When it comes to tech, ignorance is definitely not bliss. But sometimes the language used in this brave new world can be a little bit baffling and a simple explanation is needed. This week Will Matthews, head of real estate insight at Deloitte, explains the basics of blockchain in property
At first glance, blockchain is something of a puzzle: bargain on more than one good coffee being needed to fathom the detail of the technology and the cryptographic currencies, such as bitcoin, that power this new way of sharing information. Fortunately, for most it is more important to grasp the general concept than to be an expert.
In essence, blockchain is simply a digital process to record data in a way that allows every participant in a market access to exactly the same information. Rather than being stored in one central location, such as a national bank or land registry, identical records are maintained on each participant’s computer.
For that reason, blockchain is sometimes termed a distributed ledger. Any transactions between participants are grouped into “blocks”, which are added one after another in a chain (the “blockchain”).
Such a chain could be administered either by a public body or private company, with the initial verification of assets provided by traditional authorities, such as the Land Registry or DVLA. Subsequent transactions would be verified through the blockchain cryptography, using consensus rules to authenticate transaction activity across the distributed ledger.
Of course, blockchain is far from being the first way to validate, store, or share data. The clever part comes from the combination of distributed ledgers with cryptographic electronic currencies, which makes it very difficult for one or even a group of participants in the market to forge records or alter historic data. In theory, the information stored on distributed ledgers in this way is so hard to falsify that records can be trusted even without a central authority.
Some of the first uses of blockchain in real estate have been based on exactly this logic: a number of emerging market economies are trialling blockchain to record land ownership, as a substitute for weak central authorities such as land registries, which cannot always guarantee the level of trust or certainty of ownership that investors seek.
However, blockchain may prove to offer value even in relatively transparent and efficient real estate markets. As a widely accessible and irrefutable reference data set upholding the validity of transactions and ownership across disparate parties, blockchain can theoretically reduce the time taken to trade real estate by a significant margin. Its coverage can span multiple jurisdictions and can include detailed information, such as the lease agreements and payments made in relation to a building.
In practice, blockchain real estate transactions are still rare enough to qualify as news, and few people currently believe that blockchain will entirely replace land registries as the ultimate source of title records.
Yet in the context of commercial property transactions, with timeframes that are often measured in months, any techniques that reduce this lengthy process stand to enhance liquidity and ultimately values.
But blockchain’s utility is not limited to payment or value transfer transactions. The emerging use of verified digital identities, in conjunction with blockchain-powered notary services, make blockchain a secure repository of documents suited to the management of complex real estate portfolios. With this potential to realise substantial efficiencies, Deloitte Netherlands is using this new technology to develop the first example of blockchain-enabled lease management.
Aside from the registrar-style features of blockchain, perhaps its next greatest benefit is the potential for automation of transactional workflow. Through the use of “smart contracts”, multi-party agreements can be represented digitally and programmed to respond to or execute conditions in response to predefined trigger events, all in the same secure, tamper-resistant environment.
Environmental factors such as interest rate or inflation changes, or even the change in status of an operating license or insurance policy could now automatically set in motion review procedures within pre-defined parameters.
In short, a blockchain-enhanced system for managing real estate portfolios could substantially reduce the audit and monitoring effort in any organisation with large or complex real estate holdings.
Beyond the transaction of leases and property, the blockchain could simplify due diligence processes. Using trusted and immutable digital records held on the chain, landlords could quickly and cheaply be provided with documents assuring the identity (and even prior history) of potential lessees, again substantially reducing the time in which a lease is exchanged.
So, how far down the path of blockchain evolution have we come? The answer, for now, is not very.
For all the excitement of proptech innovation, the venerable industry of real estate remains tied to time-honoured processes – partly because they still work. However, momentum is building rapidly: blockchain could be the technology that finally allows the traditions of physical deeds and handwritten signatures to be left behind and revolutionise the real estate environment. It may not reduce the relevance of these methods overnight, but for those who adopt blockchain, the potential for far greater security, transparency, and efficiency awaits.
Interact with Matthews on Twitter using @WillHMatthews
