Real estate remains the most prominent form of investment and as such plays a significant role in the global economy. In a climate where the Australian housing bubble is set to collapse, interest rates are rising and there is a growing dissatisfaction with the big four banks, it’s clear there needs to be an alternative to the current system.
Alongside problems of transparency and accessibility to the property market, a lack of liquidity also plagues the real estate industry. Blockchain technology is set to have a transformative effect on the real estate industry in its ability to enhance transparency and convenience through the introduction of cryptosystems like smart contracts and tokenisation.
Blockchain systems are defined as a time-stamped list of immutable records that are managed by a group of computers, not owned by any one entity. Using cryptography, these ‘blocks’ of data are bound and secured. Blockchain technology resides on three premises:
Decentralisation: As all data stored and shared on a blockchain system is not owned by one single authority, eradicating the confusion and complexity of intermediaries. It also simplifies the nature of data as it’s stored on an unalterable system rather than multiple, wide-ranging servers owned by third-parties.
Transparency: The simplification of decentralised blockchain systems makes data completely transparent. Data is more secure but also more traceable as every person part of the network can trace data back to its source.
Immutable: Data stored inside the blockchain cannot be corrupted due to the cryptographic principles.
Real-estate is an industry primed for blockchain implementation. Not only has it been a traditionally stagnant industry with little innovation in the past decade, but it requires a change to adapt to the global economy where currency is increasingly digitalised. Real-estate is characteristically stifled by the sheer amount of third-party intermediaries involved in selling and acquiring properties. Blockchain technology would simplify this process by linking together data so that only authorised parties (these third-parties) can access it.
The checks and balances system that is currently the standard for loan and mortgage application remains a huge problem in the real estate industry. The settlement process currently takes up to 42 days, a drawn-out procedure that incurs its own set of complications and fees. The current system sees several third-parties, like mortgage brokers and banks completing admin tasks like asset-to-debt ratios and title settlement. This is timely because these assessments need to be done manually.
What blockchain presents is not just a more transparent way of doing things, but also a more efficient approach that would streamline the mortgage process. Instead of intermediaries such as mortgage brokers and banks accessing data such as your borrowing power manually, blockchain would encrypt this information on its ledger. This would securely automate and store loan application details, making it accessible to approved parties. Distributed Ledger Technology would facilitate an automated loan contract that would set up a loan account and transfer the ownership of the property simultaneously. The current 42-day practice could be cut down to as little as 5 days.
Smart contracts can accelerate real estate transaction and eliminate the need for escrow arrangements. Smart contracts are automated settlements that use blockchain technology to cut out intermediaries and thus reduce the costs on the investor. They also speed up the transaction process and make details about the property more accessible to the investor. This protects investors against property fraud as you have the ability to connect all associated property documentation to the blockchain system. Once the digital ownership of the property is linked to the blockchain, it remains incorruptible. Smart contracts are already being used to fight property fraud around the world.
The tokenization of assets is a game-changer for the real estate industry. Whilst traditionally real estate has been limited to a small investment base, asset tokenization is making real-estate investment globally accessible. This accessibility will ultimately lead to a greater financial return for investors.
A token in the crypto world refers to a digital representation of a real-world asset or value. The tokenisation of assets has the potential to increase the liquidity traditionally illiquid assets, such as property. Tokenisation also makes it possible to trade these assets without a third-party such as a bank. STO’s are cryptographic security tokens that derive their value from tradable, external assets. They have the ability to generate profit, pay dividends and invest in other tokens. Classified under Federal Laws, STO’s function as a viable way to trade property. As real estate is the largest asset class in the world, it’s no wonder that the industry is crying out for more avenues for liquidity.
When it comes to accessibility, real-estate is often conceived as an exclusive market that is extremely difficult to break into. In Australia alone, rising house prices have led to home ownership becoming a topical social and political issue as the market is more and more closed off to new or first-time investors.
Fractional ownership functions as an alternative to traditional conceptions of property ownership. It refers to buying tokens of property and essentially co-owning a fraction or percentage of it. Fractional ownership involves a seller tokenising a property and entering into a multi-signature smart contract. As smart contracts are self-executing and honourable, it doesn’t necessitate supervision and is completely transparent by nature. This development widens the accessibility of the property market and innovates the very definition of what ownership means and constitutes.
The disruptive nature of blockchain technology is especially pertinent to the real estate sector which is already subject to immense change. The implementation of the blockchain system looks set to widen the investor pool in relation to the property market and further redefine our conceptions of ownership and liquidity. Blockchain is a democratising force that is synonymous with transparency and efficiency. When applying these principles to the traditionally stagnant real estate sector, the results are sure to be revolutionary.