The Blockchain and its application in the real estate industry
“Nothing is as constant as changes”, this quote by the Greek philosopher Heraclitus of Ephesus from 500 B.C. has by no means lost any of its significance since then, but applies even today to the real estate industry, which is rather conservative in terms of change. Christoph Berger even writes for the German magazine Focus: “The real estate industry must reinvent itself. And that’s what it’s doing. The right tool for real disruption: the Blockchain – or more precisely, distributed ledger technology. The technology and consulting firm Spacewell also comes to this conclusion: “The revolutionary effects of technology in real estate are becoming increasingly apparent. And the renowned management consultancy and auditing firm PWC also concludes: “In the long term, Blockchain will help to provide transparent portfolio and tenant databases in a decentralised and secure manner.
In this article our edeXa team wants to point out in which fields of the real estate industry we expect central changes through the integration of the Blockchain technology and furthermore what these changes might look like.
1. Acquisition of real estate, capital investment and real estate financing
In 2019, the first two buildings were successfully tokenized and the security tokens were afterwards sold to investors. One of the most serious disadvantages of investing in a property from the perspective of investors was the low liquidity associated with it. Transferring a property to block chain ledgers, splitting it into smaller mosaic pieces and making the shares available as digital Asset Backed Security Tokens creates a new way of investing in real estate that allows owners to sell shares on the open market without having to sell the property itself. In doing so, tokenization can lower the investment barriers that previously existed for retail investors to the nominal value of a single token, which can theoretically be as low as a few cents.
For the first time in history, exclusive real estate investments will become an investment opportunity for everyone. In summary, real estate based security tokens enable the proportional ownership of a building or plot of land, increase market participation and open up completely new financing possibilities for developers. Another factor that can be achieved with Blockchain technology is the highly efficient evaluation of real estate investments based on anonymous and comparable data. This saves the parties involved in a transaction financially costly, independent real estate valuations, as all available data can be easily accessed on the Blockchain, making the entire history transparent and traceable. This sounds easier in theory than it will in practice, but the free accumulation of data offers considerable advantages and economies of scale.
If you have previously signed a mortgage, you know how labor-intensive this process can be. With a variety of parties involved, such as financial institutions, notaries and estate agents, who can be involved in the process, the mortgage industry is very vulnerable to errors as well as rather costly.
With the introduction of Blockchain as a technology in this area, the need to rely on paper-based and individual communication can be reduced, saving not only money but particularly time. This exclusion of intermediaries not only benefits borrowers, but also financial institutions, which can offer more competitive prices and reduce staffing costs thanks to a lean lending process.
2. Project management and data collection
Let us imagine a project as a list of transactions between different parties. These transactions can represent any type of agreement, such as milestones achieved, payments made or targets set. All of these project-based transactions could be programmed as a sequence of intelligent digital contracts that are automatically executed when the respective requirements of an individual contract are met. Another application example would be an architectural firm, once it has delivered a predefined set of designs, the contract is marked as completed and payment is automatically triggered, which is then reflected in the total project cost.
Such project management could make all parties more accountable and create an unchangeable information and security basis for all those involved, from which all parties would ultimately benefit decisively.
It is known to be difficult and expensive for real estate companies and private buyers to check all the important details of a property before buying or selling. However, this also applies to almost all used sales. From used cars to used digital cameras. A look into the past of the good is often denied to the new buyer. Even though the majority of global real estate markets are becoming more transparent, there is still much room for improvement, especially through technology. Blockchain technology will do that job.
Blockchain technology could even be used to track the route of building materials throughout the life cycle of a building, from the factory to the demolition and recycling of parts, making it easier to trace the origin, quality and age of each part.
However, the entire real estate industry is currently undergoing a tremendous change. We often talk about so-called Prop Techs. Prop Tech is a collective term that defines start-ups that develop and offer technologically innovative products or new business models for the real estate markets. These can be innovative concepts on the block chain – but also any other technology. With the ability to store all building data such as repair logs or blueprints in a digital and secure location, the Blockchain can make it much easier for investors to perform their due diligence and check all property details. The edeXa Blockchain simplifies basic processes for companies and offers a uniform yet highly secure platform for the processing of services, payments and customer management.
3. Facility Management & Rental
The introduction of Blockchain technology offers completely new ways to track user information and improve the customer experience. A concrete application example is the Hilton hotel group, which recently introduced a block-chain based property management system. This particular platform allows the hotel to collect information about its customers in many different locations, while giving the customer more control to review and change their personal profile and preferences and ultimately benefit from personalized services while keeping their data protected and encrypted.
The rental process of real estate, as we have known it until now, could also be fundamentally redesigned by the Blockchain. Smart contracts for rent payment could be set up, structured in such a way that rent payments are automatically withdrawn as soon as the rent is outstanding. In addition, service charges could be calculated and billed in real time using data from IoT devices and electricity consumption records. This means less work for the landlord, payments on a daily basis and fewer unpleasant surprises for the tenant in the event of additional payments.
Source: Deloitte – “Blockchain in commercial real estate. The future is here!”
4. Real property rights
Conflicts over land as well as over estates are a present topic, especially in developing countries, which repeatedly lead to massive conflicts. Historically inadequate documentation or fatal natural disasters, such as Hurricane Matthew in Haiti in 2016, which destroy sensitive information, sometimes make it impossible for the authorities to understand who is legally entitled to which property titles. However, even in highly developed territories such as the USA or Europe, the granting of titles is always a challenge, as it is estimated that a quarter of the land registrations are incorrect. The fact that this figure is so high is due to central offline administration, which reflects fraud, errors and a lack of information.
Block-chain-based Smart Contracts offer a new alternative for the registration of land titles. Moving all documents to a decentralized and secure general ledger could be a much more efficient way to manage land ownership, avoid conflicts and ensure that records are not manipulated or get lost. Countries such as the United Kingdom, Sweden and Ukraine are currently leading the way in testing block-chain applications for recording national transactions.
5. Current challenges and outlook
Despite many possible use cases of Blockchain within the real estate industry and serious efforts by governments and companies to develop appropriate applications, there are still various obstacles to achieve broad acceptance.
The first obstacle is data-related: massive efforts are still needed to transfer data sets from real estate and the land registry entries of the federal states onto the Blockchain. Such data is currently still completely analogue in most places and it will take a lot of effort to digitise it completely.
Another challenge is that the Blockchain applications must comply with existing data protection laws. The European GDPR regulations, for example, include the right of every person to have their personal data deleted if they want so. This requirement fundamentally contradicts with the basic idea of a Blockchain as such, because a Blockchain is basically programmed in a way that it does not allow for this but stores data unalterably. Although there are initial scientific solutions to this problem, the latest findings still have to prove themselves in practice and in front of the courts.
Another obstacle to the introduction of the Blockchain in the real estate sector is the issue of interoperability. Comprehensive acceptance will depend on the interaction between many different types of private and public Blockchains. Different companies develop individual Blockchain solutions and there is a risk that in the future different marketable solutions could remain isolated from each other. Therefore, APIs and the interface capabilities of offered solutions will play a crucial role for the success of the respective solution. With the development of our Business Blockchain Platform, we at edeXa offer a revolutionary basic technology followed by applications for contract creation, management and storage. We rely on an open architecture for the edeXa Business Platform, so that every company can develop and extend its own applications and connect it to various other platforms and solutions.Lastly, there is the state or states respectively – almost all authorities in Europe and worldwide rely on little digital and outdated land registers. Without an endorsement by the respective governments, a real digitalization of the land registers will not be possible, because finally the legal capacity depends on it.
Even though there are still decisive challenges for the broad introduction of Blockchain technology in the real estate sector, from our perspective the associated advantages are so important that companies in the real estate industry should look into the possibilities and potentials at an early stage. edeXa offers excellent solutions for this, which considerably facilitates the everyday life of real estate companies, owners and tenants. We would be pleased to show you the comprehensive possibilities that the edeXa Business Blockchain offers in real estate management. Please do not hesitate to contact us.
In times of maximum globalization, the letter of credit is regularly used by companies to carry out international purchases and sales.
There are countless applications for the blockchain — our next use case is about the support of notaries and lawyers.