs to pay careful attention to this emerging technology and develop a strong understanding of the potential changes that could take place in the market.
Blockchain can be the technological foundation to create and trade security-law-compliant representations of traditional private assets via platforms like Harbor (a Navitas portfolio company) Polymath, tZERO or Meridio (See notable blockchain start-ups in appendix D). These so- called security tokens represent ownership claims of private securities on blockchain. Security tokens allow asset owners to easily convert the rights of individual properties on to a blockchain network, subdivide the asset into individual parcels and create tradeable fractional ownership of property rights.
In practice, blockchain-based security tokens give real estate owners the ability to:
- Compliantly leverage new sources of equity in the form of crypto-wealth looking for quality investment opportunities and
- Increase liquidity for investors.
As a result, the security tokens can potentially transform capital formation as owners can obtain long term committed capital, while investors can freely trade the tokens on a secondary market with other accredited investors. Investors will eventually be able to get in and out of previously illiquid positions instantly, and more importantly without the involvement of intermediate fund managers. This represents the largest opportunity for blockchain in real estate as it can lead to a liquid secondary market that potentially enables the true democratization of real estate access.
Democratization will first require regulators to form the necessary guidelines, similar to how Title III of the JOBS Act established crowdfunding provisions. The continuous regulatory process will be the only viable path to create a truly liquid, blockchain enabled marketplace for real estate. Blockchain adoption will therefore depend on the progress of the technology alongside the advancement of regulations, making it impossible to forecast its full impact and the timing of that impact. However, the eventual efficiency gains that can be achieved are significant, especially in regard to broadening the investor base for commercial real estate transactions, where an added layer of security and verification can provide significant value.
Looking ahead, blockchain also has the potential to lower transaction costs, as the ease and security of transactions would permit the efficient unbundling of property rights.