Several businesses have lately discovered the sheer quantity of positive utility the blockchain technology in their space. One of these industries happens to be the property market. Real estate is still the largest asset class in the world. According to Fortune, London-based property advisor Savills tallied up the value of global property, including residential and commercial property and forestry and agricultural property. By their calculations, the whole global property evaluation includes a whopping $217 trillion total, and residential property constitutes about 75% of their complete value.
Note: These figures were calculated back on 26 January 2016.
Yolande Barnes, head of Savills world research, stated,”To provide this figure circumstance, the complete value of all of the gold ever mined is roughly US $6 trillion. This sum pales compared to the complete value of developed land by a factor of 36 to 1″
There was a crucial conclusion that Savills made out of their analysis. Since Barnes puts it,”Property is the pre-eminent asset class which is impacted by international monetary conditions and investment activity and which, consequently, has the ability to the majority of impact national and worldwide economies.” Essentially, property has and will continue to play a massive role in the global market.
However, as with the majority of traditional heritage businesses, some issues are seriously affecting the real estate market. Let’s look at a number of those pain points.
The Biggest Problems with the Traditional Real Estate Industry
#1 Not open to everyone
Real estate has been the investment option of the wealthy. Hardly any assets manage to offer the same amount of passive income and capital appreciation. The thing is that the barrier of entering the real estate market has always been exceptionally high. These obstacles could be citizenship, global bank account, Credit Score, funding, cash requirements, certification, and having availability to the perfect sponsors and fund managers.
If you’re planning to invest in a different country, you’ll need to make at least one international trip and also to visit the property. You’ll need to spend a whole lot of time and undergo several middlemen to invest in the house of your choice.
#2 Acute lack of transparency
The Panama Papers controversy showed us the depth of corruption and dishonesty in the real estate business. A greater level of transparency may combat corruption, tax evasion, and money laundering. According to the United Nations, $800 billion — $2 trillion USD is laundered globally each and every year. A substantial amount of it’s laundered through property. The UN Office on Drugs and Crime estimated this figure to be in the area of $1.6 trillion in one year.
To understand why this is a significant problem, consider this — Based on Global Financial Integrity, nearly 80 percent of the estimated $1 trillion that leaves developing countries in those illegal financial flows, might be taxed to provide revenues for public spending on global challenges like climate and infrastructure change.
#3 High prices
If you’re investing in international real estate then below are a few of the fees you will need to cover — trade charges, transfer fees, agent fees, lawyer fees, taxes, investment fees, etc.. Due to the sheer number of middlemen involved, foreign property investment can be a costly procedure. Additionally, you will need to bear in mind you will have to consult attorneys and accountants as well to be certain your tax returns are in order.
#4 Lack of Liquidity
We come to one of the most crucial issues with real estate. They are notoriously difficult to liquidate. Liquidity is defined as how fast an asset or investment can be converted into cash. The reasons why property is not as liquid as crypto is because:
Cryptocurrencies can be recorded on a public exchange and sold quickly in open hours.
The amount of buyers for crypto is far more than for property.
Liquidity of an advantage is directly proportional to the distribution of their buyers. The problem with property buyers are:
Primarily, the barrier for entry is extremely high when it comes to property.
They are not looking to get any property that is far away from where they reside (except in the case of global property.)
Real estate transactions have loads of third parties involved so the trades are bogged down by regulations and fees. This discourages potential buyers.
Even in case you do find a few buyers, you’ll be locked up in a protracted trade process, and the odds are high it will end in failure.
#5 Replies Commitments
Real estate investment takes a whole lot of backing up front. More often than not, investors need to check at expensive alternative methods of funding. Also, in regards to international real estates, having an exceptional credit score on your native country, will not carry over to the country you would like to invest in.
#6 Transaction Speed
Like we’ve mentioned multiple times, property transactions can be exceedingly slow. Based on Juwai Chinese Consumer International Travel Survey, 56 percent of Chinese investors spend more than one year finding their perfect US investment property. Generally speaking, it may take you six months to discover a property and another six months to meet all of the formality required to acquire it.
Keeping all these factors in mind, you can see why the real estate sector is prime for disturbance. This is where the blockchain comes in.
Blockchain Technology and Real Estate
A blockchain is, in the simplest of terms, a time-stamped collection of immutable record of information that is handled by a bunch of computers not owned by any single thing. All these blocks of information (i.e. block) are secured and bound to each other using cryptographic principles (i.e. chain).
The three main properties of this blockchain are:
Decentralization: All of the information that’s stored within a blockchain isn’t owned by one single entity.
Transparency: All of the information that is stored within the blockchain can be understood by everyone who’s a part of the network. Each and every piece of information can be traced to its very source.
Immutable: All of the information that is within the blockchain can’t be tampered with due to cryptographic hash functions.
The blockchain brings in a Number of utilities to the real estate ecosystem, chief among them being:
- Smart Contracts
- Smart Contracts
Wise contracts are automatic contracts. They’re self-executing with particular instructions written on its own code that get executed when specific conditions are made. Wise contracts are a collection of instructions, written using the programming language”solidity,” which works with the IFTTT logic aka the IF-THIS-THEN-THAT logic. If the initial set of directions are done then implement the next function and then the next one and continue repeating until you get to the end of the contract.
The best way to comprehend that is by imagining a vending machine. Every step that you take actions as a trigger for the next step to do itself. The main part of this whole interaction is that you (the purchaser ) is calling directly with the vending machine (the provider ). At no point are you currently coping with a shopkeeper (a middleman.)
Plus, keep in mind that smart contracts are made on a blockchain, making the contracts immutable and transparent (unless privacy attributes are used). Let us go through the significant advantages that smart contracts can provide.
Benefits of smart contracts
The most obvious advantage is that it will cut off most of the middlemen. Imagine how much money you can save by cutting out all of the agents, banks, and lawyers. With them not collecting their regular 2-5% reductions, you’ll be saving up a little fortune.
Smart contracts will also substantially accelerate real estate transactions. LIke we’ve mentioned previously, property transactions can take weeks on end, and that’s mainly due to the huge quantity of bureaucracy, middlemen, and lack of transparency that you will need to go through.Realistically talking, smart contracts won’t wholly eliminate local government regulations, but it is going to remove middlemen, as mentioned above.Plus, all of the various data concerning the property can be stored as a hash file inside the blockchain. If you’re interested in knowing more about a specific property, you are able to exploit the blockchain’s transparency to trace all of the information you want. Imagine how long that will save compared to the more traditional middle-man strategy.
Ultimately, smart contracts may protect owners from fraud. It’s possible to link the digital possession of your property, documents, and contracts directly to the blockchain. Once within the blockchain, it’s not possible for it to be tampered with or altered.The governments of Andhra Pradesh and Telangana in India are using the blockchain technologies to fight against land fraud. We’ve covered this in detail here.
According to Wikipedia,”Tokenization, when applied to information security, is the practice of substituting a sensitive information component with a non-sensitive equal, known as a token, which does not have any extrinsic or exploitable significance or value. The token is a reference (i.e. identifier) that maps back to the sensitive information via a tokenization system”
Essentially, a token is a digital representation of a real-world advantage, worth, or function. One of the most exciting use-cases of blockchain technology is that it assists in the tokenization of real world resources. This tokenization won’t only boost the liquidity of traditionally illiquid assets, but it will also make it feasible to trade those assets with no third-party. Consider it, instead of purchasing a property, you’re buying simple tokens from a market.
Does this look a little too far-fetched for you? Well, according to the World Economic Forum, in another ten decades, 10 percent of the world’s GDP will be saved in crypto assets. That is $10 trillion worth of assets saved as tokens.
Deeper insight into tokens
Tokens in the blockchain space generally fall under three categories:
Payment Coins: These are the”cryptocurrencies” that we’re all familiar with. Bitcoin, Litecoin, Ethereum, etc. could be applied as money both inside and out of their stage.
Utility Tokens: Tokens that meet a specific utility or function in their platforms are called utility tokens. Utility tokens may give holders a right to use the network and/or take advantage of this network by voting within the ecosystem. Golem’s GNT is a good example of a utility token.
Security Tokens: A token that derives its values from an external, tradeable asset is called a security token. These are subject to federal regulations and securities. This is the category which is used to tokenize real-estate.
Fractional Ownership via Tokenization
One of the most interesting outcomes of tokenization is fractional ownership. This is particularly intriguing when it comes to expensive assets such as real-estate. Instead of one person owning one land, it can be possible for a number of people to purchase tokens of their property and co-own the construction.
To know how this will work, let us take a hypothetical example.
A typical Malibu beach home costs ~$650,000, which is from their budget for most people. But, suppose the vendor tokenizes the home. After that, five individuals each $130,000 worth of those tokens each and collectively own the home. When the transaction is finished, these five input a multi-signature smart contract depending on the possession of the home.
A multi-signature smart contract will ensure that whatever decision is taken with regard to the home is agreed upon by a vast majority of the owners. Since the contract is self-executing and enforceable, it won’t need any supervision and will induce the joint-owners to be honest.
Advantages of tokenizing property
Fractional Ownership reduces barriers to entry by a staggering amount. Real estate doesn’t have to be the playground for the wealthy anymore. Instead of saving up and accepting loans to buy one expensive asset, you can just buy one-fifth of that advantage. A multisignature smart contract will be certain the joint owners adhere to honest conduct.
Tokenization increases liquidity by a substantial margin. Instead of waiting indefinitely to sell your house, you can visit a market and liquidate your tokens.
It allows for greater portfolio diversification and risk reduction. Instead of locking up all your money in one single property, you may use the identical money to get fractions in a number of properties.
How Will Blockchain Change Real Estate?
The blockchain technology will allow for the democratization of real estate properties. It’ll open up the gates for prospective investors from throughout the world to try their hands in real-estate investment. If implemented properly, then this can be hugely helpful for the crypto-space also, because it is going to raise the real-life utility of tokens. The frightening part is that we’ve only scratched the surface of what might be possible through the marriage of blockchain and real-estate. Hopefully, we’ll see more exciting use-cases shortly.