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Blockchain in Real Estate Building Economies of Scale

28 September 2018
Real Estate Sector
At DWF we have been working with our clients for over 12 months to advice on the wider implications of blockchain across our global network. As well as our current clients we have also had the opportunity to present on blockchain to businesses in our key sectors of central & local government; energy & industrials; financial services; real estate; retail, food & hospitality; technology; and transport.

Recently we have seen a marked increase in the buzz that blockchain is generating outside that of cryptocurrencies and the financial services industry. It carries the promise of fast and secure transactions and businesses in a wide variety of industries are increasingly considering if and how to apply this new technology to their benefit. 

The real estate market is one of the prime sectors standing to benefit from this technology and we already see promising applications of the technology being developed and even put to the test. Blockchain stands to mitigate many concerns relating to fraud as well as the fluidity of the transaction process. 

So how does blockchain work as opposed to traditional systems recording transactions? Traditional systems storing information or processing transactions are centralised. The process is managed by one central entity which makes the system vulnerable to fraud as altering this entity’s records corrupts the whole system. To improve such vulnerability, systems can be decentralised which means that the same information is stored simultaneously in several different servers that relay such information to users. However, decentralised systems are still more vulnerable than a distributed system. 

In a distributed system, as is used in blockchain, information may be stored in an infinite number of different nodes, all connected to each other, thus forming a network. If the information were to be corrupted in one node, it will still be accurate in the remaining majority of nodes. Fraudsters would have to corrupt an infinite number of nodes to permanently alter the information, which would be practically impossible. The inherent qualities of such a distributed ledger are that information is stored and processed in a verifiable, transparent, irreversible and secure way and it makes for higher transaction speed. 

Blockchain technology generally means a paradigm shift from centralised to peer-to-peer systems. Transactions in a centralised system require trust between the parties which are usually provided by engaging an intermediary. Blockchain technology enables trust based on code, which foregoes an intermediary and as such, saves time and money. 

In real estate, the following four applications of blockchain impressively showcase what the technology is capable of:

  • streamlining search processes, 
  • blockchain-based land registers, 
  • property financing, 
  • streamlining supply chain management to help build economies of scale in construction methods.

What unites these four processes is that when using current traditional systems they are quite time-consuming and costly, as well as requiring intermediaries to build trust and being vulnerable to fraud. These issues can all be mitigated when blockchain technology is applied. 

If we first look at search processes matching buyers and sellers of real estate, a blockchain-based listing service could provide for a uniform database with more reliable data, easy accessibility and lower fees as intermediaries such as online platforms would no longer be necessary. Reliability of incorrupt data may be achieved through a practice that is already applied in transferring land registers to the blockchain, namely a Digital Identity for property. In this, each property is given a digital identifier consolidating all information available including plot number, address, owner, previous title transfers and owners, GPS data, as well as vacancies, tenant profiles and financial status. 

Turning to land registries and title management, the pressing problems currently are a lack of land registries, mostly in Latin America and on the African continent, and centralised land registries’ vulnerability to human error and fraud, as the cases of Edwin McLaren and Laylah De Cruz in the UK bear testament to. The benefit blockchain brings here is to eliminate the fraud and error risk by creating a permanent and distributed record clearly identifying all relevant features of a property via the digital identity while allowing all interested parties to access such information. 

Moreover, in common law jurisdictions title insurance would become obsolete the moment a system could reliably reflect previous changes of title. Prominent examples of land registry use cases are Sweden, Estonia and Ghana that have partnered with private business to “blockchain” their land registries. HM Land Registry is currently looking into a model to transfer the complete real estate transaction from search to change of title into an automated, comprehensive system based on blockchain technology. Information could be shared where required and processes sped up.

Property financing is another area that provides a prime example of the value of using blockchain in real estate. Real estate transactions are time-consuming, expensive and involve multiple actors that - at least in part - require similar information over the course of a deal. Moreover, investing in real estate cross-border is a cumbersome process. Blockchain technology offers answers to these concerns. Furthermore, blockchain technology offers access to a new form of crowd-funding and cross-border investment. Asset tokenisation allows for different structuring and participation models that allow for owners or developers to raise funds from a pool of global investors and for such investors to participate in promising projects all over the world.

Lastly, the housing shortage in the UK is impacted by long construction times and expensive land. Modular method construction permits for large parts of the construction process to be conducted off-site which shortens actual construction time considerably and reduces labour as well as construction costs. However, reliable supply chain and project management is key. Using blockchain technology to that end may serve as a basis for companies using modular method construction (MMC) to scale more efficiently. For instance, it will enable MMC businesses to vastly improve the administrative elements of production via smart contracts which can execute payments automatically. 

As with many new and emerging technologies we will learn more as it matures, though blockchain can help address many of the security frailties that we currently experience within a traditional centralised model. There are many legal questions surrounding the use of blockchain, one such being that of which jurisdiction takes precedence in light of any arising disputes. It has been very insightful speaking at events such as The International Business Festival on the subject, particularly as its applications beyond that of cryptocurrency grow. One thing is for certain - blockchain is here to stay.

Further Reading