In a nutshell, Blockchain refers to a continuously expanding set of data known as blocks. Even if you are a highly experienced hacker, each block includes protected cryptographic data that is nearly hard to alter.
Each block has a timestamp as well as a plethora of transactional data, as well as a cryptographic hash of the block before it in the line. As a result, cryptography is used to connect all of the blocks.
Blockchain and Real Estate Sector
But why is blockchain expected to provide such a huge boost to the real estate industry?
First and foremost, it promotes confidence through increased transparency by utilising Distributed Ledger Technology (DLT). And with real estate, trust is crucial – in a website, an agent, or a listing. Additionally, blockchain speeds up contract processes, saves time, and lowers costs.
As the volume of real estate transactions is so high on a daily basis, a centralised database of leases and acquisitions is more important than ever. That is something that blockchain can deliver.
Upgrading the existing Multiple Listing Service (MLS) database to a blockchain-based ledger system will result in a significantly more transparent ledger system, allowing brokers and agents to see a property's complete transaction history.
Technology improvements and startup disintermediation are progressively making some of this information public in response to increased demand for transparency. As a result, property-related data is becoming more widely available in both digital and printed formats.
However, a large percentage of the digital data is stored on different systems, resulting in a lack of transparency and efficiency, as well as a higher rate of errors, which increases the risk of fraud.
The CRE (commercial real estate) market may be able to remedy these inefficiencies and errors using blockchain technology, which is a digital, distributed ledger that immutably stores and exchanges information.
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According to a 2015 World Economic Forum poll of 800 executives and professionals in the information and communications technology industry, 57.9% of respondents think that by 2025, blockchain technology would be used to store 10% of global GDP data. Until recently, blockchain was mostly associated with the technology that underpins Bitcoin.
Industry participants are already realising that blockchain-based smart contracts may play a bigger role in CRE, possibly changing basic CRE activities like property transfers (purchase, sale, financing, leasing, and management).
Blockchain adoption has the potential to have a larger influence over time, since it can be integrated to public utility services like smart parking, trash, water, and electricity bills, as well as enabling data-driven municipal administration.
(Must read: Types of blocks in blockchain network)
Advantages of blockchain in real estate sector
Advantages of Blockchain in real estate
Loan origination and underwriting remain unstandardized and paper-based. Security structure is left up to interpretation, and safeguarding against asset double-pledging takes a significant amount of work. Decisions about trading and asset servicing are frequently based on obsolete data. Finally, financial reconciliations between lifecycle events frequently result in settlement delays, which negatively influence investor cash flow.
Banking organisations can benefit from blockchain because it provides a single version of verified data, safe data sharing, immutable transaction monitoring, and real-time payment settlement.
A loan or mortgage can be programmed to contain important data such as ownership rights and loan payment history in order to help future servicing choices by digitising it. Smart contracts may be used to collect and distribute payments to beneficiaries, as well as provide regulators with real-time information.
This allows for effective asset lifecycle management and increases secondary market trust by providing investors with documentation of asset performance.
The real estate ecosystem has always included brokers, attorneys, and banks. According to a Deloitte research (Here), however, blockchain may soon usher in a transformation in their responsibilities and involvement in real estate transactions. Listings, payments, and legal paperwork are all services that new platforms might ultimately take over.
By eliminating middlemen, buyers and sellers will get greater value for their money since they would save on commissions and fees levied by these intermediaries. This also speeds up the process by eliminating the back-and-forth between these intermediaries.
(Suggested reading: How can Blockchain be used in Financial Services?)
Real estate has long been considered an illiquid asset since it takes time for sales to conclude. This isn’t the case with cryptocurrencies and tokens since they can, in theory, be readily traded for fiat currencies through exchanges. However, as tokens, real estate can be readily traded. A seller doesn’t have to wait for a buyer who can afford the whole property in order to get some value out of their property.
By providing extra liquidity and ease of access for best-in-class real estate sponsors and issuers, the blockchain-enabled primary issuance and secondary trading platform for illiquid real estate securities and properties gives previously limited aftermarkets new viability.
The secondary market will reshape the previously disjointed network of real estate sponsors, inter-dealer brokers, and registered investment advisers into a dynamic and competitive trading marketplace, allowing sponsors to raise capital more efficiently and cost-effectively while also providing liquidity for new issuers on the platform.
Blockchain lowers the obstacles to real estate investing by enabling fractional ownership. In order to buy property, most ventures demand a large sum of money up front. Alternatively, investors may combine their funds to purchase more expensive houses. Investors would simply use a trading software to purchase and sell even fractions of tokens as they see fit using blockchain. Furthermore, fractional ownership would allow them to avoid the hassles of property management, such as maintenance and leasing.
The expense of upkeep alone may be substantial, and dealing with renters can be a difficult task. This has an impact on associated industries such as lending, where property owners are frequently required to use their homes as collateral for loans in order to obtain rapid cash. Property owners may be able to keep using their property depending on the circumstances.
To stay up with the rising demand for digital transactions, CRE market players should consider creating digital IDs for their properties. As the term implies, digital identity in the context of a real estate property refers to a digital identification that stores information in digital form such as vacancy, tenant profile, financial and legal status, and performance indicators.
A combination of blockchain technology with digital identification can solve the problems with physical identity proofs mentioned above, as well as speed up some pre-transaction processes including underwriting, financial evaluation, and getting a mortgage commitment.
In addition, businesses are working on ways to solve data integrity issues. In fact, if businesses that are experimenting with blockchain technology also explore utilising digital identities for property and people, the end result may have a significant influence on decreasing inefficiencies and errors.
Property digital identities connected to the digital identities of transacting parties may help a property generate useful and secure online records, enhance lease information management, and substantially simplify the due diligence process.
(Recommended reading: Blockchain with AI)
The transparency provided by a decentralised network can help reduce the expenses of real estate transactions. Other costs connected with real estate include inspections, registration fees, loan fees, and taxes, in addition to the savings gained by eliminating intermediaries' professional fees and commissions.
These prices differ considerably depending on the jurisdictional region. These, like middlemen, can be decreased or even eliminated from the equation as platforms automate and integrate these activities.
Hundreds of billions of dollars are invested in global real estate, yet it is dominated by the affluent and huge businesses. More individuals may be able to access the market as a result of blockchain technology, which makes transactions more transparent, safe, and egalitarian.
Real estate transactions might become genuinely peer-to-peer in the future, with blockchain-powered platforms doing the majority of the labour.(Here)
According to the survey, the UK government has revealed intentions to convert the country's property register to blockchain by 2022 as part of the 'Digital Street' initiative, while Sweden, Ukraine, Dubai, and the Republic of Georgia are all said to be testing the technology.
This initiative highlights the benefits of blockchain and also allows other countries to take notice and tap into the future for real estate.