What’s going to happen with Real Estate + Blockchain

Summary:
1) Current situation of the Real Estate industry today
2) Blockchain initiatives/startups related to Real Estate
3) Where the world is going

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You might also want to read about the “Rent vs Buy” dilemma.

Introduction

There’s so much noise around Blockchain / crypto that it’s hard to discern exactly what’s going to happen to the Real Estate market.
Is everything going to be “crypto”? Are realtors going to disappear? Will we live in a perfectly “liquid” world, where you can buy a fraction of a house in the Philippines from the comfort of your home in Chicago?

Unfortunately, most opinions come from people belonging to disparate fields: traditional real estate, traditional finance, the tech world, and some libertarian crypto enthusiasts with very little connection to the real world.
It’s hard to know who’s right, or at least knowledgeable.

The goal of this post is to provide some answers.

What about Real Estate?

Biggest problems in real estate today?
Fragmentation. Illiquidity. Elitism.

Real Estate is the biggest asset class out there (I’m not counting derivatives), worth approximately $217 Trillion globally.

It used to be dominated by the US and Europe, but now emerging economies (particularly developing APAC) are taking a larger share of the pie:

Real Estate investments, by region, from 2004 to 2020, in USD trillion (source: PwC)

We know that the market is strongly fragmented (Fortune agrees)— a big pain for investors. You can hear stories about empty apartments purchased by affluent Chinese investors in Vancouver, and many similar ones.
Today it’s still VERY difficult to purchase (a piece of) a real estate property, either in your domestic market or abroad. There’s so much paperwork, due diligence, back and forth between banks and escrow services and agents, and so on.

Real estate: a very illiquid, almost “frozen” market

It’s also a very illiquid market, where the only “liquid” opportunity, public or private REITs (Real Estate Investment Trusts), represent approximately only 1% of the asset class. They are typically a “buy-and-hold” type of investment, and often underperform compared to other assets in the class.

(update #1, April 3rd, 2018: one of our investors showed REIT’s returns over the past few years, and noted that “underperform” might not represent historical returns properly. Duly noted)

(update #2, April 26th, 2018: REITs might be better off by shifting to a traditional C-Corp structure, due to the recent Tax reform in the US. To be noted this specific passage: “Because of their dividend payments, though, REITs are often forced to sell assets or turn to sometimes volatile capital markets to finance expansion and meet other needs.”).

It is also becoming more and more difficult to own the house you live in — some call this the “shrinking of the Middle class”. In the US, we are back at 1965 levels.

Home Ownership rates in the US (1960–2016) (source: US bureau of the Census)

Enter the Blockchain

Real estate problems? No worries, we have the Blockchain!

Jokes apart, many announcements and predictions related to “How the Blockchain is going to revolutionize Real Estate” typically fail to acknowledge the real nature of the problem.
Technology can only mitigate issues, as usual.
But let’s take a look at what is going on.

I present you a list of some relevant initiatives and startups (in casual order), with some brief personal comments on each one. If you see any omission or if you think I misrepresented something, let me know in the comments.

Crypto-Property startups

1. TrustToken: they tokenize any kind of asset (including real estate). I like their approach because it has several similarities with Fabrica’s (ours!), in particular their use of a legal “middle layer” (a trust).
2. Velox.RE: they completed the first successful pilot of a real estate transaction on the Bitcoin Blockchain, with Cook County (Chicago); they also founded the International Blockchain Real Estate Association. I haven’t seen much progress lately, but I am eagerly awaiting for news.
3. Atlant: a decentralized platform to trade in real estate assets using a proprietary token (ATL).
4. ChromaWay: interesting company with good track record; also now implementing the Swedish land registry on the Blockchain. Small market, but very interesting initiative.
5. BrickBlock: similar to Atlant: a platform to trade tokenized assets, including real estate. I like their work on Real Estate Funds (REFs).
6. Decentraland: a virtual reality platform on the Ethereum blockchain. I like these guys, especially their work on improving the ERC721 standard (non fungible tokens).
7. Propy: a marketplace where listed homes for sale can be bought with cryptocurrency. I don’t like the use case, as there’s no strict need for “crypto” to do it; but I am keeping a close eye on their progress, in particular their pilot in Vermont and some early results.
8. Ubitquity: an alternative to title companies, based on the Blockchain — although it is still unclear how transparent their solution is. When I see the Blockchain being used, I expect to be able to publicly view records of these transactions. (and no, I don’t believe much in “private” Blockchains).
9. SmartRE: fractional ownership, using proprietary tokens. I have reservations on their ability to respect local regulation. They don’t support properties with mortgages at the moment (and I don’t know if they ever will).
10. Caviar.io: mixes crypto-assets with income-generating short-term loans, backed by real estate. (I am not sure I want to mix these two, or that you need a token to handle a basket of different investments, but… the team seems to be strong and smart. We’ll see)
11. SALT lending: loans backed by cryptoassets. Impressive team.
12. BlockFi: loans backed by cryptoassets. (don’t know the team yet — it might be impressive as well :D).
13. Dharma.io: open protocol for tokenized debt. I like this one a lot. Solid team, and super-clear whitepaper.
14. Foam.space: proof-of-location protocol.

Zone Anchors in FOAM (credit: Foam.Space)

Besides these projects, and many others that I won’t describe here (Rentberry, Tokenlend, Propify, LAToken, PropertyCoin, RexMLS, etc. — I mean, the list never ends), there are still a significant number of unanswered questions, when it pertains to real estate + crypto, such as:

1. How can you perform KYC (Know Your Customer) and AML (Anti Money Laundering) for real estate transactions? (and possibly even CIP)
2. Can we benefit from 1031 “like-kind” exchanges (US only) when using some form of “crypto” infrastructure to buy and sell real estate? Or, for non-US persons, is your “crypto” solution as beneficial, from a tax perspective, as a traditional solution?
3. Is there a solution that can work seamlessly, across every jurisdiction and every country? (shameless plug: we are building one at Fabrica)
4. Can you be in compliance with current regulation in the real estate and financial industry? (e.g. Regulation D 506(c) in the US)
5. Can mortgages be applied to a real estate purchase on a “crypto” platform? A US-specific version of the question would have “Fannie Mae” in it.
6. What happens in court? Is your solution able to withstand the hardest, toughest case? Is it as solid as the (current) traditional system?

Where the (real estate + crypto) world is going

Where will Real Estate go?

It is very clear that the Blockchain represents an opportunity for the real estate industry.
Potential benefits include:

1. accurate land titles;
2. faster and cheaper transactions;
3. higher liquidity;
4. cross-border simplification;
5. better accountability and financial disclosures;
6. trading and fractional ownership.

First, any innovation HAS TO DEAL WITH existing regulation and players. An example? Tokenizing a real estate asset is quite simple from a technological standpoint. However, making sure it’s legally valid, and can hold in court, is a completely different beast.

Second, I reject the notion that an entire industry will be dismantled by a technical innovation. Banks will still be there. Title companies? You bet. Escrow services, realtor, mortgage companies? Same.
What will change, however, is their role in the process of transacting real estate, and their ability to charge for their services.

The players that (I think) will be damaged the most are title companies in the United States (a $16B/year market). They provide a great service, for a very UNREASONABLE price. In fact, they only pay ~5% of these revenues in claims; the rest is margin. It’s basically a legalized racket.

Banks and mortgage companies will offer a more streamlined and efficient service to home owners, and they will mostly benefit from a simpler “backend” to handle titles and transactions.

The increase in transparency and auditability will potentially reduce fraud (mortgage fraud, title fraud, etc). This is of great benefit for consumers, even though they won’t notice much (the Fireman’s paradox: when you have fewer fires, you think the Fireman is lazy and useless — you never notice the fire prevention policy itself).

Third, the Liquidity Premium offered by asset tokenization will also vastly benefit everyone in the space (some companies more than others), and bring large gains to first movers. (more by Stephen McKeon).

My expectation for 2018 is that a clearer legal/compliance landscape (not specific to real estate, but extended to the entire “crypto” space) will allow several initiatives to “make a dent” in the real estate market, and prove that it can possibly be the largest use case for “crypto”.
So far, the ONLY strong use case I see is “store of value”. The rest is simply potential.

So, to summarize:

1. Any innovation has to take existing players and regulation into account. And it will.
2. Some players will suffer. Others will evolve.
3. The Liquidity Premium represents the biggest opportunity for all players (old and new).

I will reprise some of the topics covered in future posts. I hope you enjoyed this post. I’m very interested in your comments and opinions.