Using Blockchain for Commercial Real Estate
Commercialized blockchain solutions are like high school sex. Everyone claims they’re doing it, for the few that are, it’s not as great as they say it is, and it’s only the teachers who actually know what they’re doing. One impediment for blockchain technology was the ICO debacle which fleeced more suckers than you can shake a stick at. Now that we can all agree that the ICO won’t be replacing the IPO anytime soon, we can start to think about practical uses for blockchain, a technology that appears to be crawling up Gartner’s Slope of Enlightenment. Progress can be seen across the globe, from farmers in Indonesia who use blockchain to track land ownership, to bright entrepreneurs in Georgia (the country) using it to sell used cars. Today, we’re going to talk about blockchain applied to commercial real estate (CRE).
How Blockchain Works
It’s not important for you to understand exactly how blockchain works, but it is important to understand the basic idea behind it. Blockchain is a transparent ledger that you can track things with using a unique identifier. There is never any question of who holds ownership over something because the ledger is always updated and accurate. These records are mirrored across so many servers that nobody can possibly do anything fraudulent to the records being tracked.
In previous articles, we talked about how blockchain technology might be used for will and testaments or international payments. We also looked at how IBM’s blockchain technology is being used in use cases from shipping to banking. Seems like blockchain technology is initially being targeted at industries where innovation is stagnant – like commercial real estate. A brilliant team of MBAs over at the Deloitte Center for Financial Services produced an excellent report a few years back on the topic which identified six areas of improvement that blockchain could be used for along with some startups that are making it happen.
Improve property search process
Multiple Listing Services (MLS) is a platform used today by CRE brokers, owners, tenants, and buyers and sellers to access property-level data such as location, rental rates, capital values, and property features. MLS platforms are typically accessible via high-fee subscriptions, and the data contained within is often inaccurate, incomplete, or outdated. One way to solve this problem is by simply not using MLS.
Founded in 2014, Woodland Hills, California startup REX has taken in $110.5 million so far to develop “the only full-service real estate company not using the MLS.” According to REX, nearly 90% of consumers looking for a home go to sites like Zillow or Google to find properties. The startup uses data modeling and machine learning to match sellers and buyers of homes as accurately and speedily as possible on Zillow, Google, Facebook and more. A 2% commission covers both sides of the transaction which saves sellers $20,000 in fees on average. A slew of other services are also offered which likely generate meaningful commissions for REX and allow them to select partners that also see the value in using blockchain for things like mortgages, home insurance, title escrow, and home warranties. While their bread and butter seems to be residential properties in 21 U.S. markets, it’s easy to see how this platform could be extended to CRE as well.
Expedite due diligence and financial evaluation
For most CRE transactions, significant time is spent on due diligence activities related to financial, environmental, and legal reasons. According to Deloitte, this is “predominantly due to the use of physical documents for proof of identity, documents that are often stored in siloed places and have limited flexibility to be customized to suit various needs.” The problem becomes compounded when you start to involve third parties, many of whom require duplicate due diligence steps and documentation. Any business process that uses paper documents is low hanging fruit which can be solved with even the most basic technology solution.
Founded in 2014, Swedish startup ChromaWay has taken in $14.2 million in funding to develop a platform that enables smart contracts and digital assets for financial and non-financial applications. Products include Postchain, “the first true relational blockchain” which lets a SQL developer implement a blockchain solution, and a blockchain-agnostic smart contracting system called Esplix. Using their products, ChromaWay completed a full property purchase transaction in Sweden in June of 2018 which used blockchain and smart contracts. They’ve also partnered with the government of Andhra Pradesh in India to build a blockchain-powered solution for land registration. This all sounds promising, but they need to show some traction by doing these things at scale instead of just proving the concept over and over.
Ease cash flow management
Managing a CRE property can quickly become a very complex operation given all the stakeholders involved who each have unique needs. Landlords, tenants, property managers, and various vendors, all have numerous payment and service transactions that need to be executed, tracked, and recorded on a regular basis. For example, rental payments need to have transparency for real estate owners, auditors, banks, regulatory authorities, and appraisers. This is where smart contracts can add value.
Founded in 2015, London, England startup Midasium has taken in an undisclosed amount of funding to develop Smart Tenancy Contract, an online software solution for independent landlords or property managers to manage the cashflow of their property portfolios. The traditional tenancy agreement between a landlord and tenant is now replaced by a digitally signed smart contract that automatically executes transactions. The company’s claim to fame seems to be this mention by Deloitte and one day back in November of 2015 when they were selected for the Citibank Mobile Challenge Final. Maybe the company will drop us a line on what they’ve been up to, else it’s highly likely someone else also had this idea and they’ve managed to achieve some traction. If that’s your sacred cow, drop us a note in the comments section.
Enable smarter decision-making
At the beginning of their report, Deloitte talks about how the CRE industry “appears to take pride in keeping several aspects of its operations secret, such as comparable lease rental rates, property prices, and valuations, to create a possible competitive advantage.” Even without the shroud of secrecy, all of that data is stored in disparate silos – probably consisting of antiquated database systems and even paper records – meaning there’s a great deal of value to be had by creating a data warehouse and feeding all that delicious big data to some hungry AI algorithms.
Founded in 2015, Chicago-based Bloq has taken in $4 million in funding to deliver “comprehensive, enterprise class blockchain solutions to business, while continuing to support innovation in the blockchain and open-source ecosystem.” A cursory look through their website shows that they’re working with quite a few large companies “to explore the possibilities for blockchain technology and the tokenized future,” one of those being Deloitte. Once a blockchain solution is transacting at scale, Bloq would step in and start mining all that data for insights. From the Deloitte report.
We need to move beyond “exploring possibilities” for a solution like this to add value.
Transparent and cheaper property title management
“Legacy title recording systems and the current paper-based property titles have several disadvantages,” says Deloitte, and they go on to mention that “in 25 percent of transactions, title professionals need to take extraordinary action to fix title defects that could impact the buyers’ ownership.” More than $1 billion a year is spent on title fraud resolutions, a problem that’s probably far worse in developed markets.
Now, the startup Deloitte provides as an example happens to be from Ghana, and we’re going to address the elephant in the room right away by suggesting readers check out our prior piece titled “Is Bitcoin Investment Trust (GBTC) a Bitcoin Stock?” where we introduced you to the cunning Sakawa Boys. There’s a certain level of implied endorsement when Deloitte includes your startup in their report, so we’re just going to cover our bases here and say this. Do your own due diligence. Founded in 2013, Ghana startup Bitland has taken in an undisclosed amount of funding to develop their blockchain-based land-title registry which is expected to be used by the government of Ghana to create a digital title ID for all existing real estate. The company hasn’t released any news since 2017, so maybe they can drop us a line and let us know what’s been happening.
More efficient processing of financing and payments
“Payments and money transfers for property transactions are expensive and time consuming,” says Deloitte particularly when they involve cross-border transactions where “foreign exchange charges and involvement of multiple intermediaries typically increase both the payment lead time and transaction costs.” Incredibly, time to close a commercial mortgage averages around three months – or about the same amount of time it takes to lose all your money in an initial coin offering.
Founded in 2012, San Francisco startup Ripple has taken in $293.6 million in funding from a whole slew of big names like Accenture, Google Ventures, Amazon, Seagate, Andreessen Horowitz, and Standard Chartered to name a few. The company was previously featured in our piece a few years back on Top 7 Biggest Blockchain Startups That Are Not ICOs in which we talked about how they claimed “blockchain is too slow for banks” and that there are a “few things wrong” with the classical blockchain model. They appear to have addressed those problems.
An article by CNBC late last year talked about how Ripple is now valued at more than $10 billion as of their latest funding round. They now have more than 300 financial services customers across the globe having signed partnership deals with some big names like Santander and American Express. For cross-border property transactions, buyers and sellers can use “Ripple Connect” and get terms of the deal, including foreign exchange rate and transaction fees, eliminating the need for costly middlemen and reducing the time to complete the transaction.
As we eluded to at the beginning of this article, blockchain sounds great on paper, but the devil is in the details. Deloitte concludes that the best use cases for blockchain in commercial real estate will emerge through trial and error, and if not implemented correctly, it can actually increase costs. (Hint: Deloitte’s MBAs can help you navigate those pitfalls.) For example, they believe that the value proposition in using blockchain technology for leasing contracts is potentially greater for properties with shorter-duration leases and a higher number of tenants because the relatively higher number of lease contract results in increased documentation and transaction costs.
Anyone who has ever dealt with a real estate agent knows that the old model is in dire need of a makeover. Like used car salesmen, recruiters who contact people on LinkedIn for a living, or that guy in the club bathroom who hands you a paper towel and expects a tip, real estate agents don’t really add value to the transaction, and technology will eventually fix the problem – blockchain or otherwise.