Blockchain has been around for a little more than a decade, but the benefits of this digital method for moving around valuables are still unknown to many commercial real estate executives.However, Blockchain and real estate have been regularly used in the same sentence during the past several years, and experts predict Blockchain and cryptocurrencies will continue to impact the real estate industry in the years ahead. In their book “Blockchain Revolution,” Don and Alex Tapscott call Blockchain “a distributed trust network that the internet never had but always wanted.” And Blockchain experts say it can make commercial real estate investing more transparent, more efficient and more accessible.
WHAT IS BLOCKCHAIN?
Blockchain is basically a distributed ledger, validated and stored across all the computers that maintain it—these number thousands or millions. Due to its decentralized nature, the ledger is not managed or owned by an individual or some company, which makes its data immutable and unable to be corrupted. In other words, this database provides perfect transparency—a critical feature in any transaction.
In order to perform transactions, one needs to have a wallet. A Blockchain wallet is a program that allows one to spend cryptocurrencies like Bitcoin, Ethereum and more. These wallets are secured by cryptographic methods.There are several established Blockchain technology platforms—such as IBM Blockchain, R3 Corda and Hyperledger—and the Foundation for International Blockchain and Real Estate Expertise was established in Amsterdam in 2018 to be a knowledge exchange for the technology. Moreover, the University of California Berkeley has a Blockchain program—Blockchain at Berkeley—where those interested can earn certificates such as Certified Blockchain Technology Professional or Certified Bitcoin and Cryptocurrencies Professional.
HOW IS BLOCKCHAIN USED IN REAL ESTATE?
Blockchain technology in real estate translates into a streamlined transaction that removes intermediaries and the affiliated costs—brokerage fees, lender charges, closing costs, appraisals, inspections and legal fees, etc. As Mountain Life Cos. President Garratt Hasenstab puts it, each of these distinct parties are not only involved in the transaction, but they also take their share when they close a deal. Additionally, through Blockchain technology, the transaction speed—which has always been one of the biggest pain points in the real estate industry—can be improved, he addedThe Blockchain deal is done via a smart contract, which acts as broker-lawyer-arbiter, with each of these processes built into the code of the contract. Each phase in a transaction is a block, each new block is added to the previous one to form a chain.
“With each step in the transaction process, the smart contract linked to that deal process progresses and transfers responsibilities to the next party,” Hasenstab, who is a certified Blockchain expert and certified smart contract developer, further explained. “If the first step is for the buyer to provide and offer an earnest money deposit, once this documentation has been uploaded to the smart contract Blockchain platform, the smart contract will automatically notify the seller and move on to the next step of the transaction process seamlessly and transparently.”
Blockchain in real estate allows for fractionalization or the division of owner equity into pieces that can be bought individually—something referred to as tokenization or the democratization of an asset. This is a major benefit, especially for smaller investors, who can access an asset that was previously unreachable due to elevated costs.
Even though it’s still an emergent technology, the number of Blockchain-based businesses is rising. Some are built as a commercial real estate marketplace with Blockchain as their underlying tech, while others are designed as a Blockchain platform focused on real estate asset tokenization and investment. Regardless of the platform, Hasenstab and Revathi Greenwood, Americas Head of Research at Cushman & Wakefield, both agree that prior to any investment one must complete their due diligence and get to know the company and its management company.
Edward Nwokedi, CEO of RedSwan CRE, decided to launch his company because the commercial real estate property owners and investors were “crying for an answer” to several problems—including liquidity and access to the best projects—and tokenization provided a novel solution.“The risk level for investing $5 million to $20 million of equity at a 4.5 percent cap rate is a threshold few are willing to explore,” Nwokedi said.
According to Greenwood, when choosing a Blockchain in commercial real estate, four main criteria should always be on the radar: security, flexibility, scalability and cost. “Since this is a new technology, it should be flexible enough to operate with multiple frameworks,” said Greenwood. “At the same time, security measures are critical to verify identities and network transactions. The costs should be transparent not long-term, and on a pay-as-you-go basis, so that users have flexibility.”
Being a decentralized system with no single party in control, the Blockchain technology is built to be secure―even administrators do not have the ability to change the information recorded in each chain.“Records are secured in blocks through cryptography and linked. Therefore, tampering with one record would mean having to change an entire series or chain of data blocks,” noted Greenwood. Nevertheless, hackers will continue to attempt to infiltrate a Blockchain platform, Greenwood said, so the Blockchain industry must increase security protocols, adopting multiple authentication techniques, similar to those applied by the banking industry. Hasenstab believes that the Blockchain technology represents the future of security, transparency and immutability for investments of all kinds, including real-world, physical assets such as real estate.