Recently, Barclays and the Royal Bank of Scotland (RBS), with the participation of enterprise software company R3, successfully tested a blockchain project that will speed up real estate transactions. How will the traditional process of real estate transactions and mortgage issuance change?
Barclays and RBS’s solution as a response to market needs
Today, real estate transactions are carried out using paperwork — a complex, slow and sometimes expensive process.
As a rule, about eight parties are involved in a real estate transaction — in addition to the buyer and the seller — each of whom must go through the process of exchanging information, including filling in a variety of documents, and using different platforms and databases.
Centralized process of a real estate purchase / Decentralized process of a real estate purchase
As a solution, Barclays and RBS proposed a system that allows participants in real estate transactions to conduct transactions directly, while maintaining control over their personal data.
During the test, which took place over five days, real estate transactions were modeled using data in a distributed registry. As a result of the experiment, it turned out that blockchain is able to simplify and optimize the process of buying and selling real estate from more than three months to less than three weeks. The first real transaction was successfully carried out by Barclays back in September 2016, in less than four hours. Blockchain was used to transfer $100,000 as a payment to ensure an export of a batch of butter and cheese produced by the Irish dairy company Ornua to Seychelles Trading Company.
According to the project participants, the use of blockchain for this process can save the real estate market about $160 billion a year. Dan Salmons, director of mortgage innovations at RBS, said:
“What has made a real difference here is that R3 has brought representatives of all the key parties involved in the process together, so as a result we can see the potential for a network of this kind to improve transparency and speed for customers, and reduce cost and complexity for all involved. IPN has given us our best view yet of what a future end-to-end journey could look like.”
The project is a consortium between the American law firms Squire Patton Boggs, Ashurst and Clifford Chance, along with the real estate corporation Search Acumen. R3 CEO David Rutter commented:
“Not only has it shown that distributed applications work and the benefits are real and substantial, it has also shown that there is huge appetite in the market to evaluate it.”
Blockchain application in the real estate sector
In the real estate sector, blockchain can be used at all stages of value creation.
Registries of objects, transactions and property rights
With the help of new technology, information about real estate objects, transactions, registration of property rights, encumbrances and the state of objects can be recorded in distributed registries, access to which can be obtained using both desktop computers and mobile applications. Since early 2017, various countries — including Sweden and Brazil — have begun to use blockchain technology to facilitate the ownership of land and properties. In particular, this will simplify and speed up the valuation of real estate, since it is now necessary to reorder the relevant documents for each transaction, which cannot always be trusted.
In the medium term, the introduction of the use of smart contracts in the real estate sector is expected. Smart contracts, in this case, can serve as electronic protocols to register, and set the terms and rules of real estate transactions. 5, 2016, British consulting company Deloitte announced that, in partnership with the administration of Rotterdam and the Cambridge Innovation Center (CIC), it had launched a pilot project that aims to serve the registration of lease transactions by using blockchain. In addition, according to Adam Cuffe — the CEO of Blockbank, a digital decentralized commercial trading platform — the introduction of distributed registry technology at the stage of conducting commercial real estate transactions will help reduce costs not only for buyers and sellers, but also for other participants of the process (e.g., banks):
“The distributed registry technology will be in demand in almost all real estate transactions, including the transfer of money, the registration of property rights and the conclusion of contracts. And banks, being profit-oriented, are the first who are interested in using such solutions.”
Cuffe also added that the further development of artificial intelligence (AI) technology will additionally reduce the human element:
“If you look at a local bank now and ten years ago, you will see the changes. These institutions will have the leading edge as we transition into the blockchain banking era.”
Notably, blockchain has already demonstrated its potential to replace routine paperwork in real estate. For instance, Hong Kong real estate operator New World Development and the Hong Kong Institute of Applied Science and Technology (ASTRI) are working on a platform similar to the one being created by Barclays and RBS. In particular, we are talking about escrow accounts, which are often used when buying or renting real estate. According to Cuffe:
“Blockchains can be in demand in other cases when decisions in the real estate industry are made on the basis of a vote, for example, for voting by shareholders or shareholders.”
These factors can also stimulate the development of collective investments.
Purchase of real estate for cryptocurrency
In the short term, blockchain can be used to transfer the price of real estate transactions using established cryptocurrencies, as well as through an initial coin offering (ICO). In the near future, blockchain can be used not only to pay for transactions in cryptocurrency, but also to transfer fiat and national digital currencies issued by state central banks.
Construction data storage and analytics
Blockchain can go beyond aiding in the purchase of real estate and be used at the construction stage, as claimed by Mike Davie, CEO of Quadrant, a blockchain-powered big data platform that maps and authenticates data:
“Location data plays a vital role in the design, placement and construction of a building – residential or commercial. If the location data is inaccurate, the negative consequences can last for many years.”
Davie also added that another noncommercial application of blockchain in the real estate market industry can be connected with data storage and analytics:
“When buildings are built, analysts will also use and study location data for investor purposes, such as foot traffic, customer demographics, catchment areas, which in turn influences everything from rental prices to real estate investment trust (REIT) values.
Others said that it is possible to speed up the process of real estate transactions without using blockchain:
I can do even faster using “internet technology” and “software technology”
— Sebastien Meunier (@sbmeunier) April 5, 2019
Maria Bellmas, institutional deputy director for trade and product supply at ANZ — one of Australia’s Big Four banks — said:
“Blockchain has been the darling of the tech world for some time and increasingly so over the medium term, perhaps in part pushed by scorned crypto fanatics grasping for some justification of their obsession in the wake of the bitcoin collapse.”
According to her, one of the main problems is that well-established financial institutions do not need blockchain technologies to improve their proposals, because the existing databases and technological solutions have checked themselves and are justified.
“The reality is a lot of the problems blockchain projects attempt to fix have already been solved by existing technologies. In many cases, a regular database can solve for the problem with more reliability and for much less cost than blockchain.”
Banks changed anger to mercy
Notably, until recently, banks were wary of conducting specific experiments, limiting themselves only to abstract statements that cryptocurrencies would not compete with traditional currencies and that blockchain is a rather young technology. States then began to create regulatory bills, and banks began to glance in the direction of blockchain. The patent application proposes using a distributed registry to process payments in real time, without having to rely on a third party to store a “control” copy of the information. In September 2016, the bank conducted the first transaction through blockchain.
In August 2017, the former leader of the bank, Antony Jenkins, stated that for large bank players, blockchain technology could become a real threat:
“This is just in the footprints of what’s going to happen here. As these technologies season and develop, we can imagine total transformation of the banking system, using Blockchain for example, in a world where banks don’t really exist anymore.” It took banks some time to thoroughly examine the benefits that blockchain can offer, according to Nick Spanos, CEO of Bapple Realty in SoHo, New York City, and founder of Bitcoin Center NYC:
“Now, they’ll begin to offer services to the public that use blockchain. Property is an industry that is ripe for this, where a complex difficult process for customers could be made cheaper and more transparent.”
A look at the future
Such a rapid turnaround in banks’ initiative to use blockchain can become a threat to blockchain projects that develop real estate solutions. However, according to Spanos, blockchain startups have nothing to worry about:
“They [banks and blockchain projects] will be complementary to each other, though in the long run people and firms will gravitate more toward the blockchain firms. The blockchain firms are starting out from a perspective of how to decentralize access to liquidity and to facilitate a more popular participation in real estate markets and development projects. While banks are using it to streamline internal processes, they’re unlikely to as quickly or as fully begin eroding their own legacy, outmoded profit models.”
In addition, he believes that such cooperation will accelerate the development of new solutions and will be beneficial, both to developers and buyers:
“There will be better rates for developers and lower entry barriers to build bigger projects, and for less. Properties with higher capitalization rates in more desirable areas will be more appealing with lower barriers, increasing the potential for revitalizing depressed areas.”
In general, the potential of smart contracts in the commercial real estate sector is assessed positively. Even being partially integrated, blockchain will be able to assume such functions as the preparation of rental and sale contracts, the storage and analysis of the necessary data for real estate valuation, the monitoring of the performance of duties by service providers and other functions. Nikolaos Kostopoulos, a European Union regulation researcher, said to Cointelegraph:
“Investigating further the potential outcomes from the widespread popularity of cryptocurrencies in combination with the vertical adoption of blockchain within the supply chain of the real estate industry predicts a whole world of new opportunities for the real estate market: from fractional tokenized ownership of properties to futuristic startup societies with decentralized governance.”
He also added that Europe already witnesses applications simplifying the facilitation of peer-to-peer loans with properties as collateral, and that they outperform financial products:
“It’s only a matter of time to see properties to be offered to a multi-ownership format which will become a reality with real estate e-registrests on the blockchain than paper contracts.”
The experience of Barclays, RBS and R3 could become a demonstration in this case. As stated by Todd McDonald, co-founder and chief product officer at R3, in the near future, the company plans to digitize records of real estate in England and Wales.