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Blockchain

Can Blockchain in Real Estate work?

There is undeniable potential for immense changes in the real estate sector, as a study published by Deloitte suggests. At the moment, however, there are few actual projects or applications of blockchain technology in the real estate industry. However, a serious approach can be seen in the area of evidence of ownership of land (the land register). In addition, there are also areas of application in the letting processes and other property management as well as real estate financing. The decisive driver for these innovations is above all the possible simplification and acceleration of management processes.

There is undeniable potential for immense changes in the real estate sector, as a study published by Deloitte suggests. At the moment, however, there are few actual projects or applications of blockchain technology in the real estate industry. However, a serious approach can be seen in the area of evidence of ownership of land (the land register). In addition, there are also areas of application in the letting processes and other property management as well as real estate financing. The decisive driver for these innovations is above all the possible simplification and acceleration of management processes.

The management processes in the real estate sector (buying and selling, renting and leasing, financing and administration) are often very time-consuming and highly inefficient. Even today, these processes are largely paper-based and are still in the hands of many intermediaries such as asset and property managers, utilities, banks, (land register) offices, notaries, brokers, lawyers, and other advisors. In addition to a high redundancy of data, this often results in poor data quality, which leads to complex verification processes in the context of transactions.

Blockchain-based land register

From a traditional point of view, it is hard to imagine a purchase of property without a notary public or a land register could be handled safely within a few minutes. Blockchain technology can make this possible, as a number of early rollout projects have shown. For example, a recent test project in Sweden has captured widespread interest in the real estate industry.

Together with the Swedish National Surveying Office (Lantmäteriet) and other project partners from the financial and IT sector, startup ChromaWay has created a blockchain-based platform for real estate transactions. However, this project is not a traditional blockchain-based land register. Rather, it is a digital transaction platform based on a so-called ‘private blockchain’, on which only certain, trustworthy participants, such as registered banks and agents, as well as the landlord’s tenant, can validate transactions and blocks. The risk of false information regarding the ownership or encumbrances of the respective property or the solvency of the purchaser is avoided without lengthy examination processes.

As part of this platform is also an app-based smart contract solution for the conclusion of purchase contracts via the blockchain, it can largely automate and securely map the entire process of transferring property in a matter of days, instead of the four to six months that are customary in Sweden. This saves in transaction costs and helps prevent fraud. The project participants estimate that these savings would amount to 100 million euros per year in Sweden alone.

Rental and property management by smart contracts

The letting process also sees considerable potential for the use of blockchain technology, especially as a basis for so-called smart contracts. Even though there are hardly any concrete applications in this field, announcements by industry participants already show that small-scale, repetitive processes, which are common in the management of real estate, may be handled more efficiently with the help of blockchain technology.

This initially applies to the entire accounting system for electricity and other utilities. In this case, there is no longer any significant effort involved in managing real estate thanks to automation, especially in the area of service charge settlements.

However, automation could go much further with the help of Smart Contracts based on the blockchain. It is being considered whether the automatic rental of rented premises can be made possible by merely entering these for-rent premises. In such a case, the automated rental agreement could automatically check and execute the requirements of a rental, in particular, the payment. The entire transaction is validated and logged by a blockchain. At least for standardized leases, which occur again and again in large numbers, e. g. for apartments, parking spaces and also an office or conference rooms in Office Centers.

Blockchain solutions are worthwhile because considerable administrative and personnel expenses would be eliminated. However, many challenges will still have to be overcome in order to make such blockchain-based smart contracts legally compliant. Finally, blockchain can be used as an application for managing tenant reputation, which can help overcome the knowledge imbalance between landlords and tenants.

Financing, investment, crowd-ownership

Of course, blockchain-based cryptocurrencies, such as bitcoin or ethereum, are feasible as a means of payment in real estate transactions, which can involve considerable regulatory issues (e.g. money laundering prevention). Blockchain technology is also used as a means of crowd investing in real estate around the world. Also noteworthy are business models that seek to issue a regulated, blockchain-based cryptocurrency secured by shares in Real Estate Investment Trusts (REITs).

Why so slow?

Looked at through the lens of the wider implementation of blockchain projects, real estate isn’t unique in not having many working initiatives in place. Very few ICOs have resulted in working applications to date, with many viewing 2018 as the year when organizations that have raised 100s of millions in funding will need to deliver for their investors. A significant obstacle for deployment of blockchain solutions in real estate is how convoluted the process is, and how embedded the players are. Banks, real estate agents, lawyers and a number of other middlemen (conveyance specialists, valuers, property managers, insurance companies) have all been profitably working the existing system for decades. While the argument for the deployment of blockchain solutions across the sector is strong, there are many powerful stakeholders who will need to be convinced of its value before that can happen.