“Software is eating the world.” The famous quote by entrepreneur and investor Marc Andreessen rings more true today than ever. Even industries such as real estate, that traditionally have been slow to change, are being turned upside down by technology (as we described in one of our previous articles), marked by an increase in global Proptech investments from $33 million in 2010 to almost $15 billion last year.
One of the technologies set to have the biggest impact on real estate is blockchain. The decentralized and unalterable properties of blockchain are enabling radically more efficient ways to make investments and structure workflows, and there is now a growing number of companies and governments building blockchain applications for real estate. We take an in-depth look at how blockchain technology is unlocking value along the RE value chain.
1. Land Titles
Land conflicts are a crucial issue in many developing countries. Faulty records, damaged documents, corruption and outright expropriation cause complex disputes over ownership and keep productive land unused. One case is Haiti, where a 2016 Hurricane destroyed so many records that land remains unallocated today. However, other countries such as the US struggle with titling too, as demonstrated by the fact that 25% of all title reports contain errors. Land registration is often managed offline and is subject to so much fraud, errors and lack of information that the title insurance industry to protect buyers from unpleasant surprises is worth $15 billion.
Blockchain-based smart contracts offer a new alternative to record land titles. Moving all documentation into a decentralized and secure ledger could be a radically more efficient way to manage land ownership, help avoid disputes, and ensure that records are not manipulated or lost. Countries such as the UK, Sweden and Ukraine are leading the way by testing blockchain applications to record national transactions. They are being aided by companies such as UBITQUITY, that provides a “record-keeping SaaS” for real estate deals that can be used by governments or title companies.
2. Data Collection and Due Diligence
It is notoriously difficult and expensive for real estate companies to verify all important property details before lease or purchase. One case in point is Knotel, a flexible office space provider with more sites in New York than WeWork, that spends 2% of transaction costs on verifying data about each property. Even though, according to JLL, the majority of global real estate markets are improving in transparency, there are still many potential efficiencies to be gained through technology. This is especially important for investors who are interested in less mature markets where transparency may lag behind.
At one end of the proptech innovation spectrum, listing websites such as Zillow have been increasing market transparency with their large database of sites. On the other side of the proptech innovation spectrum lies blockchain. By making it possible to store all building data such as repairment records or floor plans in a digital, central and secure place, blockchain can make it much easier for investors to do their due diligence and verify all property details. The technology could even be used to track the journey of construction materials across the building lifecycle, from the factory until demolition and recycling of parts, making it easier to track the origin, quality and age of each part.
One of the main disadvantages of real estate as an asset is its low liquidity. Even investment vehicles like REITs and SPVs that are seen to be more liquid do not offer the same granularity and ease of sale of other assets, as they lock up investors ́ funds for a considerable length of time. Transferring a property into a blockchain ledger, dividing it in small fractions and making the fractions digitally available as tokens (i.e. tokenization) creates a novel path to property investing, allowing owners to sell their stakes in the open market without the property needing to be sold. Therefore, tokenization also helps with another disadvantage of real estate: high barriers of investments for smaller participants. Real estate tokens enable fractional ownership of a building or land, increasing market participation and unlocking financing methods for developers.
The private equity firm Peakside Capital recently announced that they are launching Europe’s first tokenized property fund to raise €200 million of capital for the German office market. As the underlying technology they are using ScalingFunds, a blockchain-powered “funds-as-a-service” that helps investors raise and manage their funds.
Another player in this new space of tokenized real estate assets is Harbor. With a total funding of $38 million from Founders Fund, Andreessen Horowitz and other notable investors, Harbor has created a platform where private securities can be tokenized in order to raise capital.
4. Project Management
When we think about moving the real estate value chain into the digital realm and codifying agreements into smart contracts, the first agreements that come to mind are those of ownership and land transfer. However, it is even possible for complicated and three-dimensional processes such as project management to be handled via blockchain.
Think of a project as a long list of transactions between different parties. These transactions can represent any type of agreement concerning milestones achieved, payments or goals. All these project transactions could be coded into a series of smart digital contracts that could be automatically executed once each individual contract is fulfilled. For instance, when a technical planning bureau has delivered a predefined set of electrical drawings, the contract would be marked as done and the payment automatically get triggered, which would then be reflected in the total project costs. Managing a project in this way could make all the parties more accountable and create a single point of information for all stakeholders.
In 2017, the Russian Development Bank VEB announced that it would test ways to make blockchain technology part of its project management processes, as one of many examples of Russia positioning itself as a global hub for blockchain technology.
5. Property Purchase
From 2009 to 2015, cross-border real estate investments have grown by a staggering 334% from $65 billion to $217 billion. With the volume of cross-border investments on the rise, it is as important as ever for international buyers to avoid wire fraud and to operate in a transparent environment. Easier said than done: according to the FBI, Americans alone lost $150 million in real estate scams in 2018.
An example of how blockchain could be used to solve these issues is Propy. The startup raised $15,5 million in an ICO and aims at simplifying the way people buy national and international properties using Ethereum smart contracts. They have created an Amazon-like RE marketplace that consists of a listing site, a transaction platform to exchange documents, and a blockchain-based registry that does not need third party agents to process transactions. In 2017, Propy announced the world ́s first property purchase on the blockchain, when Techcrunch founder Michael Arrington made a purchase of a $60,000 apartment in Kiev settled by smart contracts.
If you have taken out a mortgage before, you are probably aware of what a laboursome process it is. According to PWC, the average mortgage application is 500 pages long and takes between 30 to 60 days to complete. There are so many steps and intermediaries involved in taking out a loan, that the average cost of obtaining one is almost $9,000.
With a long list of middlemen such as financial service providers, lawyers, solicitors and realtors, involved in every loan, the mortgage industry has a strong potential for technological disruption. The rating agency Moody’s for example estimates that up to $1 billion of annual cost-savings are possible by implementing blockchain-based mortgage applications. The technology reduces the need to rely on paper-based and individual communication lines, saving not only money, but also time. This disintermediation will not just benefit borrowers, but also those financial institutions that are able to offer more competitive rates thanks to a leaner lending process.
7. Property Management & Renting
Blockchain technology offers exciting new ways for property managers and service companies to track user information and deliver better customer experiences. One notable example here is Aqua, with their blockchain-based property management system that recently integrated with the Hilton Hotels chain. The platform allows hotels to maintain clean and trusted records of their customers across many different locations and puts more control into the hands of the customers, who can validate and change their personal profiles and tastes, all while their data remains protected and encrypted.
The renting experience too, is set to be disrupted by blockchain. Smart contracts structured to automatically withdraw rent payments and it is even foreseeable that property management fees could automatically be calculated and charged using data from IoT devices and utility bills. One of the main players in this space is Rentberry, that has raised $30 million in the largest real estate ICO to date. Rentberry has built an online home rental service that allows potential renters to bid on the rental fee, instead of landlords selecting the price.
Outlook and Challenges
Despite many possible use cases of blockchain along the real estate lifecycle and serious efforts being made by governments and companies to develop corresponding applications, several barriers to wider adoption persist.
(i) The first is data-related. It will require massive efforts to transfer real estate data sets such as countries ́ land title records into a blockchain. Such data is currently analog in many places and it will require significant resources to digitize all of it. One can argue that this data will need to be digitized sooner or later anyway, so the best idea might be to do it on blockchain right away.
(ii) Another challenge here will be for blockchains to comply with existing data protection laws. The European GDPR regulations for example include the right for users to have their data deleted, while a blockchain is by default programmed not to do this. It is therefore very likely that new data protection laws will need to come into place specifically to regulate blockchains.
(iii) Another barrier to blockchain adoption exists around the issue of interoperability. Mass adoption will depend on the interaction between many different types of private and public blockchains. These blockchains are by nature built for specific purposes only, with the risk that they may remain isolated from each other. In the future, there will need to be ways for different blockchains to communicate with each other and provide information to users in one central platform. One company working on this is Wanchain, that aims at being the world’s most advanced blockchain interoperability platform.
Even though there are significant barriers to the wider adoption of blockchain technology in real estate, we believe that it will significantly improve processes within the real estate industry, many of which are heavily paper-based, and overly inefficient today. The time has come to move more parts of the real estate value chain into digital environments such as a distributed and secured blockchain network.
CB Insights — How Blockchain Technology Could Disrupt Real Estate
Savills — Around the World in Dollars and Cents
Unissu — Global PropTech Funding in 2018