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How Blockchain Will Transform Real Estate Industry?
Global real estate market is expected to generate a revenue of USD 4,263.7 billion by 2025 (Source: Grand View Research, Inc report), which underlines its significance as a universal economic power. Even though, the property industry has lagged behind in adopting new technologies. Real estate sector, which generates trillions in revenue every year, is dominated by paper based system. Such archaic methods are unnecessarily cumbersome, inefficient and costly, especially when we are living in a digital age. That is why a big shift has been happening with the world’s largest asset class, as real estate technology (or Proptech) continues to gain significant traction in the market rapidly. Venture capitalists (VC) have taken keen interest in this expanding global market, as a whopping ~$4 billion was invested in 2018 (Source: CB Insights, Rise of Real Estate Tech 2018). Real estate sector has noticed how other industries have gained a vital differentiating edge by adopting new technologies. And this realization have persuaded several real estate organizations to engage with proptech companies to embrace technological innovation.
Blockchain technology has been playing a crucial role in disrupting a wide array of industries such as banking, automotive, entertainment, healthcare, government, insurance, energy, travel, supply chain, education, property, charity, and more. Garnering substantial attention in recent years, this distributed ledger technology(DLT) bestow trust in a peer to peer (P2P) decentralized network, thus ensuring traceability, transparency and security. Blockchain technology could be applied to a wide variety of real estate use cases such as property leasing and management, and purchase and sale transaction processes. Traditional business model of real estate sector faces a plethora of problems that hamper its functioning and efficiency. Some of the major pain points include lack of transparency, hefty fees, financing difficulties, low speed transactions, greater potential for fraud, inaccurate market data, expropriation risks, and time-intensive procedures. Blockchain technology could enable property industry to address such inefficiencies and inaccuracies effectively. Let us explore the applicability of blockchain development in real estate leasing, purchase and sales transactions.
Currently, Multiple Search Listings (MSL) is one of the highly sought after option for accessing the details of real estate properties. Buyers, renters, tenants and brokers rely on several third-party platforms to view and access property listing. Fragmented listings of data provided across multiple forms not only make the search process inefficient but also misleading. Isolated and disparate MSL platforms doesn’t have any standard data format or communication features, which make it difficult for the users to analyse or compare the data. Most of these platforms are subscription-based and can demand high fees from users. It’s a struggle for buyers, sellers and agents to gain exposure to their property listings. Blockchain technology can tackle such inefficiencies by introducing a distributed and decentralized MLS system that enables all parties to view and access the available listings based on their requirements. Information on real estate properties would be processed and shared across a peer-to-peer network of authorized parties where the data will be controlled solely by the listing party. Implementing blockchain’s distributed ledger technology for creating a global MSL can increase the data security, save time, reduce transaction costs and make the real estate market more transparent.
While the real estate market has its own share of ups and downs, it has been one of the most prominent investment choices. However, real estate investment is only available to those able to raise a sizeable, chunky and illiquid capital, thus creating a barrier for many. Exorbitant fees charged by the intermediaries during the transactions is another roadblock. Blockchain technology could transform the real estate investing through crowdsourcing and tokenization. Digital securitization of both residential and commercial rental properties or dividing a property into individual investment unit is known as tokenization. Hence, a property owner can offer digital tokens to multiple stakeholders (crowdfunding) thus offering an effective way to trade properties in more granular pieces. Not only it lowers the barrier to entry for real estate investments, but also increases liquidity by a considerable margin.
Property tokenization using blockchain technology is immutable and transparent which reduces the risk of fraud. Fractional ownership is an interesting application of tokenization as each multiple stakeholders co-own a single piece of property or building according to their share of investment. Additionally, investors and buyers can track their property tokens and use it as collateral in many transactions. Real estate crowdfunding is dynamic and ever-evolving industry and there are a huge number of platforms supposedly in operation now. According to Forbes, the crowdfunding industry as a whole is anticipated to be valued at more than $300 billion by 2015 and online real estate marketplaces are primed to capitalize on that explosive growth. Implementing decentralized crowdfunding platforms using blockchain technologies and smart contracts help in creating a transparent and trusted environment where multiple stakeholders can work together with greater efficiency and minimum operational costs.
Property title fraud is rising at alarming levels reporting hundreds of millions of dollars in losses. What is home title fraud? When someone obtains the title of your property (usually by identity theft) and changes its ownership from your name to theirs. The fraudster will either sell the property or use it as a collateral to secure loan. The real homeowner becomes aware of the scam only when someone shows up claiming the property or when they receive collection calls and notices from lenders. Title fraud and mortgage fraud occur as a result of identity theft, and is considered as one of the faster-growing cybercrime schemes in the country. Introducing blockchain technology could be a perfect solution to combat identity theft and title fraud. Property title and related information is cryptographically stored in a decentralized network, which can be accessed by authorized parties only. Immutable data sources stored in blockchain network improves the overall transparency and availability thereby cutting down the risks for error and preventing the likelihood of fraudulent activities.
Land registries is another important area of real estate where blockchain can prove beneficial. Currently, property titles and records of property ownership are paper based, challenging to access and stored offline. This makes transferring a title or tracking the history and issues of a property a time consuming and tedious process. Digitizing the records and moving it to blockchain not only helps in augmenting the physical paper trail, but also prevents land corruption and property fraud risks. Data recorded to blockchain’s distributed ledger can be accessed by permissioned authorities in real-time, knowing that the information has been tamper-resistant and immutable since it was originally added.
Property management and real estate transactions consists of a lot of documentation, verification, and monitoring, which makes the procedures tedious and complex. All these processes are currently managed through manual paperwork opening up high possibilities for fraud, money laundering and identity theft. Moreover, the industry hosts a large number of high-cost intermediaries, from brokers to escrow companies, to handle various aspects of property transaction. Introducing blockchain based smart contracts removes the need for intermediaries thereby reducing costs and saving time. According to Nick Szabo, the American computer scientist who first proposed the idea of smart contracts, it is a “computerized transaction protocol that executes the terms of contract”. Blockchain based smart contracts are digital contracts that runs on computerized transaction protocol supervised by a number of nodes connected to a blockchain network. Since blockchain transactions work on a decentralized system between all permitted parties, it can self-execute and self-maintain thereby eliminating the need for intermediaries such as lawyers or notaries.
Introducing decentralized applications that uses blockchain-backed smart contracts will enhance the speed of transactions, reduce costs, and protect against fraud. According to a report published by Moody’s Investor Service, adoption of blockchain technology could save the US mortgage loan industry up to 20% in expenses per year, which would amount to $1.7 billion in annual savings.
There are a number of companies that have been experimenting with blockchain technology for different use cases of property industry. Blocksquare, SwissRealCoin, RealtyBits, Global REIT and Harbor are some of the many blockchain startups working to develop tokenized investing platforms. Companies such as Rent Berry, The Bee Token, The Lending Coin, Wealth Migrate and Etheera are using blockchain to facilitate decentralized P2P rental and investment whereas Imbrex, Propy,UBITQUITY, and Elea Labs focuses on leveraging blockchain development in launching decentralized real estate marketplace.
Even though blockchain promises to deliver a range of benefits to the real estate industry, it comes with its own set of challenges. Complex regional regulations, lack of standardization or data interoperability are some of the major challenges in the widespread adoption of blockchain technology.
It is clear that blockchain technologyhas the potential to transform the real estate industry. Its decentralized architecture, asset tokenization and immutable transaction ledgers can significantly increase market transparency, solve principal-agent issues and enable greater liquidity. Hopefully, we will see a practicable and mass-suitable implication of blockchain technology in property management very soon.
Blockchain technology has been playing a crucial role in disrupting a wide array of industries such as banking, automotive, entertainment, healthcare, government, insurance, energy, travel, supply chain, education, property, charity, and more. Garnering substantial attention in recent years, this distributed ledger technology(DLT) bestow trust in a peer to peer (P2P) decentralized network, thus ensuring traceability, transparency and security. Blockchain technology could be applied to a wide variety of real estate use cases such as property leasing and management, and purchase and sale transaction processes. Traditional business model of real estate sector faces a plethora of problems that hamper its functioning and efficiency. Some of the major pain points include lack of transparency, hefty fees, financing difficulties, low speed transactions, greater potential for fraud, inaccurate market data, expropriation risks, and time-intensive procedures. Blockchain technology could enable property industry to address such inefficiencies and inaccuracies effectively. Let us explore the applicability of blockchain development in real estate leasing, purchase and sales transactions.
Standardized Property Listings
Currently, Multiple Search Listings (MSL) is one of the highly sought after option for accessing the details of real estate properties. Buyers, renters, tenants and brokers rely on several third-party platforms to view and access property listing. Fragmented listings of data provided across multiple forms not only make the search process inefficient but also misleading. Isolated and disparate MSL platforms doesn’t have any standard data format or communication features, which make it difficult for the users to analyse or compare the data. Most of these platforms are subscription-based and can demand high fees from users. It’s a struggle for buyers, sellers and agents to gain exposure to their property listings. Blockchain technology can tackle such inefficiencies by introducing a distributed and decentralized MLS system that enables all parties to view and access the available listings based on their requirements. Information on real estate properties would be processed and shared across a peer-to-peer network of authorized parties where the data will be controlled solely by the listing party. Implementing blockchain’s distributed ledger technology for creating a global MSL can increase the data security, save time, reduce transaction costs and make the real estate market more transparent.
Real Estate Investing
While the real estate market has its own share of ups and downs, it has been one of the most prominent investment choices. However, real estate investment is only available to those able to raise a sizeable, chunky and illiquid capital, thus creating a barrier for many. Exorbitant fees charged by the intermediaries during the transactions is another roadblock. Blockchain technology could transform the real estate investing through crowdsourcing and tokenization. Digital securitization of both residential and commercial rental properties or dividing a property into individual investment unit is known as tokenization. Hence, a property owner can offer digital tokens to multiple stakeholders (crowdfunding) thus offering an effective way to trade properties in more granular pieces. Not only it lowers the barrier to entry for real estate investments, but also increases liquidity by a considerable margin.
Property tokenization using blockchain technology is immutable and transparent which reduces the risk of fraud. Fractional ownership is an interesting application of tokenization as each multiple stakeholders co-own a single piece of property or building according to their share of investment. Additionally, investors and buyers can track their property tokens and use it as collateral in many transactions. Real estate crowdfunding is dynamic and ever-evolving industry and there are a huge number of platforms supposedly in operation now. According to Forbes, the crowdfunding industry as a whole is anticipated to be valued at more than $300 billion by 2015 and online real estate marketplaces are primed to capitalize on that explosive growth. Implementing decentralized crowdfunding platforms using blockchain technologies and smart contracts help in creating a transparent and trusted environment where multiple stakeholders can work together with greater efficiency and minimum operational costs.
Title Management and Land Registries
Property title fraud is rising at alarming levels reporting hundreds of millions of dollars in losses. What is home title fraud? When someone obtains the title of your property (usually by identity theft) and changes its ownership from your name to theirs. The fraudster will either sell the property or use it as a collateral to secure loan. The real homeowner becomes aware of the scam only when someone shows up claiming the property or when they receive collection calls and notices from lenders. Title fraud and mortgage fraud occur as a result of identity theft, and is considered as one of the faster-growing cybercrime schemes in the country. Introducing blockchain technology could be a perfect solution to combat identity theft and title fraud. Property title and related information is cryptographically stored in a decentralized network, which can be accessed by authorized parties only. Immutable data sources stored in blockchain network improves the overall transparency and availability thereby cutting down the risks for error and preventing the likelihood of fraudulent activities.
Land registries is another important area of real estate where blockchain can prove beneficial. Currently, property titles and records of property ownership are paper based, challenging to access and stored offline. This makes transferring a title or tracking the history and issues of a property a time consuming and tedious process. Digitizing the records and moving it to blockchain not only helps in augmenting the physical paper trail, but also prevents land corruption and property fraud risks. Data recorded to blockchain’s distributed ledger can be accessed by permissioned authorities in real-time, knowing that the information has been tamper-resistant and immutable since it was originally added.
Financing, Processing and Payments
Property management and real estate transactions consists of a lot of documentation, verification, and monitoring, which makes the procedures tedious and complex. All these processes are currently managed through manual paperwork opening up high possibilities for fraud, money laundering and identity theft. Moreover, the industry hosts a large number of high-cost intermediaries, from brokers to escrow companies, to handle various aspects of property transaction. Introducing blockchain based smart contracts removes the need for intermediaries thereby reducing costs and saving time. According to Nick Szabo, the American computer scientist who first proposed the idea of smart contracts, it is a “computerized transaction protocol that executes the terms of contract”. Blockchain based smart contracts are digital contracts that runs on computerized transaction protocol supervised by a number of nodes connected to a blockchain network. Since blockchain transactions work on a decentralized system between all permitted parties, it can self-execute and self-maintain thereby eliminating the need for intermediaries such as lawyers or notaries.
Introducing decentralized applications that uses blockchain-backed smart contracts will enhance the speed of transactions, reduce costs, and protect against fraud. According to a report published by Moody’s Investor Service, adoption of blockchain technology could save the US mortgage loan industry up to 20% in expenses per year, which would amount to $1.7 billion in annual savings.
Blockchain Real Estate Start-ups
There are a number of companies that have been experimenting with blockchain technology for different use cases of property industry. Blocksquare, SwissRealCoin, RealtyBits, Global REIT and Harbor are some of the many blockchain startups working to develop tokenized investing platforms. Companies such as Rent Berry, The Bee Token, The Lending Coin, Wealth Migrate and Etheera are using blockchain to facilitate decentralized P2P rental and investment whereas Imbrex, Propy,UBITQUITY, and Elea Labs focuses on leveraging blockchain development in launching decentralized real estate marketplace.
Limitations
Even though blockchain promises to deliver a range of benefits to the real estate industry, it comes with its own set of challenges. Complex regional regulations, lack of standardization or data interoperability are some of the major challenges in the widespread adoption of blockchain technology.
Final Thoughts
It is clear that blockchain technologyhas the potential to transform the real estate industry. Its decentralized architecture, asset tokenization and immutable transaction ledgers can significantly increase market transparency, solve principal-agent issues and enable greater liquidity. Hopefully, we will see a practicable and mass-suitable implication of blockchain technology in property management very soon.
