In 2009, a mysterious person (or persons) named Satoshi Nakamoto published a white paper that introduced the world to bitcoin—a digital payment system that eliminated the need for financial institutions. For the cryptocurrency to work, transactions would need to be recorded in a database known as the blockchain.
In 2011, the first bitcoin “bubble” took place when a single coin reached a value of $31.00. In December of 2017, the value of a bitcoin reached a high of over $19,000.00, indicating the success of blockchain technology’s first primary use case and opening the door to further innovation.
This presents an opportunity in the commercial real estate space. Historically known to resist change, a new generation of startups are building applications on top of the blockchain that will disrupt the industry and force us to rethink the concept of value.
Steve Weikal is Head of Industry Relations at the MIT Center for Real Estate. He also lectures and conducts research on innovative new technology and business models that disrupt the traditional ways of developing, transacting and managing real estate.
Weikal describes the blockchain as a trusted, general ledger. “In a building, all the information (mortgage documents, title deed, surveys) can exist in one digital record, and that record is duplicated in hundreds, if not thousands of nodes around the world,” he says.
This duplication of records makes the blockchain unhackable. “Because it exists in multiple versions, anytime somebody attempts to make a change, everybody can see it,” Weikal says. “That maintains the integrity of the system. The blockchain is to transactions what the internet is to information” he adds.
The ability of an electronic, decentralized ledger that can store hack-proof records is what allowed bitcoin to thrive. Blockchain continues to serve as its main accounting system and it is this very concept that is now being applied to other sectors.
Weikal sees the potential for blockchain to disrupt the financial aspect of real estate. “Not digital currency, necessarily, but just imagine how important it is in real estate to know where the money is, where it came from, who really controls it, who owns it, where is it stored, and when it gets passed off,” Weikal says.
This is huge. If property transactions have a trusted source on the finance side—a source that is not your traditional institution but perhaps a fintech company that automates much of the protocols—deals could be completed at blazing speeds. And with smart contracts and electronic signatures in place, the potential for fraud is practically eliminated.
Blockchain technology will also improve the process of recording ownership in the land registry. Weikal calls it the intersection of legal tech and real estate tech. “All the paperwork that exists in the system can be digitized,” he explains. Imagine the time saved completing real estate transactions and the confidence knowing a property’s title is free and clear.
And in foreign markets, the opportunity is even greater. “There are trial programs in countries where they don’t have this archaic Western recording system on ownership of real property,” he adds—in places like the Republic of Georgia in Brazil, where the entire legal structure of property ownership can be redefined.
Last month, the Knox Group of Companies announced a real estate development in Dubai that will accept Bitcoin as payment. In Texas, Kuper Sotheby’s International Realty became the first brokerage in the State of Texas to close on a home entirely with Bitcoin.
“It’s happening now,” Weikal says. But the potential is so much more, and it will depend on our imagination to see where it goes. Weikal brings up LAToken?—?a U.K. company that ‘tokenizes’ and makes fractions of assets ranging from real estate and loans to artworks.
“They want to frack assets so investors can own a hundred-dollar share in a piece of construction machinery and get a 3% return,” Weikal says. Companies are rethinking what we consider an asset, and in the process, creating new opportunities for creating wealth.
In the Netherlands, Securancy is working with MIT alumnus to standardize leases. “Say you have a tower, and it has 20 leases in it. If you can standardize the lease, authenticate it, and trust it through blockchain, could you strip the leases out and securitize them?” Weikal asks.
“That’s kind of cool, right? We do that with debt already—we strip debt payments out and sell the future cash flows, but we haven’t figured out how to do that with leases. What would that look like? That’s kind of provocative and interesting. That’s kind of where we are.”
The commercial real estate industry has not been known to embrace change. Deals are done a certain way and supported by incumbent systems and processes that have been around for ages. The question is, will blockchain break through these challenges?
It wasn’t until recently that funding in real estate tech picked up steam, increasing by 40% within the past 5 years, so it seems the market is ripe for innovation. This might be the catalyst that propels the industry into the digital age.
“Blockchain definitely isn’t going to look the same way it did originally, but it is solving really painful points in the process, and there’s a lot of money at stake,” Weikal says. Alongside IOT technology and AI, blockchain presents opportunities across every vertical of the industry to reduce friction and allow transactions to be faster, more reliable, and more secure.
A few years ago, no one imagined that we would use our cars as taxis or our homes as rental apartments. And yet, in the absence of policy or regulation, the need for these products and services survive by the sheer demand of its application.
The concept of blockchain technology has been introduced and tested in the market. It is being used in the exchange of goods and services and new applications are being built to expand the possibilities. The potential to change the commercial real estate industry in the years to come is exciting to think about.
*If you like this post, be sure to enroll in our free six week course on the fundamentals of commercial real estate investing — Enroll Now.*