Could Virtual Blocks Be the Next Boom in Real Estate
The real estate world has undergone groundbreaking technological changes over the past two decades, from new construction technologies and regulations to maximizing energy efficiency for buildings, to building new economic models through Internet platforms.
Airbnb used the web to disrupt the traditional distinction between rental and tourism and thus completely eliminated that old school distinction. Similarly, platforms like Rentberry change the way in which property owners communicate with their tenants.
However, in all of this period, the real estate investment model has not undergone any significant change. It seems that the technological revolution completely skipped over the Land Registry offices. Today, not unlike 40 years ago, there are only two ways to invest in real estate and enjoy its fruits. You can buy a property and register its ownership in the land registry, or invest in a management and holding company, whether in the stock market or as an investor at a private equity fund.
Although there are variations on these models, such as purchasing groups, Real estate investment trusts (REIT) etc., these are essentially the same two options. You can buy your own asset, or acquire rights in a company that holds an asset portfolio of one kind or another.
Blockchain technology breaks out of this model.
It may yet turn out that the biggest change that Blockchain technology and the digital currency revolution will produce at the end of the day is a coup against the face of the most traditional and stable market in the world.
What applications are developed in Blockchain that change the real estate world?
Let’s start easy and work our way up.
Distributed Rental and Purchase Platforms
An interesting entry of one Blockchain application into the real estate world is the streamlining of processes with replacement of intermediaries in the provision of market-making services.
The startup rentberry.com that we mentioned at the beginning aims to move the entire rental process into the online arena along with automation through their platform, which has been active since 2015.
The company has completed a recruitment of $4M in an ICO that will be used to make the entire deal-making process decentralized. In other words, in addition to completely processing assets locating and communications online, the payment will also be made through the platform, directly between the buyer and the seller. This will include all the mechanisms of legal contracts and conditions between the parties.
Even more ambitious projects such as crowdvilla.io and beetoken.com are directly confronting real estate giants such as AirBnb, claiming to on-board the short-term lease model to a decentralized system and reinstate control over the $ 30 billion market for property owners and tenants.
Another step deeper into the mechanics of the market comes when Blockchain platforms support the full process of buying and selling assets. The advantage of registering real estate transactions on the Blockchain is clear, Registration and testing process is cheap, global, immediate and much more reliable than the complicated process of registration in local land registry offices alone.
Propy.com offers advertising properties for sale around the world in various currencies, including Bitcoin and Ether. The process of negotiation and sale is managed entirely on the platform, including notarized documentation and registration approval on top of the Ethereum network ledger. At the end of the day, the transaction is completed by the local real estate registrar and registered in Blockchain for control and future usage purposes.
Moving to a model of real estate management directly on public Blockchain is of course complex, that’s why it’s especially interesting to follow countries that have begun to test it, such as the U.K , Australia and Malta. The combination of Propy-like platforms together with the possible transition to state-level Blockchain registration lights up the imagination to the possibilities for democratization and globalization of the concept of land management in the world.
Distributed Real Estate Investment Funds
The steps we have described so far have the potential to create a real earthquake in the real estate world, yet we are approaching an even more disruptive event. Its first part is the new model of issuing real estate funds.
The REIT model is one of the most common institutional investment vehicles in the real estate market, such funds invest only in real estate at defined categories, meet strict regulatory conditions and enjoy tax benefits accordingly. Investors are generally entitled to dividend distributions out of operating profits.
Similarly, new Blockchain funds like Global REIT and Slice raise funds against the issuance of tokens that grant ownership and/or rights to profits from a basket of assets to be acquired through the funds raised. Some specialize in a particular geographical area, such as SwissRealCoin or GlobalREBitcoin that focuses on the Canadian market. And some focus on the type of activity, such as Property Coin, who specialize in the renovation and sale of private homes in the United States.
This new type of investment fund has different features and management challenges than we traditionally consider, including large and difficult regulatory challenges. It is important that we touch on them before we finish since this is where a lot of the attention in the Crypto world is focused at the moment. But before that, we will present the last model and, perhaps, the most revolutionary.
Distributed Direct Ownership
Real-estate properties are characterized first and foremost by their lack of liquidity. When I own a real estate property, I know that in order to receive money for it, I have to go through a long process of advertising and locating a suitable buyer, negotiating and arranging an agreement, registering the transaction and transferring ownership. This involves large amounts of money and third parties to be trusted. Even the exit from an investment in a private real estate fund usually requires a similar process.
When one speaks about tokenizing a real asset, the purpose is to convert the direct registration of ownership of the property into a proof of ownership of another type- token possession.
The process usually involves using dedicated special purpose companies whose sole purpose is to own a single asset. The company receives financing through the acquisition of tokens and executes the purchase transaction of the property. The tokens of the company holding the asset are now issued to the investors and give them a link to the rights to the property, income and perhaps even decision making.
Apart from the fact that such an offering allows for a share of ownership in a single property between a large number of investors (subject to local regulation), it also allows for great liquidity once the tokens are listed for trading on the appropriate Crypto stock exchange.
Year of the Equity Token?
Are we really going to witness a fundamental change in the way capital, management and real estate interact? Will the liquidation and accessibility of the safest and most used asset in the world really help the public to diversify risk and enjoy safer and more liquid returns, or is it merely building the infrastructure for the next bubble?
Tokens are in effect smart contracts, bits of code registered on the Blockchain in a reliable manner that cannot be changed or erased. This allows its creator to pre-define a set of automated financial and decision making rules.
Security Token sales, Security Token Offerings (STO) are at the heart of Crypto funds and entrepreneurs activity in 2018. Such offerings generally refer to any token that grants a right of ownership or profits distribution.
The issuing of asset-based STO is an important sub-sector that relates not only to real estate but also to other types of assets, such as works of art, diamonds, holdings in private companies and investment funds.
The issuing of real estate assets is the most prominent example. Prestigious real estate assets are among the first and most famous assets to be issued in practice. One famous example is the Colorado ski resort Regis Aspen Resort. They are already issuing Security Tokens in response to the stringent regulatory challenges and the great uncertainty that still prevails in this new field.
At this point, in order to join in and trade in the (yet limited) range of property tokens, you will likely need to pass a verification process and prove that you are an Accredited Investor according to the Securities and Exchange Commission (SEC) guidelines.
The Slice market investment fund already allows investors to register for an investment with a minimum of $ 10,000 to receive tradable tokens in commercial real estate development projects in the United States.
Pioneers of the field believe that dismantling of real estate assets to many direct holders, combined with distributed and immediate trading and management platforms of the types we have touched upon, allows us to manage assets in a way yet to be experienced throughout history.
New financing alternatives challenging the traditional mortgage market, unprecedented liquidity, immediate voting rights, liquidation and consolidation of rights between asset classes and asset portfolios (Bundling / Unbundling). The possibilities are many and varied. This is paving the way for a real and substantial change in the economic fabric of one of the oldest and most stable markets in the world.
Unlike the ICO rush we saw during 2017, the real estate solutions will be accompanied throughout the way in coordination and cooperation with regulation, but the responsibility for using the new tools will always stay at the doorstep of the investors. For this, it must be based on recognition and in-depth study of the new alternatives. The risks and opportunities, and an understanding of the technology driving these solutions.