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Jeremy Fennema – Tech Innovation Alchemist
- Blockchain technology shows potential to enhance land registration integrity in areas of mistrust or disaster vulnerability and can streamline property transactions in more stable settings.
- Tokenization of real estate assets has been a prominent innovation, promising benefits such as increased liquidity and reduced costs, although facing significant challenges in investor interest and regulatory compliance.
- Despite setbacks, the possibility remains that blockchain could facilitate direct public trading of property interests via apps, with further advancement in proptech and cryptocurrency markets expected to influence real estate transactions.
While cryptocurrency and blockchain have been in the headlines less recently compared to when they first emerged, blockchain technology in the world of commercial real estate is still relevant. It’s imperative for business leaders to understand the technology to stay relevant in the future of work.
For those who aren’t clear on the differences between crypto and blockchain, or how they relate, PWC defines them in this way: “Blockchain is the technology that enables the existence of cryptocurrency (among other things). Bitcoin is the name of the most recognized cryptocurrency, the one for which blockchain technology, as we currently know it, was created. A cryptocurrency is a medium of exchange such as the U.S. dollar, but is digital and uses cryptographic techniques and its protocol to verify the transfer of funds and control the creation of monetary units.”
Further, “a blockchain is a decentralized ledger of all transactions across a peer-to-peer network. Using this technology, participants can confirm transactions without a need for a central clearing authority.”
Why does blockchain matter in commercial real estate?
The clearest use case for blockchain in real estate is land registration. In countries where the government is not fully trusted, or where corruption is a problem, or where paper records are at risk of destruction — as happened in the earthquake in Haiti — the case for using a blockchain to provide a permanent record of land rights is clear.
In countries where the institutions are still trustworthy, and natural disasters less likely, blockchain can still be of great value as a means of streamlining property transactions.
In the U.K., HM Land Registry (HMLR) has undertaken a successful trial of a blockchain-based system for residential property transaction recording as part of its Digital Street Initiative, which “enables us to explore how we can use technology to make processes such as buying and selling property simpler, faster and cheaper.”
As part of the trial, HMLR created a simple mobile interface for the buyer and seller so they could complete their actions on their mobile phones, such as verifying their identity and signing their agreements.
The use of blockchain made all the steps transparent, so that the parties could easily check what had been done, and by whom. Since 2019 HMLR has been offering digital mortgage deeds in partnership with a number of U.K. banks and building societies.
How does tokenization fit in?
The most interesting development in blockchain technology in real estate in the past few years had been the growing interest in tokenization, which means investment in the form of digital tokens backed by real world securities or assets, or the process of moving traditional non-digital assets to a digital form using blockchain technology.
“Tokenization is quickly gaining traction in the real estate sector, and traditional real estate institutions are partnering with technology providers to explore the tokenization of debt or equity. As more and more technology-backed real estate projects come to fruition, we expect that real estate investment will be invigorated by increased investor access to quality property assets. Technology providers will in turn benefit from quality asset origination as well as the financial expertise of an expanding network of traditional real estate stakeholders.”
KPMG and its co-authors, all technology firms, saw three benefits flowing from tokenization:
- enhanced liquidity
- lower transaction and administrative costs
- greater cash-flow generation
Proponents of tokenization received a lot of press in 2019, but most of the projects failed or were quietly scrapped in the following three years, due to lack of interest from investors or more frequently, problems with regulation.
Although not directly linked to blockchain, the biggest disappointment of 2023 in the U.K. for fans of the new style of property investment was probably the decision by the International Property Securities Exchange IPSX to throw in the towel, and the subsequent delisting of the Mailbox REIT, its biggest customer. IPSX’s inability to attract enough listings, a problem it shared with the London Stock Exchange and AIM, proved fatal.
The poor state of the commercial property market in the aftermath of the pandemic, as shown by the large discounts to NAV visible in REIT share prices, must have been a factor in the failure of IPSX.
Despite the weak market and undoubted regulatory bottlenecks, it is perhaps not too far-fetched to imagine a time in the near future when members of the public could buy and sell their houses or ownership shares/coins/tokens in commercial buildings that appealed to them, using an app on their phones — secure in the knowledge that their investments were indelibly recorded on a blockchain.
The fast-developing world of proptech is certain to discover more uses for blockchain and the smart contracts that can be written on a blockchain platform.
The fast-developing world of proptech is certain to discover more uses for blockchain and the smart contracts that can be written on a blockchain platform.
Should the cryptocurrency market mature to a point where large amounts can be traded without causing large price movements, it is possible that future buildings for sale might be offered, priced in and/or paid for in Bitcoin or some other non-fiat currency.
In the meantime, real estate professionals would do well to monitor changes in market processes and structures and plan for necessary changes in their business model.
