Blockchain in Real Estate

  • By Jan Breker in Research
  • 04 Aug 2020
  • 7 min read

Real estate is one of the most important sectors of the economy from a global perspective and has a large impact on the livelihoods of many people throughout the world. The real estate sector plays a crucial role in all countries' economies, and the gravity of this massive industry becomes clear when one looks back at the crash of the US housing market, which led to the longest and deepest economic recession since the Second World War.

Real estate is now a trillion-dollar industry, as well as the largest asset class in the world. Over the last few years, it has consistently achieved positive growth. Just the professionally managed global real estate investment market increased from $8.9 trillion in 2018 to $9.6 trillion in 2019 [1]. However, real estate is not only an investment object but often the largest capital outlay in a person's life. It lays at “the intersection between big capital and big humanity” [2], offering vast opportunities for both enterprises and individuals. Blockchain technology can have a significant impact on this industry and can assist both enterprises and individuals in solving the existing challenges in the real estate industry.

 

Challenges in Real Estate

Despite the size of the industry, the process of buying, selling, and valuing real estate is rather opaque. For many, it is difficult to access the true value of a property and to understand the idiosyncrasies of the housing market. Today, many transactions are still paper-based and involve numerous parties, leading to decreasing transparency and increasing costs. The real estate market consists of many siloed and independent networks with transactional friction and obscurity between them. In this context, there is a great deal of potential to improve the process of real estate transactions by increasing both efficiency and transparency.

The real estate market has been used by criminal organizations for many years. Between 15 and 30 percent of all proceeds from criminal activities are invested in real estate [3]. The intransparent nature of real estate transactions allows activities, such as money laundering to persist.  According to Transparency International and Global Witness [4], over 87.000 properties in England and Wales are owned by anonymous companies registered in tax havens. According to these same organizations, at least £4.4 billion worth of property in the UK has been bought with suspicious wealth. In Germany, about €30 billion of international money with an unclear background entered into the real estate market in 2017 [5]. Despite measures introduced by governments, money laundering remains a big problem in the industry.

This issue coincides with the low degree of digitization concerning land and ownership registries, of which some are still paper-based. As a consequence, these can still be lost, destroyed, falsified, or easily manipulated.

Real Estate has been considered to be a profitable investment object for many years now and has provided impressive returns, including its capability of creating passive and stable income, coupled with providing tax advantages. However, the majority of the population does not have access to this investment possibility. The barriers to entry are still very high which prohibits many individual investors from investing in real estate. As a result, it is mostly large corporations or the wealthy who have access to this market. For smaller investors, it is often too expensive and too risky. The average person only buys real estate for residence purposes, as opposed to using it as an investment. Moreover, real estate is also one of the most illiquid investments, which means that it cannot be sold quickly without a substantial loss in value due to a lack of potential buyers. Once committed, it is difficult to turn back. This contributes to the difficulty of non-wealthy investors to join in. Benefiting from real estate is quite difficult without having a high financial backup or taking a large amount of risk.

 

Benefits for Enterprises & Individuals

Blockchain technology can have a significant impact on solving these challenges, as it has the ability to benefit enterprises as well as individuals in many ways. The key characteristics of blockchain technology, decentralization, and immutability, play a primary role in this context. Decentralization means that data stored on the blockchain is visible to everyone, and immutability refers to the fact that this data cannot be tampered with or changed by an individual. These very important features lay the foundation for efficiency and transparency in ways that have never been attainable before in the real estate industry. Through blockchain technology, real estate transactions can be automated, accelerated, and traced, as well as becoming more accessible.

 

Blockchain makes the transaction process more efficient and cuts costs

Currently, purchasing and selling real estate is a slow and expensive process and changes can not be done easily. Blockchain technology can make transactions of real estate more efficient and less costly by reducing the number of intermediaries. Transactions facilitated on a blockchain can be made within minutes and cost only a fraction of its current price. Expensive intermediaries, such as real estate agents, appraisers, and notaries are cut out of the process. Moreover, it can make the market more integrated and can eliminate currently existing database silos which are very common in the industry. By compiling data from various stakeholders in a blockchain-based database, buyers, sellers, and observers can easily get an overview of the market, analyze the value of properties faster, and consequently, can both enhance and speed up the decision making process.

 

Blockchain makes the real estate industry more transparent

Blockchain technologies’ immutable and decentralized nature can have a significantly positive impact on the transparency within the real estate market and can assist in combating money laundering and tax evasion. Through blockchain technology, documents, and events during the purchase of a property can be tracked, contracts become readable, and registries cannot be changed afterward. Furthermore, it also establishes an all-encompassing overview of where investments come from and who the actual owner of a property is. As a result, it becomes more difficult for criminal organizations to launder illegally obtained money through the purchase of properties. By facilitating real estate transactions on a blockchain, it also becomes impossible to hide the value of property transactions from tax authorities. In addition, blockchain technology helps companies and individuals to access the actual value of properties and facilitates an easier due diligence process before the purchase of properties.

 

Blockchain makes real estate investments more accessible

Blockchain technology enables new ways to invest in real estate which benefits companies as well as individuals. New business models lower the barriers to real estate investing for individuals and allow companies to raise funding more easily for projects. Blockchain technology allows individuals and companies to purchase and trade only fractions of a real estate, and in turn, enables fast and easy transactions of ownership. This creates liquidity and ultimately makes the real estate industry more accessible. This fractional ownership is often defined as tokenization.

 

Tokenization

Tokenization refers to the securitization of digital assets. It is a process in which blockchain tokens are issued to represent real-world assets, such as bonds, commodities, artwork, and real estate. Tokens can be programmed to include ownership rights, rules, and transaction history and can be traded on a secondary market; similar to cryptocurrencies and stocks. After an asset has been tokenized, it can be divided into more granular pieces, hence it becomes available to a larger audience. In the case of real estate, tokenization reduces costs of investments, allows fast and easy transactions, and provides liquidity in an otherwise slow-moving industry. Consequently, it enables more people to invest in real estate, also investors with only minimal available capital. Moreover, real estate companies that issue tokens have a larger pool of potential investors available to finance a project and can innovate faster due to the lean process of raising money. Tokenization offers the possibility to establish new business models and make use of the secondary market. In conclusion, tokenization can benefit the issuer as well as the investor and ultimately makes real estate more accessible. 

 

Blockchain Technology Applied

Enterprises have already recognized the impact that blockchain technology can have on the real estate industry. More start-ups are emerging that develop new business models, and large real estate companies and capital investors are incorporating blockchain technology into their business portfolio. In addition, governments are also experimenting with blockchain-based registries. Some of the most well-known use cases of blockchain technology in real estate are those covering the tokenization of properties and blockchain-based registries.

 

Tigris Immobilien - Tokenization of Real Estate [6]

The German real estate company Tigris Immobilien GmbH partnered with Black Manta Capital Partners in 2020, with the goal of tokenizing high-end properties located in Berlin with a value estimated to be around $12 million. The project includes around 2000 m² of real estate, most of which are individual apartments. Parts of the properties will be financed via a real estate token offering (RETO).

Usually, investments in similar projects require hundreds of thousands of euros in investments. However, the minimum investment for RETO is only $500. In addition, investors will receive dividends from the initial and subsequent sale of apartments, they will gain preference during the sale, and will receive around 20 percent of the total profit of the project.

While this project is reserved for German and Austrian investors, Black Manta Capital Partners will carry out more token offerings throughout 2020.

Benefits of the Initiative:

  • A larger pool of investors.
  • An easier way to finance the project.
  • Low transaction costs.
  • Low barrier to invest in real estate.
  • Professional opportunities for the regular investment community.

 

Sweden - Blockchain for Land Registry [7]

Lantmäteriet is the Swedish mapping, cadastral and land registration authority, that is responsible for guaranteeing the security of ownership of Sweden’s real property, which has been exploring blockchain technology for its land registry. Together with Telia, ChromaWay and Kairos Future, they introduced a pilot project in 2017 to study the possibilities of using blockchains as a technical solution for facilitating real estate transactions faster, with both more transparency and efficiency.

After the completion of the pilot project, they realized that blockchain technology can reduce the number of mistakes during the process significantly, which in turn can increase the likelihood of acquiring a property title, and hence reduce the time of the registering process from 4 months to a few days. In 2020, ChromaWay, the startup that was responsible for the technical part of the pilot project, started to expand into Latin America. It plans to strengthen blockchain standards, governance, and protocols for land transactions in Bolivia, Peru, and Paraguay [8]. 

Benefits of the Initiative:

  • Faster and more efficient processing of transactions.
  • No loss of data.
  • No manipulation of ownership.

 

Real Estate Blockchain Applications Built with Lisk

Enterprises, individuals, and governments can benefit greatly from exploring the potential of blockchain technology in real estate. Lisk provides the tools to experiment with this technology and to develop real estate proof of concept blockchain applications. Leasehold is a real estate company that created a business model around sharing income from short term rental. It used the Lisk SDK to develop its blockchain application and aims to connect it to the Lisk blockchain application platform later on. The Lisk Builders program can assist enterprises and developers in developing blockchain applications for the real estate industry.

 


[1] https://www.msci.com/documents/10199


[2] https://conferences.oreilly.com/strata/strata-eu-2019


[3] https://www.dw.com/en/german-law-targets-money-laundering-in-property-market


[4] https://www.globalwitness.org/en/press-releases/government-announces-new-law-bring-transparency-property-market/


[5] https://www.dw.com/en/german-real-estate-market-a-hotbed-of-money-laundering-transparency-reports


[6] https://www.securities.io/black-manta-capital-partners-tokenizes-12m-of-german-high-end-real-estate/


[7] http://ica-it.org/pdf/Blockchain_Landregistry_Report.pdf


[8] https://www.coindesk.com/chromaway-expands-effort-to-put-latin-american-land-records-on-the-blockchain


Jan Breker

Business Development Manager

International Business graduate and technology enthusiast