The real estate sector has been one with limited technological disruption over the years. This is poised to change. With tokenisation, microtransactions and smart contracts; Blockchain is one such technology that can act as a driver in this change.
As previously established in the first article of the Blockchain for Smart Cities series, Blockchain is viewed across many industries as one of the great innovations that could disrupt and help drive companies forward. Blockchain is an open, decentralized ledger that records transactions between two parties in a permanent way without needing third-party authentication. Blockchain can be used to enhance other technologies such as Internet of Things (IoT). IoT is often thought of as an internet or network facing object that can provide data about a vast array of attributes.
Commercial Real Estate: an overview
Traditionally, commercial real estate spaces have made limited use of technologies to enhance user experience within the spaces. Interactions between various stakeholders and users of spaces follow a manual, repetitive process, with limited leveraging of technologies and data analysis to enhance efficiencies and improve overall business bottom line, and most importantly, improve user experience within the space. In a recent survey conducted by Deloitte and aimed at over 200 commercial real estate leaders, 56% of respondents were of the opinion that the global pandemic has exposed shortcomings on the digital capabilities of their organisations. Digital transformation of the business and tenant experience is fast becoming a business imperative. With the uptake of virtualisation of business activities, the use of cloud and digital tools, many organisations are also concerned about issues such as cybersecurity and data privacy.
We are also seeing that technology is changing the way commercial real estate is valued. Once viewed as the primary source of a commercial property’s value, location, while still being very important, is fast becoming secondary to the value generated from information-based applications. These have the potential to generate new value for clients, customers, developers, and users of the space, while also allowing CRE companies to differentiate themselves from competitors. The potential to generate new sources of income is also being unlocked thanks to the growing use of technologies and data within these spaces.
How blockchain can enhance real estate and smart real estate
The use of blockchain in real estate is a new application. In Ukraine a real estate asset was traded over blockchain and in Sweden, the government land registry responsible for regulating real estate, was tested a blockchain solution to enable the secure capture and recording of real estate sales.
Smart contracts can enhance the sale of real estate, making it a more secure and streamlined process. In 1994, Nick Szabo, put forward the term ‘smart contract’. He described a smart contract as a way to execute the terms of a contract digitally. He foresaw the removal of intermediaries in a transaction, allowing for the exchange of an asset between two parties directly. The Ethereum blockchain has smart contract functionality. This allows for the execution and storage of contracts on the blockchain. There have been many different applications of the smart contract across industries. In real estate, this can be used in lease agreements through efficient property searches, an online due diligence process, automated agreement and payment and data analysis capabilities.
We have already established that smart real estate is a building that is heavily supported by the use of IoT. With many IoT devices in place, there may be an overwhelmingly large amount of data across disparate systems and databases. Blockchain could aggregate all of the data into a single source of truth allowing for a more effective way of managing data and deriving insights.
There are other uses through the secure transactions and trading provided by blockchain. In New York City, developer ConsenSys initiated a microgrid pilot program enabling peer-to-peer electricity by selling excess solar energy to other buildings, with all transactions managed by blockchain.
Challenges faced with using a Blockchain network for Real Estate
Blockchain technology is still a relatively new concept. There are limited successful implementations of this technology within the commercial real estate ecosystem. Implementations will likely be very complex and may require a significant amount of time and resources from various stakeholders in order to make the system successful in executing desired outcomes. There may also be a hesitance by stakeholders in the real estate sector to adopt new technologies and change their way of work.
A general lack of standardisation of various elements involved in commercial real estate means that extra effort and time will need to spent up front to ensure that all parties involved in the ecosystem will understand and make use of potentially redesigned systems in order to ensure a “universal” standard is used. Data such as reports and frameworks need to be standardised and adopted in order for the system to ultimately add value. This could then allow various record-keeping applications to be linked to external databases by way of APIs. This would allow for easier and faster validation of data.
Applications of blockchain in real estate
Due to the large number of listings available on a myriad of listing sites, property searches can be inefficient and time consuming with property seekers not being able to immediately find exactly what they are looking for.
With an absence of standardised data-gathering across these sites, the accuracy of data is questionable and dependent on what the listing site has made available. Trust between the buyer and seller is also put into question as the buyer cannot be sure of the information that has been provided until an in-person evaluation is made of the property, costing more time and money.
The use of a blockchain-based listing service would allow market participants to have access to more accurate, verified data at a lower cost than currently experienced in the current environment. Data for property listings would be distributed across a peer-to-peer network, where brokers can network participants can verify property data and increase trust levels between market participants. Access to richer data would also be possible, as details around ownership history, property age, refurbishments, tenant details etc. can be verified over the blockchain network.
The complex processes involved in leasing and property management are also often incredibly time-consuming and a manual process predominantly executed on a paper-based system.
A commercial lease includes several parties who are generally dependant on each other to ensure the process is conducted as accurately, efficiently, and timely as possible. The vast amount of transactions that occur in these lease contracts also bring with them a great amount of complexity due to the various checks and balances that need to be conducted on an on-going basis.
The use of smart contracts supported by a blockchain network to execute lease contracts and the on-going transactions over a lease term can address many of the administrative complexities currently faced by the lessor and lessee. These smart contracts would enable greater transparency and accountability on all parties. Cash flows will be improved, as payment can be automatically executed on time, whenever various contracted conditions are met.
Leases today are, for the most part, completely separated from any data that can potentially be gathered around the use of the property. This absence of data and analytics drastically limits the effective decision-making capabilities of management.
It is very common to see that many commercial real estate systems are disjointed and operate in silos. Data and information are therefore dispersed across various areas and there is no one source of truth, accessible by all. This all leads to a lack of real-time data being made available for effective decision-making.
A blockchain-based solution will be able to provide a transparent, consolidated database, accessible by all relevant parties, and where all information is accurately stored and verified for real-time access. The availability of real-time data will allow for greater analytics to be run and provide decision makers with the ability to act upon data-backed information for more accurate decision-making.
Microtransactions, a key feature of blockchain presents opportunities in real estate especially with the changing environment that we face. Microtransactions allow for transactions of low value to be transferred to different people as well as to devices. With the COVID-19 pandemic, there is a lot of uncertainty as to how the real estate world will take shape once it is all over. With office space, there are growing concerns that many large offices may sit barren as companies continue to adopt ‘work from home’ strategies and are therefore hesitant to sign long term leases and pay for office space that sits unused. This is where the opportunity of microtransactions comes in. Microtransactions could enable landlords to charge tenants using a ‘pay as you use’ model. The sensors and IoT devices in a building can pick up the number of employees using a space and then send a command to charge the tenant based on the number of people who used that space. This provides a unique opportunity to assure tenants that they will only be charged per employee or per usage, ensuring that they are not forced to pay a fixed monthly fee if there is another lockdown or if most employees choose to work from home.
Another opportunity is by making use of tokenisation. Tokenisation allows for the conversion of an asset into a token that can be stored on a blockchain. Deloitte has been exploring the use of this in a smart leasing solution. Smart or Tokenised leasing enables a landlord to unitise commercial spaces as an asset. The landlord sells tokens to tenants which can then be redeemed as rental payments. Each token represents a fixed rental period and is sold by the landlord at a market rate.
With a number of opportunities and few risks, Blockchain can certainly enhance the experience in real estate for tenants and landlords. It opens up opportunities and new ways of business and engagement that previously may not have been possible. Being disruptive, the technology may not be widely embraced at first, but it may just be the key that unlocks extra potential in the wider city context.