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NEWS - How Blockchain Technology is Disrupting Real Estate

How Blockchain Technology is Disrupting Real Estate

How Blockchain Technology is Disrupting Real Estate

Real estate has nearly always been considered a relatively safe investment. After all, whatever happens in the stock market, people will always need a place to live and work. Yet, real estate transactions also tend to be some of the most complex and expensive, rendering real estate itself relatively illiquid.

Blockchain technology could fundamentally alter how real estate is owned, managed, and transacted around the globe. There is no doubt that it will take time for this technology to reach its full potential, but it is already impacting several sectors, including real estate.

The real power of blockchain technology lies in the automated execution of a transaction using the technology and the potential to create fractional ownership in real estate assets using tokens that inventors can trade on a blockchain-based exchange, thus opening up investment opportunities in the real estate market.

Read more: The risks when investing in tokenized real estates & how to avoid it

Why blockchain technology could disrupt the real estate industry

Blockchain technology offers a form of shared record-keeping which is designed to be difficult to tamper with. Blockchain technology operates through decentralized peer-to-peer platforms, building resilience against the spread of corrupted information and boosting resistance to fraud.

Blockchain technology has the potential to address many challenges within the real estate industry, including:

  • Improving trust and transparency: Blockchain technology offers a verifiable and censorship-resistant option for sharing information (such as valuation details).
  • Reducing siloed databases: Real estate processes would benefit from secure and tamper-resistant shared databases that compile data and documents from various stakeholders in one place.
  • Making transaction processes more efficient: Most real estate transactions are still conducted through wire transfers and require costly verification processes that can take days to complete. Blockchain-based transactions could enable a streamlined process that delivers quickly and reduces costs.
  • Limiting the use of intermediaries: Many intermediaries — from brokers to escrow companies — could be rendered obsolete by blockchain-based approaches, as records could be stored, verified, and transferred using blockchain technology. Removing the need for intermediaries could dramatically reduce costs and save time.

The Blockchain Technology Use Cases in Real Estate

GIG considers several areas that could benefit from blockchain technology below, from due diligence to financing systems.

How Blockchain Technology is Disrupting Real Estate

How does tokenization impact real estate funds and asset management?

In real estate, tokenization refers to digitizing securities, alternative assets, and financial instruments. With Ethereum blockchain technology, digital assets can be programmed to include ownership rights, transaction history, and rules to ensure asset issuance, distribution, and transfers are regulation compliant. Simple examples include controls to ensure that tokens can only be transferred to certain counterparties or not at all during a lock-up period. Digital assets can be customized to meet all kinds of issuer requirements. 

In addition, tokenization reduces the costs and increases the speed of creating, issuing, and exchanging assets, innovating new features, administering dividends, and managing other corporate actions. In-depth customization and rapid issuance allow issuers to tailor digital assets directly according to investor demands, significantly reducing counterparty risk. 

Reduced costs allow issuers to decrease minimum investment amounts and expand access to a wider pool of investors. Increased connectivity between digital assets and associated networks expands secondary market opportunities and improves liquidity. These benefits to both issuers and investors demonstrate the real promise that blockchain technology is a future with fundamentally new instruments and markets.

How do blockchain technology impact due diligence and the financial evaluation process?

Physical paper documents for proof of identity are still the norm today. This approach requires significant time and effort for due diligence and financial verification.

This manual verification process also increases the likelihood of errors and can involve multiple third-party service providers. These factors can be costly and slow down the due diligence process.

Using digital identities on the blockchain technology, this entire process can be taken online in a secure manner — increasing efficiency, lowering costs, enhancing data security, and reducing the chance of manual errors.

For example, a real estate property’s digital identity could consolidate information such as vacancy, tenant profile, financial and legal status, and performance metrics.

This solution streamlines the process of transferring property titles while also adding some layers of security. All parties involved in the process, including the buyer, seller, real estate agent, the buyer’s bank, and the land registry, have their own digital identities.

Each can use a single application to send and sign official documents using blockchain-verified smart contracts securely. All actors can view the associated documents and information with verification of the steps that have taken place during the process.

How does blockchain technology impact alternative financing for real estate?

Raising finance for new real estate projects is difficult. Property development firms face interest rates when working with banks as single source loan providers. They also face challenges with multiple loan sources as crowd financing can be difficult to administer. 

Blockchain technology simplifies access to alternative financing models by facilitating investor management for developers and ensuring investment transparency and continuous ROI tracking for investors. Blockchain-based financial products can also be programmed for global distribution. These solutions simplify investor experience, increase investor confidence, and unlock access to a wider investor pool. 

Real estate investing

Real estate investing has historically only been available to those able to put down large sums of capital — especially regarding commercial property and multifamily housing. Additionally, real estate investing often involves expensive intermediaries such as fund managers, further raising entry barriers.

However, blockchain technology is looking to disrupt real estate investing by providing a way to decentralize the process through crowdsourcing and tokenization.

Tokenizing real estate assets refers to a process in which a property owner can offer digital tokens that represent a share of their property. Using a blockchain to track these investments, with each transaction being time-stamped and immutable, makes it possible to limit the risk of fraud.

This approach makes it easier to establish a market for property “micro-shares,” creating the potential for a property to have numerous co-owners with a stake in potential returns effectively.

Loan and mortgage securitization

Loan origination and underwriting remain unstandardized and reliant on paper documentation. Security structuring is left open to interpretation, and great effort is required to protect against double-pledging of assets. Trading and asset servicing decisions are often made based on outdated data. And lastly, cash reconciliations across lifecycle events often incur settlement delays impacting investor cash flow. 

Blockchain offers banking institutions a single version of verified information, secure data sharing, immutable transaction monitoring, and real-time payment settlement. Digitizing a loan or mortgage can be programmed to include relevant data such as ownership rights and loan payment history to support future servicing decisions. Smart contracts can collect and distribute payments to beneficiary holders and deliver real-time reporting to regulators. This provides efficient lifecycle management and generates confidence in secondary markets by providing investors proof of asset performance.

Urban planning

Property development almost always occurs without valuable input from the community. The public often feels disenfranchised from planning processes, unable to express preferences for the local community. Blockchain-based planning platforms can include educational resources, token-based participation incentives, and a feedback loop between stakeholders. This would encourage community engagement and better integrate local communities in the property development value chain, improving public confidence and improving developer services for sustainable success.

Investor identity

Blockchain-based digital identities will be powerful across multiple industries, consumer applications, and within the public sector. Tenant and investor identities from mutualized blockchain-based KYC/AML procedures can streamline background checks, reduce costs, and increase security. Decentralized identities enable anyone to prove ownership of properties while making essential documents (proof of insurance, identity, credit history) easily shareable with necessary parties. 

Tokenization can change the way people invest in real estate the world over. But realizing that potential will require significant thought and planning by blockchain developers and their professional advisers. Tokenization is subject to a complicated web of legal and practical issues, any one of which could make the difference between success and failure. Hope this article will be useful for investors.

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