Real estate is known as an illiquid asset. Turning real estate assets into cash is a complex, costly process. This is so, whether the owner is selling, or seeking profit from steady rental income. Returns on an initial investment are typically slow, cumbersome, dependent on intermediaries, and reliant on other people’s reliability and performance.
Blockchain technology is being applied to lessen the administrative friction. Were real estate easier to transfer, proponents say, new investment choices could be developed.
Readers may have noted a marked rise in discussions of DeFi — decentralized finance — as a way to bringing tangible assets into digital, accessible form. Real estate, with a global market approaching $300 trillion in total value, is an impressive use case. According to Paul Tostevin, director of the Savills World Research team:
By any measure, real estate is by far the most significant store of wealth, representing more than 3.5 times the total global GDP.
And no wonder. Territory is a good we cannot live without. And real estate is finite.
Defining DeFi
Decentralized finance is the ability to carry out transactions without central banks or brokerages through the use of blockchain-based smart contracts. Let’s break this down:
- Blockchainwas first introduced to the world of finance through Bitcoin. Blockchain the storing of data in blocks, which are linked together in the order received. It seems ready-made for storing the data related to a chain of title, doesn’t it?
- Smart contracts were introduced through Ethereum. These contracts automatically execute when agreed-upon actions are completed. Automation cuts transaction time and costs. The contracts integrate compliance with securities and anti-fraud laws.
- Once a property (or a company such as an LLC that controls the property) is tokenized (represented in the form of a digital asset), shares can be created on a blockchain. Then, digital transactions can occur. Information about a property can be etched on the chain indelibly. A token can represent a deed or any legal instrument — just as a traditional piece of paper can.
- Over time, an entire history of a real estate investment is etched onto the blockchain. This includes a continuous record of value, covenants, rental income, contracts, insurance, investment dividends, investors’ votes, and so forth. No detail can fall through the cracks. The record is complete, transparent, and fraud-resistant.
The company hosting a DeFi project is agnostic about the investors and where in the world they live. The tokens are what matters — along with the transparency the tokens provide. Yet the project can include a verification process to involve only certain classes of investors. Additional security precautions might include lock-in periods and the staking of digital assets as collateral.
How It’ll Work: An Example
An LLC has a property to split into shares and divide among multiple investors. You wish to invest in the project.
There’s a minimum investment of $55, and you purchase 100 shares. You receive tokens for your shares, which can fluctuate in value based on income, expenses, appraisals, weather events, the development of nearby amenities, geographic trends, financial and political contexts, and so forth.
The property’s value and all other pertinent data are continually updated on the blockchain. You can track and earn your rental profits every week. Profits are paid into your digital wallet using a stablecoin — a cryptocurrency tied to the dollar, so its value is always predictable.
Transforming the Investor Experience
Traditionally, buying real estate takes at least 30 days, and many satellite industries play a role.
In contrast, decentralized finance enables transactions to happen in minutes, completely online. Unlike an investor-owner in the analog world, a digital real estate investor isn’t called out to remove tree roots from a sewer line, or haul away tree branches after a storm. There’s a property management company handling that work for all investors. The low minimum investment means people can take part who have never before had the chance. Investors may sell their shares any time they like.
Offering this unprecedented level of ease and convenience is one of many ways blockchain will transform real estate. We invite you to join us as we continue exploring this exciting area of innovation. Watch this space.
Supporting References
Paul Tostevin for Savills.com: Market Trends: 8 Things to Know About Global Real Estate Value (Jul. 2018).
Blockchain App Factory (S A Eonsofttech Pvt Ltd): Real Estate Tokenization (2021).
Aakash Athawasya for Interaxis: Tokenizing Real-World Assets: Bringing Real Value to the DeFi World – DeFi, Digital Assets, Real World Assets, Security Tokens (Oct. 18, 2020).
Sohail Hassan for Benzinga.com: Emerging Real Estate Investment Trends: The Future of Blockchain And Real Estate Tokenization (May 24, 2021).
RealT: What Are the Benefits of Tokenized Real Estate? (last updated Mar. 2021).
Photo credits: Grant Lemons and Ralph (Ravi) Kayden, via Unsplash.