Blockchain technology can bring positive change to the real estate sector
Global investment volume in commercial real estate fell 3.2% year-over-year in the second quarter of 2018 according to the recently published CBRE «Global Investment Volume on Par with Last Year» report. Investments could have been higher if blockchain technology was implemented by the main players on local property markets.
While real estate is still the major asset class in the world accounting to over $220 trillion dollars in size, capital intensity, illiquidity, slow transactions, high costs and geographical limitations for smaller investors are the key problems prohibiting investment growth in the real estate market. There are over $750 billion of transactions happening in this sector every year. Real estate has also been proven to earn a stable income with low volatility. This is why for decades it has been among the favorite sectors of many large investors such as banks, insurance companies and money management firms.
But since commercial real estate is expensive, smaller investors can not receive the same level of returns as larger investors. Why so? Retail investors pay collective management fees for schemes such as mutual funds, in additional smaller investors cannot invest internationally. The other problem with real estate is that unlike the stock market it is illiquid and both larger and smaller investors have to wait until the end of investment period which, on average, can last for 5 to 7 years.
Blockchain has the potential to change the basic principles of existing real estate processes in a positive way. In a sector with high entry barriers plagued by middlemen and characterized by inefficient processes, this technology is able to democratize real estate ownership, while restructuring the process of managing real estate and transferring digital asset holdings in the process. It can turn a perspective gimmick into a financial instrument that would be eagerly developed by whole economic sectors. Blockchain can help in the organization of new register forms and property titles as well as formalizing transactions in the real estate sphere.
The blocks entered into a blockchain system will authenticate the process of transferring ownership rights from one property to another as payment details, contracts and owner’s details are verified. Blockchain technology can power a decentralized cryptography-secured database that stores a registry of assets and transactions across a peer-to-peer network. The Ethereum blockchain in particular allows for smart contracts, enabling the creation of tokens or digital equivalents of claims on practically any real world assets — both have applications to real estate, making the industry more efficient.
Here are some of the other ways in which blockchain benefits real estate investing:
1. Ability to tokenize assets expands investor universe: Any amount of tokens can be issued against a specific real estate asset and would represent the value associated with this asset. This allows smaller investors to cherry-pick assets of their choice, buy any amount of tokens and receive rental income. This similar to crowdfunding concept also increases the speed and the value of any such transaction. In the real world it is only possible through investing into units (shares) of real estate funds (REITs), which do not allow to select specific assets and are bounded by geography and fund manager’s investment declaration.
2. No geographical boundaries to invest: Tokens can be sold practically in any jurisdiction (with some limitations). They are easy to buy and sell and provide cross-border simplification. For example, a person in Brazil can buy tokens issued against an office building in Germany which is occupied by a top-tier financial institution and receive rental income in stable currency. A great way to diversify anyone’s investment portfolio, isn’t?
3. High level of liquidity: Tokens can be traded on crypto exchanges, which give them a premium level of liquidity. This would imply, that a person can easily sell his tokens with the attached rights to property should he change his mind or find a more interesting investment proposition.
4. Increased transaction speed and more efficient property management: Transacting and managing real estate properties involves several entities such as buyers and sellers, tenants, operators, lenders, lawyers, brokers and other service providers. Blockchain enables an easy data gathering and transfer of tokens in any amounts free of barriers as all of the above parties can provide, access and modify a variety of information through the records of a decentralized public registry.
5. Shortening the chain of middlemen: Blockchain-based smart contracts help find, purchase and register any real estate based on the records of the blockchain public ledger and without the need for traditional middlemen including real estate agents, lawyers and notaries, thus saving money to transaction parties. Transactions are carried peer-to-peer faster and cheaper. This is also due to the highest level of security, as the blockchain allows for transparency and irreversibility of transaction terms stated in the smart contract. Risk of fraud is eliminated. The blockchain can also help reduce the risk through digital identities and more transparent and safe record keeping systems for real estate. During fundraising, services of middlemen such as banks, insurance companies or standard exchanges are also eliminated.
For someone who has ever contemplated taking a shot at the lucrative real estate market but found himself somewhat ‘short on ammo’, coming to the conclusion that the higher risks and lower returns would make it worth their while, the recent advances brought by blockchain mean that now would be a good time to revisit this idea. Thaler.One is a blockchain platform for global real estate investments, our team plans to revolutionize traditional real estate investing and offer a whole new class of geographically diverse retail investors the benefits made possible through blockchain and further strengthened by diligent legal compliance and our team’s strong industry expertise.