My last article discussed how distributed ledger technology (DLT) and blockchain are revolutionising the traditional and alternative asset management sectors, and producing real use-cases specifically in the private equity industry. But what potential does DLT hold for the real estate industry, and how could it help overcome the very specific challenges of this sector?
Real estate investments are usually seen as alternative investments in the asset management world. However, "alternative" may no longer really indicate a niche market that generates high returns with very exclusive accessibility. This asset class has nowadays become a lot more accessible and mainstream to institutional investors even though it is still not very liquid. This is forcing the real estate industry as well as investment managers in this asset class to look for scalability, some kind of retailisation, and operational efficiency.
What are the challenges of the real estate market?
The property sales process is slow and costly. It requires third party verification through escrow and title companies to make transactions more secure and reduce chances of being hit by fraud.
Transparency in this market is also an issue. Properties are registered on very different ownership registration systems in different countries, which can obfuscate the big picture.
Investing in property and property management experiences pose still other challenges. Once the properties are purchased, the management must deal with a huge number of cash-flow streams. Additionally, the real estate investment property manager and the accountant are usually separate from each other and rarely use the same systems, which makes the process slow and cumbersome.
All in all, it is clear that, with high demand and shrinking margins, the industry is looking for operational excellence and efficiency. So, the motivation is there—but why hasn't this market come up with the quick-and-easy, plug-and-play solutions that other industries have found?
Blockchain is the answer
As to why, I'm not completely sure. Probably, as in other industries, developers must be extra careful about design and testing when the platform in view must handle large financial transactions and gain people's trust. But as to the opportunities available, they are many, the key ingredients being automation and digitalisation. Processes can be streamlined, systems globally connected, and manual involvement lessened—all possible with blockchain technology.
For a start, DLT could bring full transparency to real estate transactions, as all parties could access the distributed ledger and all validated records would be irreversible. Traceable digital IDs for properties, buyers, and sellers would also increase transparency. Such IDs would be secure, visible, and immutable, and would contain all the details and history of the property, i.e. ownership, fixtures, and repairs.
DLT also promises to save all parties an inordinate amount of time, as information would be immediately available to everyone (either publically or to the members of a private blockchain).
Money transfers as well as cash flows within the management of commercial property and investments could be processed via smart contracts. The nature of these contracts is that they are only executed once each party fulfils conditions that are pre-programmed, which again reduces chances of fraud. For example, in a purchase of property the title is only exchanged once the funds are made available and vice versa; the transfer is then verified and an irreversible record is left on the blockchain.
This might also lead to disintermediation: property databases, escrow companies—in short, all parties that currently must certify and validate ownership and title—might no longer be necessary, at least in the same way.
The disintermediation of notaries, banks, and escrows will of course worry those parties, but overall it will have a positive shake-up effect on those who see an opportunity to streamline and simplify their processes, and to involve themselves in the value chain in a different way to how they do now. The key, however, is for the whole ecosystem to work together to explore the full potential.
Such technology will of course not emerge tomorrow, but the time has come to start analysing processes and looking for possibilities to optimise and automate using DLT. This could mean starting with small steps, using some process automation and maybe trying out document-sharing and the notary function for your due diligence process.
Distributed ledger technology: a distributed ledger is a shared, replicated, and synchronised database spread across multiple locations. DLT allows parties in a value chain or ecosystem to share data securely in near real-time, thereby opening up new opportunities for peer-to-peer collaboration and transactions.
Blockchain is a type of DLT. It shot to fame because it powers the bitcoin cryptocurrency and is now commonly used as a synonym for DLT.
Smart contracts are self-executing contracts programmable on a distributed ledger. Standardised, fully-automated, and autonomous, they can ensure that agreements are fulfilled by all parties, automatically and nearly in real-time.
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