The RE-evolution of Real Estate Capital Markets
If time is money, then blockchain is gold. But when you talk to landlords and real estate professionals about blockchain’s potential impact on their business, many have no idea what it is, some don’t care, and others simply don’t understand its practical use.
Across all industries, blockchain is making its mark. “According to a 2015 World Economic Forum survey of 800 executives and information and communications technology sector experts, 57.9 percent of the respondents believe that 10 percent of the global GDP information will be stored on blockchain technology by 2025.”
But how does all this impact landlords? How can landlords and real estate use blockchain to create liquidity? And more importantly, should they care?
Rooted in Security & Decentralization
Blockchain is a software protocol that enables the sharing of data in a secure way with its origins deeply rooted in accessibility and openness. According to Wikipedia, “A blockchain is a decentralized, distributed and public digital ledger that is used to record transactions across many computers so that any involved record cannot be altered retroactively, without the alteration of all subsequent blocks.”
Chain technology’s biggest impact is its ability to optimize databases for 1) transparency and auditability (internally and externally) 2) accessibility and 3) security. As the technology improves and becomes more mainstream, blockchain-based technology can be embedded in every software platform. Beyond software, blockchain can have a positive implications to the internet, IT hardware, semiconductor, and payment sectors.
Deloitte’s Blockchain in Commercial Real Estate paper highlights that the “commercial real estate (CRE) industry appears to take pride in keeping several aspects of its operations secret, such as comparable lease rental rates, property prices, and valuations, to create a possible competitive advantage.” Fifth Wall, the VC fund focused on Built World and backed by some of the largest landlords in the U.S., is on record saying, “Despite their vast size, real estate capital markets are among the least liquid and transparent in existence, not to mention among the most heavily regulated asset classes.”
Blockchain’s decentralization promises to upend CRE’s historic secrecy, creating a more transparent industry with more liquidity than has ever existed.
How will Blockchain Impact Real Estate?
There are numerous opportunities for blockchain to impact commercial real estate including: sales transactions; property and title searches; financing; leasing; purchasing and selling; due diligence; managing cash flows; and payment management, including cross-border and international transactions.
Efforts to move blockchain adoption beyond experimentation, for use in payments, has seen some progress, but development has been largely confined to use cases like smart contracts, record keeping, and decentralized applications, rather than an institutionalized approach.
For financial institutions, transactions offer the most ideal use of blockchain, where exponentially faster transaction times will come with less fraud, too. Blockchain is unlikely to re-invent the global payments system, but instead it can provide marginal improvements to various parts of the payment process. However, blockchain solutions making a meaningful difference for banks and lending institutions in the U.S. is at least five to seven years away. Greater progress toward this vision has occurred outside the U.S.—the Australian Stock Exchange and Spanish banks are relatively advanced in the implementation of blockchain technology.
Meanwhile, blockchain’s maximum potential for landlords and REITs will be unlocked once the entire real estate lifecycle is transitioned onto the chain. This potential will take shape for both purchases and investments, as well as tenant rent payments.
Opportunities are bursting at the seams in a wide open landscape, attracting new players regularly. It’s no surprise a wealth of startups have entered the fray in this increasingly crowded landscape. These startups see blockchain’s enormous potential. Transparency/auditability, accessibility, and security are all byproducts of blockchain implementations seen across several key areas of blockchain innovation.
LIQUIDITY OF CAPITAL MARKETS
With $33 trillion in the U.S. housing stock and $15 trillion in commercial, real estate is the largest asset class in the world. That said, it’s the least liquid. The name of the game for developers is to raise capital faster, cheaper, and more easily -- and be able to re-allocate capital from one project to another quickly. Blockchain technology unlocks division of ownership into fractions, bringing liquidity to stakes in physical assets that has never existed before. Making real estate capital markets accessible to those without hundreds of thousands of dollars to invest widens the capital pool to include an entirely new market of investors.
Fifth Wall’s co-founder, Brad Greiwe, believes “the absence of a regulatory framework has been the major hindrance in the tokenization of real estate assets using blockchain technology.” It was that core belief that led to Fifth Wall’s investment in Harbor, with Greiwe noting that the “protocol delivers critical compliance infrastructure for crypto-securities, allowing issuers and investors to play by existing rules to enforce compliance across all transactions and jurisdictions.”
Companies to Watch:
An end-to-end “Tokenization as a Service” platform being developed for Real Estate Sponsors that helps automate the technical, legal, and operational functions of raising capital via Security Tokens. Learn more.
A system enabling owners/developers to create and issue tokens linked to commercial real estate properties, distribute rental yields to 100s of investors, and trade tokenized assets without intermediaries. Learn more.
An investment platform allowing individuals to purchase BITs, fractional shares in the economic rights of a wholly-owned subsidiary that holds title to specific properties—profits and losses of the subsidiary flow up to all BIT Holders. It’s emphasis is newer construction and allows investments of as little as $500. Learn more.
An investment platform that converts individual properties into digital shares on the Ethereum blockchain, connecting diverse investors and asset owners to invest and trade. Learn more.
An all-in-one platform for digital securities such as funds, private equity, and commercial real estate that addresses the regulatory challenges of trading private securities on blockchains, including Initial Coin Offerings (ICOs) and secondary trades. Backed by Fifth Wall. Learn more.
At its core, tokenization simplifies the legal and financial framework for investing/owning commercial properties, unlocking faster and cheaper capital sources from a wider pool of investors. It also offers individual, non-accredited investors a chance to participate in the ecosystem and multi-family owners could make it seamless for tenants to start buying a percentage of their place with every rent payment.
Smart contracts are another key area of blockchain innovation. According to Forbes writer Hunter Perry, transactions can occur in less time and with less chance of fraud—another instance where blockchain implementation greatly impact transparency and security. Perry highlights that with smart contracts, “the seller includes all of the details of the property and the buyer puts all of their necessary information on a 100% encrypted and secure block. Computer protocols check the legitimacy of the transaction and no agreement can be completed until all of the terms are met.”
Real estate professional Mark Zilbert takes the idea further, noting that smart contracts will “enable real estate contracts, escrows, property records (deeds, for example) to be completed and monies distributed without title companies or attorneys.” All in an easily auditable way. Further, “brokerages will need to adapt their business models to understand and enable smart transactions but otherwise will continue to thrive in the era of the blockchain.”
Ethereum has grown its developer base and adoption by building smart contracts into the platform. Smart contracts enforce a relationship with cryptographic code compared to traditional contracts, which usually enforce a relationship by law.
Increased visibility to contracts and signings by all participative parties, alongside less risk and more security, can only be a boon for transaction speeds.
Companies to Watch:
A blockchain-powered global real estate store facilitating connections between sellers, buyers, realtors, title agents, and/or notary to enable the purchase of real estate online. “Transactions executed on the Propy Transaction Platform are legally binding, provide additional proof of ownership, and safeguard the transfer of ownership via traditional legal instruments.” Of note, Propy facilitated the “first comprehensive blockchain-recorded property deal in California.” Learn more
A platform applying smart contract templates and management systems to rental agreements and property sales. Payments can be made using ETH, BTC, LTC, USD, EUR, or many other currencies, which are automatically be converted to RLTY tokens and applied to the smart contract. Learn more.
Compared to liquidity in capital markets and smart contacts, property title is a long-term opportunity for blockchain innovation. Decentralizing property title on the blockchain would streamline the entire process, potentially allowing a “homebuyer to buy a home and complete the sale (along with escrow and title insurance) by clicking on a shopping cart on a website,” according to Zilbert. Sellers would receive cash through cryptocurrency while buyers seamlessly receive the title or deed through the blockchain to the appropriate government records.
Beyond greasing the wheels of the transaction, blockchain technology could store a wealth of property information. The future of property title could operate like a “carfax for homes,” according to Perry, by storing additional information “about construction, damages and improvements,” and even “record the title or deed to the appropriate public records, such as a county in the United States or similar,” says Zilbert.
All of this to say nothing of the blockchain’s unique ability to yet again improve transparency, simplicity, and security, thus reducing corruption and fraud—a welcome addition to not only land title registries (Sweden is building a blockchain-powered land registry), but also the escrow market that is plagued by frustration and wire scams.
Companies to Watch:
A digital land registry combining automation with blockchain technology for a pilot project in Ghana, with sights on expanding its reach further into the African continent. Learn more.
A digital clearinghouse for money that provides a secure and seamless home closing experience. Eliminates escrow costs using a blockchain platform and supports the transaction from offer to close.
Despite tests such as that by Cook County in Illinois, property title innovation is much more likely to happen in other countries first before it’ll happen in the United States—there is much greater risk of fraud in unregulated, developing markets. Not to mention, a lot less bureaucracy is involved in creating a system from scratch compared to overhauling 3,600 county assessor offices across the U.S. Bitland tackling land fraud in Ghana is one example.
Throwing Caution to the Wind
We’re in the early innings with blockchain in commercial real estate. Far too many still confuse blockchain with Bitcoin—blending them into the same sentence is asking for trouble. A single cryptocurrency is very different than the decentralized ledger technology that underlies its existence.
Barriers for blockchain implementation remain significant, including data privacy, security, regulation, scalability, and governance challenges.
Lost identities are also a major problem—without a central authority there is no dispute resolution clearinghouse. Dispute resolution has historically been the responsibility of institutional companies leading investments, and owners and developers will have to account for this reality.
Blocks are Not a Fad
While Fifth Wall’s bet on Harbor was a vote of confidence for proptech investing, it’s not only real estate industry investors backing the future of blockchain.
Venture capitalist Fred Wilson believes “that decentralization is the right technology arriving at the right time...” His firm, Union Square Ventures, lists “enablers of open and decentralized data” as a bucket of interest in its investment thesis. Meanwhile, Andreessen Horowitz announced the z16zcrypto fund, “a $350M venture fund that will invest in crypto companies and protocols.” One of their partners, Chris Dixon, is betting on a decentralized internet because a big percentage of the smartest engineers are working on blockchain ideas on the weekend.
Support for blockchain is growing. Startups are launching. Money is being invested here, too. The potential for massive revolution resulting in more efficient, liquid, and transparent capital markets is clearly there. Founded in 2013, the International Blockchain Real Estate Association helps companies far and wide bring blockchain to all corners of the industry, and it now numbers more than 5,000 members worldwide.
Everything hinges on adoption. Who will execute on the conceptual wins we all know are lingering? That’s the multi-billion dollar question. And that’s why 20% of engineers continue burning the midnight oil on blockchain ideas to revolutionize the largest asset class on earth.