29 JUL 2018
A handful of years ago hardly anyone except tech geeks had heard of blockchain. Today, the digital world is abuzz with claims that the system’s decentralised database technology has ushered in a new internet that is transforming the way people do business in every sector of the economy, real estate included.
Blockchain is an application of computer science that enables highly secure peer-to-peer digital transactions. It offers the potential to increase transparency and trust, reduce fraud and speed up a wide variety of business processes by reducing the need for middlemen and paperwork.
"This is a technology that is incredibly interesting and could be transformational, but there is a lot of hype around it," observes Alan Penn, Professor of Architectural and Urban Computing at University College London’s (UCL) Bartlett School of Architecture. UCL has established a Construction Blockchain Consortium which, Penn says, is "bringing together the industry with academics and scoping out whether or not these technologies have any real use".
Some dizzying scenarios are being sketched out for blockchain’s potential to overhaul the way the property sector operates, and a multiplicity of tech start-ups are now developing applications employing the technology.
Stockholm-based Chromaway is among the most advanced blockchain companies in developing a practical application for the technology within the property sector. "You can take the analogy with the internet," says CEO Henrik Hjelte. "In the early days of the internet, some business models were totally unrealistic and futuristic, like showing video on the internet or buying groceries online.
"[But] you don’t have to buy into a futuristic vision of blockchain with everyone buying and selling property using tokens on their mobile phones. This technology also has a lot of advantages for incremental improvements," he adds.
One sector of the real estate business in which blockchain looks likely to have an early impact is the registering and transferring of land titles. By creating an immutable digital token that represents the title to a property, and storing it within a publicly accessible ledger, blockchain can remove the need for paperwork and vastly reduce the opportunities for corruption and fraud.
Several national or state governments have already begun to explore the potential benefits of creating such a registry, including Georgia, Dubai, Honduras, Cook County in Illinois in the US and the Indian state of Andhra Pradesh. "That makes it fast and easy to register titles and has an effect on GDP – in particular for developing countries, but also for developed countries," says Hjelte.
Chromaway is undertaking a pilot project with the Swedish land registry that goes a step further, exploring how to create a blockchain “smart contract” that can facilitate transfer of ownership. "We are taking a paper-based process that takes three months and creating a digital process that can bring it down to less than a day," claims Hjelte.
Olly Freedman MRICS, Director of Sales at Commercial Property Data Solutions provider Datscha in London, believes blockchain applications could speed up the conveyancing process: "If all the data for a property is held on a virtual ledger, and that ledger can be accessed and amended in seconds, the whole legal process becomes much faster. The process of lawyers doing searches and then reporting back would be shortened significantly."
Smart contracts, which can be coded to execute when certain conditions are met, offer exciting possibilities for the real estate sector, argues Rob Parker MRICS, Senior Portfolio Manager, Global Occupier Services at Cushman & Wakefield in Singapore. "For example, you can have a deposit paid in at the start of the lease and because all transactions are visible on the blockchain, you can check that your landlord hasn’t spent that money or run away with it. Then, at the end of the contract, you can implement a multi-signature system so if both landlord and tenant are happy that the deposit should be returned, then it comes straight back. Alternatively, if there is a query, then a third party can arbitrate the dispute and when two of the three agree, the money is released."
Within the construction sector, smart contracts could be coded to pay subcontractors automatically as soon as work has been completed and checked, reducing the payment delays that cause cashflow problems for small businesses. Smart contracts could even remove the need for human intervention in some processes altogether. "You could use internet-of-things-connected devices to record energy and water usage. The service charge would be very easily verified and the payments could automatically be taken through a smart contract," says Parker.
Blockchain can be combined with BIM to reduce the potential for disputes in the construction sector, suggests Penn. "If you have a history of exactly what took place within the blockchain, which with BIM becomes possible because everything is within the one data repository, you stand a chance of shifting the culture to a much less litigious and much more collaborative one."
Marcus Granadeiro MRICS, a director at Brazilian construction management firm Construtivo in São Paulo, has already begun to record all of the information relating to the construction process on certain projects on a blockchain-based application: "With blockchain you can take a picture of the evolution of the contract at any moment. Every change is reproduced on the system from the beginning of the work to the end. There have been problems with scandals in the construction industry in Brazil, so there is a market for more compliance and consistent information."
In the Netherlands, the City of Rotterdam, Cambridge Innovation Center (CIC) and Deloitte are developing the first real estate blockchain application to record lease agreements at CIC’s Dutch business incubator. Leases are recorded digitally on a blockchain platform, which also monitors rental payments so that the financial performance of the building and its tenants can be documented over time.
"Lease agreements are one of the main drivers for the value of real estate,” says Jan-Willem Santing MRICS, manager, real estate and partnerships at Deloitte in Utrecht. “With this system, if you sell or refinance your property you can save a lot of time because you can instantly see whether the parties do what they have agreed upon, and you can make better-informed decisions."
Looking to the future, blockchain could revolutionise the real estate investment market. Some property developers have already begun to accept bitcoin in payment, although the volatility of cryptocurrencies has deterred some investors. Meanwhile the possibilities arising from tokenisation have already begun to be explored, as real-estate-backed "initial coin offerings" (ICOs) invite investors to buy digital tokens that represent a share in properties.
"Real estate is an illiquid asset and that is what we think we can solve with blockchain," says Ragnar Lifthrasir, the California-based President of the International Blockchain Real Estate Association. "What people are doing with ICOs is trying to represent property assets as a token. You trade the token to trade the asset and you can divide a property represented with a blockchain token into pieces. That is the long-term future for property and blockchain, but it has to be well designed and thought out."
To date, most big institutional investors have considered ICOs to be too risky. Thomas Herr, Head of Digital Innovation for EMEA at CBRE in Berlin, believes that the industry is likely to adopt blockchain at a measured pace. "One school of thought says that blockchain will change real estate within the next three to five years. I belong to another, which says there will be a longer period of introduction of 10 to 20 years. There will be a smooth integration of this technology in certain applications that are not as crucial as property transfer, then when we are more used to it we will use it for more complicated transactions and acceptance will grow."
Disintermediation — cutting out the middleman — is pivotal to the disruption that blockchain will wreak. As the property industry’s skilled intermediaries, surveyors could be forgiven for asking what that will mean for their career prospects.
"Yes, people in the property industry are middlemen and there will be a slow movement away from them, but they can leverage their knowledge to help tech entrepreneurs come up with the best applications. They should educate themselves about blockchain and start playing around with bitcoin, getting some hands-on experience," advises Lifthrasir.
"Lawyers and bankers should probably be more worried about this than surveyors,” adds Parker. “Blockchain won’t reduce the need for a surveyor to confirm the structural integrity or accuracy of the floor area, and I don’t believe it will affect the way we go about the negotiating leases."
The technology is still in its infancy, and hurdles remain to be overcome, not least the carbon consequences of the vast amount of energy consumed by the server farms needed to maintain blockchains. It is as difficult to predict exactly what forces blockchain will unleash today as it was to foresee the impact of the internet in the early 1990s, but the results could be almost as revolutionary