The real estate sector is one of the most significant markets due to its volume and number of transactions. We want to highlight the link between Blockchain, real estate, and the new face of this market.
Investments in real estate are made on a daily basis, however, its high volume and continuous growth (according to MSCI, investments increased from $7.4 trillion in 2016 to $8.5 trillion in 2017), are limited by considerable transactional friction and low transparency.
Although some baby steps towards full digitalisation of this sector have been taken, we are still too far from the goal, and the problem seems to be that there are too many central authorities involved in real estate investments.
It is clear that in a Blockchain real estate market, most of such central authorities would likely be cut out, but let’s try to define how this would be possible and, first, what the benefits of a Blockchain-based market would be.
Blockchain main benefits
Blockchain has the power to change the rules of this market from the ground up. Blockchain is basically a shared database with a public, distributed ledger on which transactions are recorded, organised in blocks and encrypted, and validated by the whole network.
All this data on the ledger creates a chain that no one can break by changing or deleting any information previously stored. Transactions are notarised in real-time and there is very little risk of incurring in frauds.
A new way of investing: tokenisation
Tokenisation has the power of giving more investment opportunities to small traders, because not only it lowers fees and costs, but also allows investors to buy a smaller portion of a building.
If there is a real chance of creating a Blockchain real estate market, tokenisation is the best shot!
In the report Real Estate Use Cases for Blockchain Technology, distributed by Ethereum Enterprise Alliance, there is a good example of the benefits of tokenisation.
Let’s imagine a landlord owns a multi-family unit, and he wants to sell a certain percentage of the property off, but he still wants to keep a cash rental income.
With a tokenisation solution, the building can be completely partitioned in tokens, which can be sold to other parties who can decide to buy one or more tokens and claim their quota from the rental income, which they will automatically receive in real-time.
Tokenisation avoids all the side effects of sharing the ownership of a building, such as bad management and competition among landlords.
Let’s take a practical situation as an example (the same reported in the EEA research mentioned above).
Let’s say there is a residential building in Switzerland consisting of 18 apartments and a restaurant worth CHF 15mln. The owner wants to sell only 20% of the building (worth CHF 3mln).
Instead of taking out another mortgage or syndicating the deal, she decides to tokenise 20% of the building.
A set of security tokens is then administered on a blockchain, and when an investor buys one or more tokens, the transaction is recorded, and there is no way to manipulate it. Next time the owner receives the rental income, a share of it, proportioned to the value of the tokens bought, goes to the investors. This process is entirely automatic and validated by the blockchain.
The benefits of a Blockchain real estate ecosystem described above become even more appealing if we consider that they could be achieved by doing little or no operations at all, thanks to smart contracts.
With a smart contract in place, the transaction can be settled automatically when certain conditions are met, hence, no middle person is required.
Conditions can be successful ID checks, AML policy acceptance, and literally anything the seller (and the law) may require. When such conditions are fulfilled, payments are automatically executed in real-time, even during weekends and holidays.
In most European countries, land registries verifications are a common requirement in order to close a real estate transaction, however, especially for old buildings, sometimes accessing the information can be very challenging.
Moving land registries on the Blockchain could quicken the process of verification, which would literally take seconds, instead of taking weeks.
The history of ownership, modifications, and developments of any building could be easily accessible to achieve full transparency. It is already happening in Ukraine.
Blockchain real estate projects
It is worth mentioning some companies in this sector powered by Blockchain. We selected four virtuoso examples:
- Blockimmo: a Blockchain-based company whose main focus is tokenisation. Blockimmo allows owners to sell fractions of properties as security tokens on the Ethereum blockchain. Remember the Swiss property example above? It was a real case followed by Blockimmo;
- Imbrex: a global marketplace providing a listing service with direct control over them and full transaction data;
- Propy: a Blockchain real estate marketplace. They are developing a unified property store and an asset transfer platform. Transactions are automated by multiple smart contract templates;
- Real House: a diversified EU real estate investment fund, managed by industry experts, who aim to disrupt the traditional Asset investing. The Investor will get the Fund Security token, which represents direct or indirect ownership of an interest in the real asset.
The best course of action for real estate companies
Switching from a traditional business model to a Blockchain real estate business involves radical changes, which can be very challenging if approached without any help. Our Blockchain consultants are here for you. We can discuss it in a free introductory consultancy.