Real estate is the largest asset class in the world. Commercial enterprises and real estate professionals are recognizing the transformative impact of blockchain technology to optimize retail and commercial property sales, streamline payments, and increase access to real estate funds and investment opportunities.
What are the Benefits of Blockchain in Real Estate?
Commercial real estate constitutes a significant portion of world economic asset and transaction activity. According to an MSCI report, the size of the professionally managed global real estate investment market increased from $7.4 trillion in 2016 to $8.5 trillion in 2017. Today’s real estate market however, consists of many siloed and independent networks with transactional friction and opacity between existing systems. The Ethereum blockchain presents a practical solution to realize the following industry benefits:
- Tokenization of real estate assets
- Process efficiency for underlying industry operations
- Reduced costs from process automation
- Access to global asset distribution
- Access to broader investor pools due to ownership fractionalization
- Access to secondary market opportunities
- Data accessibility to increase transparency and inform better investment decisions and portfolio management
One of the most exciting ways Ethereum benefits the industry is through the digital securitization of real estate properties, also known as tokenization. Digital assets can represent real-world assets such as real estate, real estate funds, revenue streams, governance rights, and more. Once these assets are tokenized, they can be divided into more granular pieces, made accessible to a wider pool of investors, and leveraged to raise capital. Once tokenized, the programmable Ethereum blockchain enables the secure and compliant digitization of the transactions and processes around these assets, including issuance, trading, and lifecycle management.
In the real estate market, the advice, knowledge, and know-how of real estate professionals will remain crucial to commercial buyers. However, the processing of securities, liability management, document processing, and accounting will inevitably change.
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What are the Blockchain Use Cases in Real Estate?
Enterprise blockchain technology transforms the real estate industry with ten use cases:
- Asset Management and Real Estate Funds
- Project Financing
- Loan and Mortgage Securitization
- Property Management
- Land and Property Registries, Sales, and Reassignment
- Urban Planning
- Property Development and Construction
- Investor and Tenant Identity
- Payments and Leasing
- Real-Time Accounting
How does tokenization impact real estate funds and asset management?
In real estate, tokenization refers to the digitization of securities, alternative assets, and financial instruments. With Ethereum blockchain technology, digital assets can be programmed to include ownership rights, transaction history, and rules to ensure asset issuance, distribution and transfers are regulation compliant. Simple examples include controls to ensure that tokens can only be transferred to certain counterparties, or not at all during a lock-up period. Digital assets can be customized to meet all kinds of issuer requirements.
In addition, tokenization reduces the costs and increases the speed of creating, issuing, and exchanging assets, innovating new features, administering dividends and managing other corporate actions. In-depth customization and rapid issuance allows issuers to tailor digital assets directly according to investor demands, significantly reducing counterparty risk.
Reduced costs allow issuers to decrease minimum investment amounts and expand access to a wider pool of investors. Increased connectivity between digital assets and associated networks expands secondary market opportunities and improves liquidity. These benefits to both issuers and investors demonstrate the real promise of blockchain is a future with fundamentally new instruments and markets.
Mata Capital Product Development Manager Baptiste Saint-Martin explains how blockchain technology is digitizing and optimizing real estate asset management to decrease minimum investor subscription amounts to €1.
Mata Capital: Catalyzing real estate investments with blockchain technology
Blockchain for real estate asset management. French investment fund, Mata Capital, partners with Codefi Assets to tokenize three funds worth a combined total of €350m, promoting trust, transparency and efficiency for real estate investors.
How does blockchain impact alternative financing for real estate?
Raising finance for new real estate projects is difficult. Property development firms face interest rates as high as 29% when working with banking institutions as single source loan providers. They also face challenges with multiple loan sources as crowd financing can be difficult to administer.
Blockchain simplifies access to alternative financing models by facilitating investor management for developers and ensuring investment transparency and continuous ROI tracking for investors. Blockchain based financial products can also be programmed for global distribution. These solutions simplify investor experience, increase investor confidence, and unlocks access to a wider investor pool.
How does blockchain impact loan and mortgage securitization?
Loan origination and underwriting remain unstandardized and reliant on paper documentation. Security structuring is left open to interpretation, and great effort is required to protect against double-pledging of assets. Trading and asset servicing decisions are often made based on outdated data. And lastly, cash reconciliations across lifecycle events often incur settlement delays impacting investor cash flow.
Blockchain offers banking institutions a single version of verified information, secure data sharing, immutable transaction monitoring, and real-time payment settlement. By digitizing a loan or mortgage, it can be programmed to include relevant data such as ownership rights and loan payment history to support future servicing decisions. Smart contracts can be utilized to collect and distribute payments to beneficiary holders, and deliver real-time reporting to regulators. This delivers efficient lifecycle management and generates confidence in secondary markets by providing investors proof of asset performance.
How does blockchain impact property management?
Large scale property management firms endure inefficient oversight of their global portfolios. Blockchain facilitates secure data sharing, streamlines rental collections and payments to property owners, and also provides premium due diligence across the portfolio. This increases operational efficiency and allows for time- and cost-savings. It also generates substantially richer data to facilitate better decision making.
How does blockchain impact land and property registries?
Land titles continue to rely on paper documentation, vulnerable to loss, fraud, and mismanagement. In addition, property transfers and permits require a multitude of lengthy and costly legal procedures, sometimes locking land in unproductive use.
Blockchain replaces outdated paper deeds with true digital assets and tracks changes on an immutable ledger that acts as a secure shared source of truth for documents between multiple parties and organizations. Ethereum enables transaction and property ownership records to be more accessible— facilitating market transactions, increasing investor confidence, unlocking access to finance, and promoting economic and social community development. Sweden’s land registry authority, Lantmäteriet, along with banks and industry players, have a fully-functioning blockchain-based digital land register platform.
HMLR: Exploring real estate asset tokenization in the UK
How does blockchain impact urban planning?
Property development almost always occurs without valuable input from the community. The public often feels disenfranchised from planning processes, unable to express preferences for the local community. Blockchain-based planning platforms can include educational resources, token-based participation incentives, and a feedback loop between stakeholders. This would encourage community engagement and better integrate local communities in the property development value chain, improving public confidence, and improving developer services for sustainable success.
How does blockchain impact property development and construction?
Larger construction projects have become increasingly difficult to manage with fractured sub-contracting and procurement practices and a lack of supply chain transparency. A blockchain platform can simplify procurement with reputation management for suppliers and subcontractors, incentivizing high performance. Smart contracts can automate contract agreements and payment terms to enhance financial management. Blockchain can prove the authenticity of premium goods at their point of origin by associating products with non-fungible tokens and using these as digital blockchain certificates. Lastly, blockchain can streamline project management by digitizing end-to-end processes. This will enable construction managers to securely track and share project status with key stakeholders and minimize bottlenecks, allowing for more efficient project management.
How does blockchain impact investor and tenant identity?
Blockchain-based digital identities will be powerful across multiple industries, consumer applications, and within the public sector. Tenant and investor identities from mutualized blockchain-based KYC/AML procedures can streamline background checks, reduce costs, and increase security. Decentralized identities enable anyone to prove ownership of properties while making essential documents (proof of insurance, identity, credit history) easily shareable with necessary parties.
How does blockchain impact payments and leasing?
Distributed ledger technology enables leases to be signed and paid on-chain. This removes the need for manual reconciliations, and automates rental and dividend payments to property owners. Smart contracts can also automate other types of payments and fees to incentivize good behaviour from tenants, landlords, and service providers.
How does blockchain impact real-time accounting?
With property ownership and cash flows recorded on-chain, investors and asset owners benefit from automated and near-immediate accounting. In the future, the preparation of annual financial statements, such as the balance sheet, statement of cash flows, or income statement will be conducted with the potential for real-time audits. This enables multiple breakthroughs in compliance, regulatory oversight, and investor relations.
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