Creating a Power Shift in The Real Estate Industry with Blockchain technology

When you think ‘blockchain’ you don’t usually think of office space and property sales. Finance and investment maybe, but not real estate.

Yet Commercial Real Estate (CRE) transaction volumes currently stand at $341 billion globally. If even a relatively small percentage of that is spent annually on informational data and due diligence, the business case for any technology that can reduce these costs becomes compelling.

Despite all the hype, blockchain technology is actually at its best when used to provide transparency, for example in a supply chain. It is already being used to ensure the authenticity of medicines and luxury goods and is poised to drive similar improvements in the office leasing business. Greater transparency will drive better and faster decisions, and ultimately, frictionless transactions.

The current landscape

As things stand, it takes unnecessary time and money just to rent an office. A series of middlemen have to search and verify, and then negotiate with both parties on terms and penalties, not to mention informational data and due diligence, relying too much on the word of landlords.

In this environment it can take more than twelve months and hundreds of pages to lease a single floor. Landlords are unable to rent floors predictably and quickly, leaving them overexposed to vacancy risks and financially stretched. Meanwhile, tenants spend months shopping and negotiating via brokers and lawyers, and then are constrained by long-term leases, imposing onerous long-term liabilities on their businesses. In many cases, tenants also have no way to easily compare the price they are offered with market equivalents, meaning many are left stuck with a poor value deal.

Decentralised approach

A proposed way of changing this situation is to decentralise the process and provide a large aggregate data source based on blockchain as the platform. The idea behind this is to eventually allow every office property in every major market globally to be indexed and searchable, available to lease with one click. This would begin with creating a distributed and immutable online ledger that simplifies the process by reducing paper trails and transaction times.

The resulting ‘trustless environment’ then encourages cooperation between companies that have never worked together before. This approach could prove invaluable for brokerages, financial information companies, and tenants of all sizes globally.

Not a one-size-fits-all solution

While many in the property industry recognise that the technology has potential to quickly improve data sharing, help with raising capital for real estate assets, and generally make the market far more liquid, blockchain is not a one-size-fits-all solution.

As in other industries, companies considering its use should assess whether and where blockchain can be useful, as the technology will not necessarily address each procedural inefficiency. For example, in its recent report entitled “Blockchain in Commercial Real Estate”, consultancy Deloitte identifies that “leasing and purchase and sale transaction processes” (among the core CRE processes), “are ripe for blockchain adoption”.

In the report it outlines five key instances in which blockchain should be considered for CRE processes as follows:

  • Need for a common database – Critical for leasing and purchasing transactions such as the multiple listing service, which collates property-level information from brokers and agents’ private databases
  • Multiple entities can edit a database – Transactions involving several entities such as owners, tenants, lenders and investors who modify a variety of information
  • Lack of trust among entities – Often participants in leasing and purchase and sale transactions are new to each other and could have concerns over due diligence and data integrity. Here blockchain can help reduce the risk through digital identities and more transparent record keeping systems
  • Opportunity for disintermediation – Less need for intermediaries due to increased security and transparency in title management and auto-confirmation
  • Transaction dependence – Many real estate transactions have conditional clauses and can be executed through smart contracts. For instance, the conclusion of a purchase-sale transaction could be dependent on loan approvals or title clearances

A question of trust

What this checklist helps emphasise is that blockchain is at its best when sitting in the sweet spot between application and database. If you are the only writer, for example, using blockchain makes little sense, but if there are many parties involved it can help create trust by providing verification and authenticity, without the need for middlemen.

In practice this could mean an end to inefficient searching for office space by the elimination of misinformation and price inflation. It could also allow for near real-time settlement of recorded transactions which will remove friction and reduce risk during the rental and buying services, limiting the ability to charge back and cancel transactions.

All this will only be possible, however, if the industry can be convinced to trust the blockchain itself. With enough people on board there is a real opportunity to put the value of property data back in the hands of those who create it.

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