Blockchain Technology could alter Real Estate Industry deals

The emerging technology that runs on a distributed ledger has become increasingly associated with transparency, accountability and open governance because of its supposedly tamper-proof design, says Ortneil Kutama, Media Director at Africa Property News

The way real estate industry deals are conducted could evolve with the development of blockchain technology, which underlie cryptocurrencies like bitcoin.

The emerging technology that runs on a distributed ledger has become increasingly associated with transparency, accountability and open governance because of its supposedly tamper-proof design, says Ortneil Kutama, Media Director at Africa Property News.

Of all the disruptive platforms and technologies discussed at the World Economic Forum’s Annual Meeting of the New Champions this year, one in particular continues to attract a great deal of buzz: blockchain.

Kutama argues that the commercial real estate market in Africa has not kept up with the changing currents of technological discourse, and discusses digital disruption.

"It’s irrefutable that the internet and digital media tools continue to change the way we do business, as it plays a pivotal role in the property sector," says Kutama.

According to Jones Lang Lasalle (JLL), some experts suggest that the blockchain, which is effectively the machine behind the cyber currency bitcoin, could completely transform the way we pay for goods and services or exchange information.

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For those of us in the real estate business, that has potentially game-changing implications.

In essence, the blockchain allows a continuously updated database to be distributed across a network of computers. Its distributed nature ensures the integrity of that database, removing the need for intermediaries and making the information contained within it completely secure. The net effect is to bring a new level of transparency to financial transactions.

Also read: Sub-Saharan Africa advances in Real Estate Transparency Ranking

In terms of the real estate industry, the technology has the potential to allow countries around the world to develop a comprehensive real-time database of the use and ownership of buildings. Trials of this are already being conducted in Sweden, Ghana and Georgia.

This could be transformational because transparency in real estate markets has a profound impact on both economic development and the quality of life of citizens. For example, it confirms ownership and checks on the enforcement of building regulations which, in the case of an earthquake or other natural disaster, could be a life and death issue. Transparency also provides increased protection for individuals’ property ownership rights.

According to Deloitte's Real Estate Predictions 2016 report, a well-known phenomenon in the real estate sector is information asymmetry related to real estate transactions. The past few years the real estate sector has become more transparent. Mainly due to the crisis, the demand for more information and alignment of ethical standards has been greater than before.

Also read: Watch: A Credible Market, the need for Standards in Property Industry

"U.S. government has been experimenting with the potential use of blockchain to manage land registries," Kutama said. International Banks and e-commerce companies are experimenting with it to design “smart contracts” to execute transactions.

Transparency can drive investment

On a broader, international scale there is a clear link between transparency and the attractiveness of a country’s property market to foreign investment. JLL recently published its biennial Global Real Estate Transparency Index (GRETI), tracking transparency in real estate markets. Strikingly, the top 10 most transparent markets attracted 75 percent of global investment in commercial real estate. With capital allocations to real estate growing (JLL forecasts growth from US$700 billion to over US$1 trillion within a decade), pressure is growing for real estate to have similar transparency as other international asset classes.

Sub-Saharan Africa makes progress in real estate transparency

While tangible improvements in transparency are being made, Sub-Saharan Africa is still some distance from competing equally with its counterparts in the EMEA region and sizeable efforts are required to close the gap with other global regions.

Craig Hean, Managing Director: Sub-Saharan Africa at JLL South Africa, comments, “Sub-Saharan Africa continues to make advances in real estate transparency, but progress has been patchy with limited development in regulatory and legal reforms and enforcement.”

Key Sub-Saharan Africa highlights:

• Sub-Saharan Africa has continued to make advances in real estate transparency over the last two years, although progress has been more mixed than in 2014.
• Six markets (Botswana, Zambia, Ethiopia, Nigeria, Angola and Ghana) have recorded reasonable progress in transparency since the 2014 Index.
• The improvement from Botswana, Zambia and Ethiopia has secured these countries a position on the ‘global top 10 improvers’ list.
• Despite these advances, the region has seen a slight deterioration in the legislative and operating environment which appears to have stalled in several markets, with two countries – South Africa and Mozambique – registering a noteworthy decline in overall score.
• South Africa, however, remains Sub-Saharan Africa’s most transparent market, supported by an active listed sector. It is the only country from the continent to feature in the ‘Transparent’ category.
• Technology is allowing some countries (Rwanda, Ghana, Kenya) to leapfrog the normal transparency evolution process by introducing innovative new ways of improving access to data or to faster, more reliable services.
• Complexities of implementing new regulatory structures and the impact of slowing commodity markets have stalled progress in certain areas.

Blockchain: a game changer

A blockchain represents a total shift away from the traditional ways of doing things. It places trust and authority in a distributed network rather than in a powerful central institution. In a blockchain based world of transactions, there is no need for the middlemen of finance - banks, governments, insurers, brokers, notaries and even paper currency. The blockchain takes this part of the transaction over from the professionals. It allows unique monetary data to be exchanged via a distributed ledger. The entire history of these transactions could be followed through the blockchain and is available for the public, so the blockchain provides full transparency. 

Some bold predictions suggest that the institutions at the centre of current transaction system will cease to exist in just a few years. Others are more conservative, positing a relatively low impact on the short term for blockchain applications other than payments. The reality is likely to be somewhere between these two extremes.

Three advantages of blockchain for real estate

Real estate is one of the many industries that are expected to make great use of blockchain. Nowadays three advantages of blockchain for the real estate industry are spotted:

1. Total transparency
   
   Information asymmetry belongs to the past with blockchain and a level playing field is created. All data necessary for a transaction is stored in the database and is easily accessible for the buyer and seller of real estate. Relevant information about prices of comparable objects is available for everyone and not only for a few person or at a high price. The entire transaction history of the property could then be followed through the blockchain. Consequence is that the need of a middlemen or due diligence will disappear when this technology is adopted within the marketplace.
2. Removing the risk of fraud
   
   With a total transparent system of real estate ownership and the possibility to track down the transaction history of each property in the market the risk of fraud becomes less. Each year a lot of money is involved with the verification of ownerships, rights and titles transfers. Blockchain makes is possible to have accurate records which identify the current owner and provide a proof that he is indeed the owner. This makes it easier, safer and faster to buy and sell property.
3. Speeding up the process associated with buying or selling a property
   
   Blockchain makes is possible to program smart contracts. Using smart contracts based on blockchain, assets exchange could follow specific instructions encoded as part of transaction to be executed automatically once agreed criteria have been met. All the computers of the participants in the network validate every transaction.
   
   Property transactions could be handled on a blockchain in a similar way to how payments between parties are handled using digital currencies like Bitcoin. Every ‘coin’ represents a unique house or piece of land and exchange is just like in any other transaction using digital currency.
   
   It is expected that a blockchain based business in real estate will not happen overnight. While the technology offers some exciting prospects for the future, streamlining such an innovative protocol with a very administration-based industry will take several years.2 It will take the examples of a few innovative and forward-thinking real estate firms to lead the way and convince the masses that blockchain is the correct path to take.3 Although a mainstream adoption of this technology will take some time, as there are many hurdles to take, the potential is worthwhile exploring. We expect that within the next 2 years the first lease contracts will be based on blockchain technology. It’s better to be forward thinking, curious and open to these (possible) changes then to wait and see.
   
   Even though it is too early to judge on the implications of the blockchain technology, it is clear it is too important to ignore.