Many people know blockchain from cryptocurrency, bitcoin in particular. However, blockchain-based smart contracts can play a large role in CRE in the near future. Previously, transacting high value assets such as real estate exclusively through digital channels has never been the norm. Real estate transactions are often conducted offline involving face-to-face engagements with various entities. However, Blockchain opened up ways to change this. The introduction of smart contracts in blockchain platforms now allows assets like real estate to be tokenized and be traded like cryptocurrencies. (Liebkind, 2020)
Blockchain is a decentralized ledger of transactions through a peer-to-peer network. With this technology, users can make transactions without the need for a central certification authority (PwC, n.d.). Possible applications include cash transfers, transaction settlements, financing among many other. Smart contracts are computerised transaction protocols which autonomously execute the terms of a contract. Smart contracts are disintermediated and generally transparent in nature (Giancaspro, 2017). Therefore, smart contracts offers the promise of increased commercial efficiency, lower transaction and legal costs, and anonymous transacting.
How blockchain can be utilised within CRE
The demand for transparency, technology advancements and the disintermediation by start-ups is increasing. This is gradually making property-related information public in digital and paper form (Deloitte, n.d.). However, a significant portion of the digitized information is hosted on disparate systems, which results in a lack of transparency and efficiency, and a higher incidence of inaccuracies that creates a greater potential for fraud. Furthermore, the existing purchase and sale transaction process is complex and involves multiple steps. As such, identifying a property and closing a transaction can be a time-consuming affair and costly for buyers as well as sellers. Blockchain technology could enable the commercial real estate industry to address these inefficiencies and inaccuracies. Figure 1 shows an example of how blockchain can be used in a CRE purchase and sale transaction, and in a lease transactions. Green indicates steps which could utilize blockchain technology.
Figure 1: Using blockchain in a CRE purchase and sale transaction (first process shown) and a CRE lease transaction (second process shown). Source: Deloitte. (n.d.). Blockchain in commercial real estate The future is here! Deloitte.
According to Deloitte (n.d.) there are six main use cases for improving the leasing, purchase, and sale processes of CRE through the use of blockchain:
- Improve property search process
A blockchain-based multiple-listing service (MLS) would allow data to be distributed over a peer-to-peer network in a way that would allow brokers to have more control over their data in conjunctions with more trust, as listings would be more freely accessible. This blockchain-based MLS could provide, among others, clear details about property location and address, comparable rents, capital values, ownership history, details about tenants, age of property. As a result, market participants could access more reliable data at a lower cost.
- Expedite pre-lease due diligence
Market participants in the real estate industry may consider developing digital identities for a real estate property to keep pace with the growing preference for digital transactions. As the name suggests, a digital identity related to a real estate property would involve a digital identifier that aggregates information such as vacancy, tenant profile, financial and legal status, and performance metrics in digital form.
- Ease leasing and subsequent property and cash flow management
The traditional lease contract may change to a smart tenancy contract. The use of a smart tenancy contract on a blockchain platform would enable transparency in lease terms and transactions. The contract could use rent or bonds for automated payments to property owners, property managers and other stakeholders, along with near real-time reconciliation.
- Enable smarter decision-making
Blockchain technology can form the connection between technology systems of CRE companies and other participants in a lease transaction by providing a more open and shared database for all parties involved. This would improve data quality and also allow for real-time capture and retrieval. As a result, CRE players can address a number of interoperability issues and use predictive analytics to extract smarter and near real-time insights from the blockchain data, which can ultimately improve the quality of leasing-related and real estate operation decisions.
- Transparent and relatively cheaper property title management
As mentioned before, blockchain-based digital identity of a property can include its history, location and ownership data. Typically, buyers and banks could potentially rely on this digital identity of the property for title assessment, as any change to the existing data would have to be made by consensus across multiple blockchain nodes. Also, the distributed, tamper-proof, and encrypted nature of blockchain will likely make it difficult for perpetrators to commit fraud related to liens, easements, air and subsurface rights, titles, or transfers. As a result, this increase in security and transparency can reduce both the risk of title fraud and the cost by simplifying the title review process.
- Enable more efficient processing of financing and payments
As explained above, blockchain can simplify the financing process during the loan application, documentation, due diligence and servicing phases. In addition, the execution of smart contracts on blockchain platforms would inherit all the benefits of blockchain, including a set of complete, immutable and traceable records, which provide audit trails of transactions such as ownership history, property cash flows and mortgage payments.
References
Liebkind, J. (2020, March 22). How Blockchain Technology is Changing Real Estate. Retrieved from Investopedia: https://www.investopedia.com/news/how-blockchain-technology-changing-real-estate/
PwC. (n.d.). Blockchain in Real Estate. Retrieved from pwc: https://www.pwc.at/en/digital-real-estate/blockchain-in-real-estate.html
Giancaspro, M. (2017). Is a ‘Smart Contract’ Really a Smart Idea? Insights from a Legal Perspective. Computer law & security review, 33(6), 825-835. Retrieved from https://www.researchgate.net/profile/Mark-Giancaspro/publication/317354410_Is_a_’smart_contract’_really_a_smart_idea_Insights_from_a_legal_perspective/links/5c2d5891a6fdccfc707902d8/Is-a-smart-contract-really-a-smart-idea-Insights-from-a-legal-perspective
Deloitte. (n.d.). Blockchain in commercial real estate The future is here! Deloitte.
