Digitization in real estate lags behind other fields though it could revolutionaries the industry in multiple ways. Digitization of properties and records in framework that is immutable and modular can help lay the groundwork for more sophisticated alternate investment products for affordable and sustainable housing. Blockchain could potentially provide a scalable and reliable technology solution due to its unique architecture. This is an area of immense opportunity that requires co-ordination between government, entrepreneurs, the sector and financial institutions.
Blockchain for Real Estate
Blockchain is often confused with crypto currency, one of its more widely known use cases. The speculation and volatility of crypto assets is thus extrapolated to blockchain architecture in general, distracting end users from its inherent strengths. I won’t go into detail to explain what blockchain technology is – but simply put, it is a digitized and shared ledger that records and shares information and makes data manipulation extremely complex if not downright impossible. Blockchain is modular and features can be added to chain as required, data again that is immutable.
Real estate transactions have over the years faced innumerable hurdles in terms of authentication of land ownership, liens, legal encumbrances and unknown regulatory implications. The conventional process of verification leaves much to be desired – it also has a level of opacity that is difficult for a layperson to circumvent and this leads to numerous rent seeking opportunities.
In todays interconnected environment, the government has made significant progress in trying to bring disparate aspects of property registration to digital platforms. This is a significant step forward but the systems are in silos and therefore cannot benefit in terms of operational efficiencies and second level or third level benefits. An integrated comprehensive system would connect all legal, financial and administrative protocols of any property. The system would need to be flexible and modular to increase or decrease the scope. The second and third level applications for creating such a system would be tokenization, securitization, fractional ownership and cross-border transactions.
Today though registrations are digital – they have to be done in person and the legal due diligence is still paper based. Lien, government dues, compliances and legal issues can be simple plug ins into the main chain done by either the government or a third party legally recognized by the government and financial institutions.
The reason REITs or InvTs work is because the instrument guarantees all of the above compliances. This level of trust is very difficult to generate for smaller participants. A blockchain based system has the ability to democratize the process and make it possible to create trust for participants across the value chain. One of the biggest friction points in for access to alternate capital is trust and monitoring.
Issues that can easily be addressed by blockchain. There is need for alternate capital to scale up affordable housing and sustainability in buildings and there also exist a number of investors who would invest in the space – the challenge is lack of instruments and accountability. Conventional investment avenues are difficult to connect the demand and supply, have a lot of friction and are difficult to scale. A blockchain platform structured in the correct manner can provide the trust – property details can be verified, transparency – every step of the process and progress can be tracked accurately and frictionless transaction.
Digitization of real estate will be successful if it is approached as a full stack solution. This will require strong government will and leadership.