Blockchain today has emerged to be the one true disruptive technology to be reckoned with. Its implementation across several industries ranging from banking, real estate, and healthcare to retail, travel and telecommunications goes far beyond cryptocurrency and bitcoin. Restoring the much-needed transparency, security and speed in financial transactions and supply chain management, the global Blockchain market is estimated to reach 69.04 billion USD by 2027 from 2.01 billion USD in 2019, with a CAGR of 56.1% in the forecast period (Fortune Business Insight). Blockchain in real estate has exhibited exponential automation starting from property purchase, due diligence to unlocking crowd-sourced investment opportunities. While public blockchains allow free and open access for anyone to the real estate data, private permissioned blockchains disallow open access and safeguard the privacy of the data, thus making real estate transactions more efficient.
Types of blockchain
Public permissionless blockchain
A public blockchain is a distributed ledger network which is an open network. It operates without a central owner and allows anyone on the internet to participate without any restriction. The network’s complete decentralization makes every participant or “node”, capabale of altering and validating transactions. This type of blockchain also allows the participants access to past and current records. In other words, public blockchain operates on a permissionless basis.
A public blockchain allows users to have full transparency and autonomy over their transactions. Further, the signature hash of the blocks makes the data immutable.
Private Permissioned Blockchain
A private permissioned blockchain is a distributed ledger which operates under a single central authority. It does not allow permissionless participation in the network. The central authority exercises the complete power to decide whether to allow or reject a node into the network. To validate transactions, the participants. needs to have a consensus. Thus, a private permissioned blockchain is a hybrid between decentralization and centralization.
A private permissioned blockchain maintains limited user autonomy over their transactions. However it allows a greater amount of privacy, legitimacy and compliance. The requirement of authorization by a central owner to enter into the network enables cost-effective transactions than in public blockchains. Presence of a limited number of blocks allows efficient management of the network and faster transactions.
Market & Market reports that the Private Blockchain type held the largest market size in 2020 and it holds tremendous potential for transforming real estate investment.
How is private permissioned blockchain revolutionizing real estate investment?
Tokenization and crowdfunding
Digital innovations like tokenization, crowdfunding and fractional ownership actualise Blockchain in real estate investment.
Real estate tokenization is the process in which real estate assets are converted into blockchain tokens or security tokens which can then be securely recorded on a blockchain ledger. These security tokens act as a digital representation of the physical asset.
These tokens represent several shares for said assets, which the owner can trade to investors via a distributed ledger and unlock crowdfunding opportunities worldwide. This is known as Security token offering (STO). Investors can purchase these tokens, or “micro-shares” and become fractional owners of that asset. The digitization of assets and their direct trading between owners and investors eliminates the need for any third-party intermediary. Here, investors get direct partial ownership of the asset and can participate in cash flows, capital appreciation of assets and other property management tasks.
The steps for tokenization are as follows:
- Identification of assets – this involves the identification of the real estate asset and its acquisition, financing and appraisal.
- Smart contract formulation– the creation of a smart contract that complies with securities law
- Token creation– the number and type of tokens to be issued and the platform for the exchange is decided
- Marketing and distribution– advertising of the token offering, confirming the authority of investors and listing of tokens on the exchange through a security token offering (STO)
- Post listing support – ongoing support to investors and distributing profits and other rights to payment
Benefits of blockchain based tokenisation:
Asset tokenization generates a win-win situation for both the owners and investors.
An asset owner can easily digitize their security and trade it to a wide pool of global investors for crowdfunding. This enables the owner to have faster access to capital, without any third party.
Kalyuzhnova reports it requires almost 15 days for property transactions to complete. This is due to the complex system of tedious paperwork and the presence of intermediaries. However, a private permissioned blockchain uses smart contracts to secure the agreement terms in its distributed ledger. As mentioned previously, a private permissioned blockchain disallows any deletion or alteration without a consensus. This eliminates the paperwork and third-party intermediaries. Ths\is leads to a definite acceleration of speed in transactions, while the intermediary charge becomes unnecessary.
Digital tokenization of their security enables the owner to connect to overseas investors, which would be impossible in physical transactions.
Fractional ownership opportunities also attract a wider number of investors who would not have access to the stakes under ordinary circumstances with the illiquid nature of assets, and a higher cost of investment. The owners also have the authority to tokenize a certain fraction of their assets, while retaining the majority to themselves. They can raise funds via tokenization to develop the property they retain.
Blockchain-based smart contracts further simplify the purchase and sale of real-estate tokens. Smart contracts are legally binding and they eliminate the cumbersome paperwork process. These conduct allow transparent transactions without any individual or third-party negotiation. These automate the enforcement of the terms of the agreement, without the intermediary charges thus reducing transaction costs and administrative time-period.
Tokenization of security, crowdfunding and fractional ownerships unlock real estate investment opportunities like never before.
Real estate investments are generally illiquid. The buying and selling of real estate shares are comparatively difficult than other securities. Capital requirements are extremely high and this creates a huge barrier for investors to enter the market with real assets.
However, blockchain in real estate converts the previous illiquid asset to liquid asset. This lowers the bar for entry into the market for every investor. Pillsbury reports that although the Global real estate market is around $228 trillion, only 7% is currently available for investment to retail investors. The same report shows only 3% of the global population has invested in real estate.
Blockchain subdivides the underlying code in the digital token, and allows the owner or the investor to sell a fraction of the shares at a reduced cost. This reduces the bar for entry into the real estate market for a large number of small and mid-sized investors. They are granted easier access to the business at a minimum investing cost. This extends entry opportunities for smaller investors who can easily gain entrée into the market alongside their wealthy accredited counterparts.
Fractional ownership of security and assets also attract wider investment opportunities. Fractional ownership grants are so much more to the investor than just partial ownership of a real estate property asset. It allows investors to have a steady share of rental income from the property. It also allows the investor to sell fractions of their asset at any desired time, thus making the property lucrative for improving liquidity.
Blockchain-based Smart Contracts also legalizes the discussed terms of transactions including trade conditions and asset description. Next, these contracts documents and stores the agreement in the distributed ledger. Since in a private, permissioned blockchain modification of any transactional record requires consensus, the operation becomes transparent and reliable. This restores the faith of investors in the transactions, thus improving the chances of investments in the real estate business.
Benefits of private blockchain:
- Speed and cost-effective:
The smart contract protocols eliminate the need for intermediaries and the cumbersome administrative paperwork. This accelerates the speed of the transaction and makes it cost-effective by doing away with the intermediary charges.
- Greater liquidity:
Blockchain allows greater liquidity flow by enabling tokenization of assets and their quick conversion of the shares into fiat. Security token offerings also enables easier exchange of shares between sellers and investors. In this arrangement, investors can also sell the assets to secondary markets, which further expedites liquidity.
- Reduces transaction-related risks:
Blockchain embeds a token with both the smart contract algorithm that contains the terms and clauses of the agreement, and also the immutable ownership record of each token. This safeguards the integrity of the tokens and diminishes the risks of record-tampering to a great extent.
- Facilitates market access:
Blockchain in real estate investment simplifies market access to investors of all sizes. Tokenization and fractional ownership reduce the minimum investment requirement to a great extent. As a consequence, a massive amount of investment opportunity is unlocked. A multitude of small investors can enter into the real estate market globally, thereby increasing the trading volume substantially.
Blockchain in real estate investment today have drastically revolutionized financing and funding in the business. Blockchain-based tokenization has disrupted the traditional arrangement of security trading and broadened the perimeters of the real estate ecosystem.
Dailyhunt.com reports that between 2016 to 2017, tokenization caused the property investment sector to grow from 7.4 trillion USD to 8.5 trillion USD. It is expected that in 2025 the global real estate market will be able to yield a revenue of at least 4.2 billion dollars through tokenization investments.
By offering a transparent, hassle free and cost-effective way of transactions, the implementation of Blockchain has provided investors a safe trading platform that unlocks investment opportunities in the market and paves the path for true revolution of the industry.