Blockchain Advantages
For all of its complexity, blockchain’s potential as a decentralized form of record-keeping is almost without limit. With real estate this means the complex paper driven process can be automated.
Blockchain Advantages
Better accountability and financial disclosures
Faster and cheaper transactions
Cross-border simplification
Higher liquidity
Smart contracts
Trading and fractional ownership
I. Better Accountability and Financial Disclosures:
Due the nature of the distributed ledger of the blockchain, all data on the chain will be immutable. Regulatory compliance is usually documented by separate entities that do not talk to each other. Providing a tamper-proof history means that all parties will be held accountable and the chain history of the property can serve as a measure of accountability. Furthermore, blockchain opens up the ability for real-time cap table management with automatic distributions. By keeping a chain history, all shareholders and their associated stakes of each property could easily be seen. Not only does this provide a more immediate view into the ownership of the property, it also has the added benefit of being able to update quickly. While ownership of stocks take several days to process (known as the T+2 [1]), blockchain transactions settle in a matter of minutes.
II. Faster and Cheaper Transactions
In both large and small real estate transactions third-parties drive up the cost associated with the due diligence process. Whether this is with the buyer financing a home and the lender needs to do extensive due diligence. Or if its a commercial transaction requires extensive financial and legal hurdles to be crossed. Blockchain transactions settle in a matter of minutes, making waiting 30-45 days to close on real estate a long forgotten timeframe. Because blockchain operate 24/7 365 days a year, there is also no waiting time on the banks to process information, money to settle, or worrying about conflicting time zones. Not only are transactions sped up, but smart contracts can be used to execute the same due diligence process followed in real estate. The added benefit of smart contracts is the programmable code can be used for each transaction and does not take a 6% cut like realtors do to execute the transaction. The costs of transactions are rather insignificant with Avalanche's fees [2] costing between 0-0.01 AVAX (See current AVAX price [3] for details in USD).
III. Cross-Border Simplification
Diversification of securities is as easy as selecting a number of companies that operate in different fields. Diversification of real estate is much harder to achieve. Many investors end up picking a specific area to invest because they know the rental rates, have easy access to the properties, and do not incur significantly more management costs if the properties are close together. However, having all your real estate in one area does not help reduce risk. Purchasing real estate out of state (and out of country) is notoriously difficult, especially for small investors. Blockchain can help bring a transparent approach to cross border transactions by creating records that cannot be altered, copied, erased, or forged [4] . Smart contracts can be designed for the specific regulation of each region, all of which can operate and trade on a decreantized exchange. This opens up the possibility for investors to diversify while not complicating their investment portfolios.
IV. Higher Liquidity
Most private markets are relatively illiquid [5]. Liquidity refers to the "cost to trade" and is measured by a bid-ask spread and price impact from trade. In the use case of blockchain liquidity is theoretically increased because users will be trading smaller amounts of real estate and because the transactions can be executed much quicker. While larger real estate investments often require a several year holding period, a blockchain application and provide the ability to immediate sell an interest in an asset. A further benefit of liquidity comes down to what is being tokenized. Both debt and equity can be tokenized, allowing the ability to lock in capital without locking in investors. With increased trading activity of fractional ownership, price discovery will be enhanced and markets will become more efficient for assets that have historically traded infrequently due to high unit costs. Therefore, an increase in liquidity also means an increase in value.
“A new level of liquidity is created when tokenizing traditional assets. This liquidity makes it faster and easier to rebalance a portfolio as the market changes.”
(Scott Hoch, Apex Token Fund [6])
V. Smart Contracts
Smart contracts are the digital determinations of a traditional real-estate contract as lines of software code that self-execute and self-enforce. They are what significantly expands the ability of blockchain technologies. Some of the processes that can be programmed into smart contracts include: the ability to transfer funds between bank accounts, transfer property titles and track changes, and record debts. A smart contract can theoretically be turned into a traditional legal contract at any time. By providing a programmable contract that executes upon the completion of certain conditions, smart contract remove the need for third-parties taking a cut of each real estate deal.
Smart contracts can take over the onerous administrative task of managing approvals between participants, calculating trade settlement amounts and then transferring the funds automatically once the transaction embedded within the smart contract has been verified and approved.
(Fintech Network, Smart Contracts [7])
VI. Trading and Fractional Ownership
Tokenization provides all the benefits of real estate plus the added liquidity benefits of securities, ultimately adding more flexibility and cost efficiency to investors. Because tokenization provides the ability to create fractional ownership at scale, retail investors are able to invest into smaller portions of a real estate deal. Fractional ownership is nothing new in the world of real estate, but adding the ability to immediately change out those owners based on a single blockchain transaction is completely novel. For example, if an investor wants to purchase in a commercial office space in San Francisco, their only option is to raise capital privately through accredited investors. They will likely be locked into a several year holding period before they can sell their shares. There's little trading potential with the current model. With a blockchain application, the commercial building can be tokenized, ownership can be split up into shares, and users and buy and sell the shares of a single high value asset. Ownership can be quickly changed out and sold to new investors as the asset continues to appreciate.
Footnotes:
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Source
[1]
[2]
[3]
[4]
Garcia-Teruel, Rosa M. "Legal challenges and opportunities of blockchain technology in the real estate sector." Journal of Property, Planning and Environmental Law (2020).
[5]
[6]
[7]
Network, FinTech. "Smart Contracts–From Ethereum to Potential Banking Use Cases." (2018).
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