Much is being said about how emerging blockchain technology stands to be a major disruptor in the global real estate space. But will its adoption be slowed by its association with cryptocurrencies, which have undoubtedly had a volatile run since their inception within the last ten years? Alarmist headlines may deter populations of more developed economies, especially, to adopt the many other proposed uses for the technology. But in rapidly developing markets like China, Singapore, and Southeast Asia, there seems to be a surging enthusiasm and recognized demand to apply it to everyday business challenges, real estate transactions included. Could the Asia-Pacific region, with its initial forays into blockchain uses, be the gateway to the greater global trust that this consensus-based technology will need in order to prevail?
Advancing Perceptions Beyond Crypto-Currencies
Blockchain technology can be a hard concept for the average person to grasp, which can be a major obstacle to any new technology’s widespread adoption. However, the same could once be said for the internet, and although most people still wouldn’t be able to explain how the internet works, they have no problem today trusting the infinite user-friendly apps that allow them to tap into it. Blockchain proponents would envision a similar fate for their own technology.
(You can go here for an excellent primer on cryptocurrency and the underlying blockchain technology that is pertinent to this article.)
For the 10,000-foot view…a blockchain is a decentralized and ‘trustless’ database capable of facilitating direct peer-to-peer transactions without the intermediators that traditional transactions have typically required. Verification is achieved by a consensus of the distributed nodes resident on the chain, each maintaining its own protected ‘copy’ of the database. Cryptocurrencies are but one type of asset transaction that can be managed on a blockchain. In that instance, the blockchain acts as a digital ledger capable of transferring funds directly between entities (in the form of cryptocurrency native to the particular blockchain), thereby removing banks as the traditional verifier and trusted third party to the transaction.
The Bitcoin blockchain is the figurative patriarch of the blockchain family and likely what comes to mind to most of the general public at the mention of ‘blockchain’. That’s not necessarily good news for acceptance of the technology given the volatile valuation of bitcoins in the past twelve months. Bitcoin increased nearly 1,900% from its value at the beginning of 2017 to its all-time high of US$19,783 per bitcoin in December 2017. It’s since plummeted about 80% from that figure (US$3,964 as of this writing), and November 2018 saw the worst monthly decline for bitcoins in the last seven years.[1] Every other cryptocurrency has essentially followed suit. Several have experienced internal strife within their communities, resulting in ‘forks’ – the descriptor for when a blockchain breaks into a different variation of its original.[2] There have also been several high-profile hacks and thefts, increasing perceived associations with illicit organizations and stoking the fears of potential investors that centralized governments will reign-in the technology with over-regulation.[3] With these factors taken together, it is no wonder that many are inclined to wait-out blockchain development or write it off altogether as just another fleeting technology fad.
But it is important to understand that a blockchain is not intrinsicly linked to cryptocurrencies; it is merely the underlying technology allowing cryptocurrencies to be exchanged between members. As mentioned earlier, a blockchain can be designed to support any type of transaction. While the founders of Bitcoin prioritized the relative simplicity of tracking financial transactions, those blocks that assemble the chain can be packaged with a multitude of other data if so designed. That conceptual variation enables such inventions as ‘smart contracts’, and unalterable registries, for example. Once assembled and collectively verified by a consensus of the network’s nodes, these blocks become an immutable part of the digital record. That is exactly what later varieties of blockchains have set out to do, Ethereum being the pioneering blockchain in that regard.[4]
This has unleased nearly limitless possibilities for uses across many industries where transactions are prominent, real estate obviously being a major candidate. Just as blockchain users are assigned a unique digital ID, any real property has the potential to be assigned an ID that has a permanent and tamper-proof digital history attached to it (Think of it like a Vehicle Identification Number that allows you to look up the accident and service history of a car you are looking to purchase.). It would be akin to a global title system for real property; something like a record-keeping ‘courthouse’ for the world.
Real property could be tokenized and exchanged on the blockchain, just as any other asset or commodity, allowing for an easy splitting of interests and ownership ‘slices’ of real estate. Here are a few examples of what this could portend for the industry:
- Simplified, reliable and transparent property searches; a reduced reliance on brokers and/or Multiple Listing Services that may present biased or fragmented information.
- Underwriting and due diligence processes reduced to a matter of minutes.
- Sales and lease agreements entered via smart contracts that are instantaneously recorded.
- Automated payments and cashflow management by smart contract between tenants, landlords, contractors and/or service providers.
- Advanced property data analytics when combined with Internet of Things (IOT) technologies, improving owner decision-making as well as property transparency and valuations.
- Introducing greater options for shared property ownership through asset tokenization, reduced barriers to trans-nation investments, and increased liquidity within the real estate asset class as a whole.
Asia a Real Estate Blockchain Bellwether?
A 2018 JLL Asia Pacific report titled Clicks and Mortar: The Growing Influence of Proptech describes some of the unique demand drivers and challenges shaping Asia’s approach to emerging property technologies, to include the blockchain. Here’s how it cites Asia could enjoy more rapid technological change relative to other regions[6]:
- The rapid urbanization and boom of megacities. 40 out of 47 countries with fastest population growth rates are in Asia; 20 alone are in China. The result will be a wider pool of users having more diversified needs that start-up technology firms can fulfill.
- The rise of the middle class and millennials. Asia’s middle class will account for 65% of the population by 2030 (up from 46% in 2015) and US$38 trillion in consumption (from US$10 trillion in 2015). By 2020, 50% of the population will be millennials. These factors will account for major changes to spending habits in the region. High priced markets will find younger consumers more open to flexible ownership and leasing structures that technology can provide.
- Improved technology savviness among consumers. Asia accounts for 50% of total internet users in the world and tops the world in growth of smartphone traffic to the internet. Online shopping is booming in the region and paving the way for ‘an Amazon-like experience when shopping for real estate’.
- Selective support from governments. Japan is one of the first countries to legalize Bitcoin, and along with India is making some of the most accelerated adoptions of blockchain technology. While China has taken a harder stance against cryptocurrencies, it has been much more supportive of alternative blockchain uses.
The report acknowledges that much of the regional consumer behavior in property purchasing has traditionally leaned towards human interactions for better trust. However, that is likely to be overshadowed in years to come by the demographic changes described here. Additionally, many developing markets, such as in Southeast Asia, suffer from major issues with title security that are a hamper to real estate investment and should highlight the problems with reliance on traditional human interactions that many supposedly favor. As one Director at a prominent Hanoi firm puts it:
“Property transactions are generally quite chunky, so traditionally it takes a lot of time, paperwork and fees to complete transactions. This creates liquidity and transparency issues in the real estate market. Blockchain has the potential to be a game changer. By digitalizing transactions, time and costs are reduced whilst transparency and security increases. Although the application of blockchain is in early stages worldwide, I believe Vietnam has the potential to quickly follow this global trend, as the population is young and eager to embrace new technology whilst policymakers are aggressive and forward-thinking.” (Matthew Powell)[7]
Even developed economies such as Japan suffer from chronically inaccurate land registries and records of ownership. That is why the Government of Japan recently began experimenting with select cities digitalizing property records on a blockchain with hopes that the trial will be successful and implementable across the country within the next five years.[8] On November 30th, MicroSoft Japan announced a major partnership with a nascent blockchain startup called LayerX with intentions to aggressively accelerate the technology.[9] With measures like these and its commitment to the smart regulation of digital currency, Japan is poised to be at the forefront of any future blockchain boom.[10]
Several tech startups in the region are also leading the way with innovative and exciting uses of blockchain technology in the real estate space:
- i-house.com is Hong Kong-based and through its Asset Tokenization Offering (ATO) allows fragmented ownership to the property rights of large investment properties, essentially employing similar advantages of REIT ownership down to the individual property level, and making asset transactions light, efficient, and transparent through the use of their smart contract.[11]
- REIDAO is a Singapore technology firm that registers real estate with its own Ethereum address where users can visit and retrieve information about the property, including its ownership details. The website for the firm’s short-term rental project, CrowdVilla, states that it will ‘change the paradigm in using real estate assets as a community. Using blockchain to create an open and transparent way of recording digital assets, CrowdVilla will revolutionize the timesharing model in real estate.’[12]
- Real Estate Doc (RED) is another Singapore-based firm targeting the commercial real estate leasing market. In describing their platform, their website claims ‘by shifting leasing operations to the blockchain, users can significantly eliminate paperwork, save time, streamline work processes, enjoy heightened security through data encryption, lower legal and banking charges, and minimize fraud.’[13]
The socio-economic character of Asia Pacific is placing the region at the leading edge of this new wave of technology. Professionals and innovators in Western real estate markets may want to take note. Their relatively stable markets may not be screaming quite as loudly for some of the advantages that blockchain technologies could herald, yet there are undoubtedly some ground-shifting changes on the horizon with successful maturing of the technology and its universal adoption. It will likely take more persistent education and successful demonstrations for many to override the image of blockchain technology from the flashy yet tumultuous birth of cryptocurrencies to the more mundane yet practical uses of the future. Once those attitudes shift, though, look for the blockchain to rapidly change the way we all do business.
References
[1] Oimet, Sam. (2018, December 1st) Bitcoin Price Ends November with Worst Monthly Decline. Retrieved from https://www.coindesk.com
[2] Van Wirdum, A. (2018, November 14th) When the Fork Forks: What You Need to Know as Bitcoin Cash Goes to War. Retrieved from https://bitcoinmagazine.com
[3] Bloomberg. (2018, September 20th) The Latest Cryptocurrency Exchange Hack is a $60 Million Theft at Japan’s Zaif. Retrived from http://fortune.com
[4] “Ethereum’s core innovation, the Ethereum Virtual Machine (EVM) is a Turing complete software that runs on the Ethereum network. It enables anyone to run any program, regardless of the programming language given enough time and memory. EVM makes the process of creating blockchain applications much easier and more efficient than ever before. Instead of having to build an entirely original blockchain for each new application, Ethereum enables the development of potentially thousands of different applications all on one platform.” Retrieved from https://blockgeeks.com/guides/ethereum
[5] Kiger, Patrick J. (2018, October 10th) Developing Blockchain Technology Has Potential to Aid Real Estate Transactions. Retrieved from https://urbanland.uli.org/
[6] Clicks and Mortar: The Growing Influence of Proptech. Retrieved from http://www.joneslanglasalle.com.cn
[7] Savills Vietnam (2018, September 11th) How Will Blockchain Effect sia Real Estate Market? Retrieved from https://www.retalkasia.com
[8] Iesho, Ashour. (2017, June 27th) Japan to Trial Blockchain for Real Estate Records. Retrieved from https://bitcoinist.com
[9] Suberg, William. (2018, November 30th) Microsoft Japan Parnters with With Startup to Increase Domestic Blockchain Uptake. Retrieved from https://cointelegraph.com
[10] Bambrough, Billy. (2018, June 27th) Japan’s Next Economic Boom will be Bitcoin and Blockchain Fueled. Retrieved from https://www.forbes.com
[11] https://i-house.com
[12] https://reidao.io/
