Blockchain’s Disruption of the Commercial Real Estate
The adoption and adaption of blockchain technology are gradually gaining momentum in the real estate sector, with special focus on the commercial part of the industry. Blockchain disruption of the CRE is proving to be a welcoming change to both the industry insiders and the investors. DLT integration into the traditional CRE processes has successfully addressed and found sustainable solutions to some of the key pain points, encouraging a positive change beneficial for all the stakeholders.
The use of a distributed decentralized ledger, smart contract development, and creation of tokenized real estate assets have shown potential to streamline existing operations within CRE such as sale, purchase, leasing, financing, and transaction management. This blog will elaborate on the blockchain solutions for real estate from the commercial aspect.
Pain Areas in the Real Estate Industry
To understand how blockchain brings reformation and innovation into the real estate sector, it is essential to acknowledge the problematic areas that need change. The legacy architecture of real estate operations, commercial and otherwise suffers from:
Lack of Accessibility
Real estate might be the largest of all asset classes, but the lack of accessibility to investors has kept it reserved for the rich. The barrier of entry is too high, in both financial and regulatory sense comprising of hurdles like credit score, international bank accounts, financing, accreditation, and access to the proper fund managers and sponsors. The lack of capital appreciation and passive income make real estate investments less desirable to many.
Lack of Transparency
For years, both investors and a certain segment of the industry insiders have been complaining of the abundance of fraud cases in real estate and the lack of transparency. Increasing instances of money laundering, corruption, and tax evasion have intensified the demand for transparent transactions.
High Capital Barrier
Real estate investments require high upfront capital that very few can pay without getting help from alternative financing methods. The need to pay multiple fees for transfer, exchange, brokerage, attorney consultation, etc makes buying property a very expensive.
The simplest of real estate purchase involves several third-party intermediaries like the broker, financier, attorney, asset manager, and more. Their involvement not only makes the process time-consuming but expensive due to fees charged by each entity.
Lack of Liquidity
Lack of liquidity is one of the biggest banes of real estate investments, which causes many to turn away from it. The involvement of third-party intermediaries and inaccessibility along with lengthy transactions all reduces the liquidity of real estate investments.
Seeking Solutions in Blockchain Technology
Blockchain integration into the real estate sector addresses each of the above-mentioned issues and eliminates the same, streamlining the existing operations making them uncomplicated and cost-effective.
- Blockchain fortifies the system with transparency and trust by offering verifiable options when processing transactions and sharing information over the platform.
- Renouncing the fragmented architecture of legacy real estate, blockchain creates a unified shared database that is highly secure and immutable (tamper-proof). It makes data sharing and the compilation from multiple sources streamlined under one roof.
- Blockchain processes instant peer-to-peer transactions that just take seconds to complete, as opposed to wire transfers that can take up to days making it expensive due to verification costs. Transactions processed via DLT platform tend to be fast getting executed at a reduced cost.
- Powered by the peer-to-peer model, blockchain-based commercial real estate eliminates the involvement of third-party intermediaries, as every transaction (monetary and otherwise) happens over a unified platform that reduces the cost as well.
Blockchain Integration in Commercial Real Estate
The implementation of blockchain technology into commercial real estate has several use cases in the form of improved property searches, due diligence in leasing, cash flow management, along with transparent and affordable title management and efficient payment processing.
Commercial real estate owners, brokers, buyers, sellers, and tenants use multiple listing services or third-party MLS to list or access properties. These platforms charge a significant amount as a fee to the users for access to property information like rate, location, amenities, property features, etc. There is no guarantee that the data is authentic or updated with a severe lack of standardization.
Blockchain integration allows all data concerning commercial real estate to be listed and accessible on a unified decentralized platform or database. The availability of property data on a shared ledger keeps control of the data in the hands of the listing party, while the immutability prevents anyone to tamper with the property listing data.
Investors can access the same without having to pay an MLS subscription fee. The ones contributing and helping in maintaining the platform can get rewards for their efforts. A peer-to-peer distributed property database ultimately streamlines property searches.
Due Diligence in Financial Evaluation
ID proof and verification are still heavily dependent on manual documentation, making the due diligence process complicated, costly, and time taking, not to mention, there is a severe lack of transparency. The verification process becomes susceptible to errors, due to third party involvement.
Blockchain-based digital identity verification ensures that the entire financial verification and the due diligence process takes place on a single platform in a secure manner. Such streamlining increases efficiency, augments data security, reduces expenses and eliminates any scope for inaccuracy.
It can be used to validate data concerning the legal status of the property, tenant profile, occupancy status of the property, etc. In a decentralized database, each stakeholder (real estate agent, buyer, seller, financial bodies, land registry, etc.) will have individual digital identities. The use of blockchain-based applications allows the participants to enter the official documents, sign, verify, and send them by using smart contracts and they are open for viewing to all the stakeholders.
Just like id verification, the property titles are most manually documented that lead to vulnerabilities like errors, loss, and frauds as well. Identification of any inaccuracy raises legal issues in property title transfer. It is due to this problem that more than often the property owners pay high fees to verify the accuracy and authenticity of the documents for title fraud prevention.
Blockchain provides sustainable solutions to title management issues through the creation of immutable or tamper-proof digital records of the property or land titles. It streamlines the title management process in its totality, reducing the risk of any fraudulent activities. Storing the digitized title documents on a blockchain database ensures the ultimate security of the records as well as the stakeholders dealing with it.
The involvement of multiple stakeholders, like property investors, owners, managers, tenants, investors, etc. makes property management a highly complex process. Most are managed manually through offline paperwork or through third-party software that is neither that reliable nor effective. The lack of coordination and integration leads to chaos making property management a task of hassle.
Blockchain integration initiates the use of smart contracts to execute property management contracts. Everything ranging from lease agreement signing, cash-flow management to maintenance clauses can be processed and executed securely through smart contracts over the blockchain platform, ensuring transparency and traceability.
The parties involved digitally sign the smart contract with a mutual agreement on various aspects like lease, maintenance, and likewise.Based on those terms, the contract will be able to automatically initiate lease payment for maintenance. In any event of lease termination, the smart contract initiates the security deposit paid back to the concerned party. Mortgage and tenancy contracts can also be executed in the same manner on a blockchain platform.
Payments and financing are the major pain areas in the existing CRE model. The need for heavy documentation along with the involvement of multiple third-party intermediaries makes the process lengthy, costly, and impervious. Things become more complex in cases of mortgage and international property transactions. The existing system takes roughly one to three months to approve a mortgage for commercial property.
Blockchain simplifies the complications and makes it more transparent for all the parties involved. Digital identity verification reduces the time of due diligence and financial verification, speeding the approval of the mortgage. The borrower and lender can execute an immutable loan document through smart contracts, in case of private financing. Apart from the peer-to-peer transaction method facilitates quick transfer and processing of funds, eliminating issues of high fees and lengthy transactions associated with traditional wire transfers.
This is the most revolutionary and interesting part of blockchain solutions for real estate. At present due to the siloed databases and other pain areas in commercial real estate, investment of any form is considered reserved for the ones with high capital in hand. It limits the scope of investments in commercial real estate.
Blockchain disruption is rapidly changing through the introduction of fractional ownership via tokenization of property. It is a process in which the property is divided into equal shares in terms of valuation and the shares are tokenized on the blockchain platform. These are known as security tokens that can be sold, bought, and exchanged over an asset trading platform that is powered by DLT.
Fractional ownership lowers the high capital barrier of CRE, making it accessible to common investors as well. Blockchain allows investors to track these investments easily and the immutability and transparency prevent frauds. It creates a unified and secured marketplace for fragmented properties, with several co-owners increasing the chances of a lucrative ROI.
With its plethora of benefits, blockchain disruption of the commercial real estate industry is gradually solidifying its position replacing the traditional processes. Although there are still barriers to overcome such as regulatory compliances and interoperability, the industry overall is accelerating fast towards mass adoption and the response as of yet has been positive.