Blockchain has had an impact on nearly every financial industry. While foreign exchange has been affected by cryptocurrencies, the stock market has faced the challenge of initial coin offerings (ICOs).
Real estate is not exempt. In the past, transactions took place in the real world, between face-to-face parties. However, now that blockchain platforms offer smart contracts, it’s becoming possible for real estate to be traded in the form of cryptocurrencies, such as bitcoin. So, how might this revolutionise the real estate industry?
A major one is all the intermediaries – including banks, lawyers and brokers – who add costs by charging fees. Moreover, the market is illiquid because settlement is such a long process. Finally, investing in real estate isn’t even an option for many people because buying usually requires a large amount of upfront capital.
How Can Blockchain Help?
Firstly, blockchain can remove the need for intermediaries, as new platforms can take over jobs like listings and legal documentations. For example, there’s a company called REAL based in the US, the Caribbean and Spain, which provides customers with dividend payouts on revenues earned on real estate and monthly audits. However, it hasn’t completely removed the expenses associated with intermediaries, as it charges a 10% fee for management.
Secondly, blockchain could see the market become fluid. If a real estate asset is turned into tokens, it can be traded straight away. There’s no need for the owner to wait. In fact, one company in London allows the purchase of tokens for construction projects, which gives the investor the right to revenues, once construction is completed and sold. Another idea of tokenizing the real estate is to provide a platform for property owners to register the ownership and issue tokens which can represent the share of the property. Anyone who wants to invest in property can be able to purchase its tokens on that platform.
Thirdly, fractional ownership could become an option. Rather than having to save capital, a potential investor would need only a trading app, which would allow them to buy and sell tokens, when and how they want to. In addition, investors could put their tokens together, in order to get access to more expensive properties. This is possible in Japan, where a company allows clients to turn their property into tokens, which are supported by the value of the power from a solar farm. Investors can buy these tokens, then receive dividends, which are distributed automatically through smart contracts.
None of this is to say that blockchain is without its limitations. One big question is the transfer of title deed and land registration from a government-run database to a decentralised system. This would be an incredibly complicated job, technologically, plus it would require legal changes in many places. In Australia, for example, the only way to change title is via deed.
Another important challenge would be ensuring standardisation. How would blockchain ensure that all exchanges were fair and efficient?That said, these obstacles are not impossible to overcome. What is clear is that real estate should be prepared for a shake-up.
Featured Image via Medium.com