While much of the hype around blockchain has been concentrated around overvalued crypto-currencies and opaque ICOs (Initial Coin Offerings), it is becoming increasingly clear that real estate – the worlds largest asset class by a large margin – will be one of the first industries to be revolutionized by the blockchain. From seamlessly registering land with the government to creating a truly liquid property market to effortlessly facilitating rental agreements, it seems clear that blockchain will have a massive impact on real estate over the next decade or so.
Many of these dynamics are a few years away, but several are being rolled out now, in countries ranging from Georgia to Gibraltar, and all indications point to the pace of implementation quickening as time goes on. Bitcoin may have been the first kid on the block(chain), but real estate seems poised to stage a takeover. In an asset class that is already being transformed by decentralization of assets like short term rentals, and online marketplaces allowing you to profit from these exclusive investment opportunities, Blockchain seems like a natural progression of a trend that is already well underway.
A Bit About Blockchain
Blockchain, for those who missed the crypto boom of late 2017, is a distributed ledger technology that allows for decentralized networks. In plain English, it is a list of information (financial transactions, land title, really anything), which is simultaneously stored across thousands of different computers. This information is kept in the form of blocks, which each contain all previous blocks, a timestamp, and transaction data (who bought what for how much, for example). The entire ledger is encrypted, ensuring that the data is essentially impossible to tamper with.
Each time a new transaction occurs, a new block is created, and a series of secure protocols pass the information along to all other participants in the network. Blockchains are often paired with what are called smart contracts, essentially digital, programmable contracts that only execute when a given condition has been met (like a transfer of funds). Traditional blockchain networks are completely open, meaning anyone with a computer can join and host the blockchain. There are also private blockchains where only certain actors or computers can authenticate new blocks.
Blockchain itself is not a disruptive technology, but rather a foundational technology. A disruptive technology is one that, when first rolled out, immediately disrupts the industry in question (Uber is a good example). A foundational technology, in contrast, doesn’t have much impact when first discovered; electricity is a good example here. By itself, a distributed, encrypted ledger is certainly not disruptive: it doesn’t have any real-world impact. Applied correctly, though, it promises to transform many aspects about how the world does business.
Distributed Ledgers and Land Titles
Few sectors would experience more profound a disruption than real estate, a $217 trillion asset class whose transactional dynamics are still primarily carried out via pen and paper. Lying at the heart of every real estate transaction is the notion of a land title – essentially, who owns the asset that is being bought or sold. Every time a property changes hand, this needs to be updated. Even in developed nations, this process can take as many as six months, and in the developing world, merely verifying the land title of a property can be a Herculean endeavor. Indeed, according to the World Bank, over 70% of the worlds population lacks access to proper land titling.
Blockchain promises to change all that. The technology can be used to create a transparent database of who owns what in any given country, and also makes the process of transferring title between parties a frictionless endeavor. Under a blockchain land title registry, figuring out who owns what property becomes a matter of un-hackable public record, available for the whole country to see. Want to sell a property in such a system? Simply set up a blockchain-powered smart contract, and the entire system will update the moment the payment reaches the sellers account. Such a system would be a marked upgrade from the current Byzantine world of registrars, sub-registrars, agents, agencies, and title verification firms. It would enable anyone, anywhere, to easily buy and sell property without paying an arm and a leg for legal expenses, increasing participation in real estate and fuelling the sectors growth as a whole.
Blockchains efficiency in terms of title verification has not gone unnoticed, and several governments around the world have begun placing their land title databases on a blockchain. In India, Andhra Pradeshs government has entered into a partnership with a private company to implement distributed ledger technology into their property. In the developed world, Sweden, has been exploring plans to bring the nations entire registry onto a private blockchain, and will be testing their first official transaction later this year, an effort that has seen 1,00,000 land records equipped with blockchain protection. Similar programs are being implemented by institutions ranging from venture backed startups to the government of the Republic of Georgia to Chicago’s Cook County Recorder of Deeds.
Tokenizing Twenty Storey Towers
While a blockchain- based land title system is undeniably exciting, the real money lies in another application of distributed ledger technology: turning real estate into a truly liquid asset class. As an investment, real estate is illiquid – it has a high ticket size and is relatively difficult to sell. This leads to the property being discounted, a phenomenon where the actual value of a property being sold is usually 10-20% higher than the price it gets sold at. This 10-20% is called the illiquidity discount, and, given the massive size of real estate as an asset class, unlocking this translates into trillions of dollars in hidden value.
How can blockchain unlock real estates’ illiquidity discount? Through a process called tokenization, where a single blockchain is created to represent a specific asset. In a nutshell, the owners of a given property would break the ownership of an asset into a given number – say, 1,00,000 – of virtual tokens, which can then be effortlessly bought or sold. In this way, thousands of people can jointly own a property, and can trade their stake in it as effortlessly as if they were buying and selling stock.
At present, a truly fluid, token-powered real estate market remains in the realm of imagination, as the regulations surrounding tokens that underwrite an asset – called asset-backed tokens – are still developing, with the majority of the worlds governments taking a restrictive stance at the moment. However, leading jurisdictions like the US and the EU have declared that asset-backed tokens will be regulated as securities, meaning that much of the necessary legal framework is already in place.
A Cornucopia of Opportunity
Blockchains potential to fundamentally modify real estate operations doesn’t end with land title and tokenized property. An entire ecosystem of decentralized mechanisms is just around the corner. These range from using smart contracts to effortlessly rent properties and pay utilities (imagine a system where the lease activates the moment your cheque hits the landlord’s account) to simply purchasing a property entirely in cryptocurrency. The latter, in fact, has already begun, with small-scale property transactions taking place exclusively via Bitcoin or Ethereum, the two leading cryptocurrencies.
Two things are obvious at this point: blockchain will massively disrupt real estate, and this disruption has already begun. A decentralized attitude towards real estate has been at the heart of the incredible growth of short term rentals, led by platforms like Airbnb in the hospitality sector. The world’s top property marketplaces are rolling out revolutionary new ways to profit from the tremendous growth of short term rentals, and participate in the worlds hottest investment destinations, all executed digitally at the mere click of a button. As the world turns the page on analog, blockchain promises to bring real estate into the digital economy – with style.