The impact of blockchain on the future of the real estate sector

Blockchain technology could fundamentally alter how real estate is owned, managed and transacted around the globe. There is no doubt that it will take time for this technology to reach its full potential but it is already having an impact across a number of sectors including real estate.

The real power of blockchain technology lies in the automated execution of a transaction using the technology and the potential to create fractional ownership in real estate assets using tokens which can be trading on a blockchain- based exchange thus opening up investment opportunities in the real estate market.

In this article we explain what blockchain technology is and look in more detail at the potential uses of this technology in the real estate sector and the benefits it can deliver.

What is blockchain technology?

The phrase "blockchain technology" is often used synonymously with "distributed ledger technology" (DLT). In fact the two are not the same and, in most cases, when referring to "blockchain" most people are likely referring to distributed ledger technology. In short, blockchain is a type of distributed ledger technology, but for the purposes of this article, we use "blockchain" as it is the more familiar term.

The simplest way of describing blockchain is as a technology that enables the secure and permanent storage of a digital ledger of transactions, contracts, agreements and other information collectively by a network of users.

The technology works by:

• implementing a set of rules (consensus protocol) to verify the transaction as having taken place or the information as being validly submitted;
•  each verified record of data is secured and bound to each other using cryptographic principles;
• the record is added to the ledger, which is not stored in one place but is distributed across several, hundreds or even thousands of computers around the world; and
• every new transaction or piece of information added to the ledger is immediately available for every network participant.

It is no longer necessary to transfer information between interested parties or to keep information in separate databases. The network can either be public, which means it is available for any interested participants or it can be a private network which means it is only available to authorised users.

The blockchain ledger is a comprehensive record of all transactions that have taken place since the ledger's inception. It is virtually (although not completely) impossible for data to be removed, or altered -  blockchain is designed for the data to be secure and immutable.

What are the key advantages of blockchain?

The advantages of storing data using blockchain are transparency, security and speed.  All data stored in the ledger is accessible by the participants in the network.  This means that any member of the network can reverify the transactions or information stored on the ledger to confirm that there have been no unauthorised attempts to make a change to any data.
The information contained within it is recorded using cryptographic principles and distributed across a network in a manner that makes it secure.  It can be very fast. Reconciliation of the ledger can occur almost instantly.

How will blockchain affect real estate transactions?

HM Land Registry is committed to their ultimate aim of having a fully digital title register for England and Wales.  They have partnered with leading blockchain technology organisation, R3, who have provided the Land Registry with access to their blockchain platform, Corda.
This is part of the Digital Street project which HM Land Registry hopes will enable it "to become the world's leading land registry for speed, simplicity and an open approach to data".

HM Land Registry have already created a digital register for a small selection of properties as a first step on the road to a register that is fully machine-readable and can be updated instantly.

In the UK, blockchain technology has the potential to speed up the whole conveyancing process.  Ashurst is very pleased to have been involved in the first global trial of the Instant Property Network (IPN) facilitated by R3 which simulated an end-to-end residential sale and purchase transaction using test data. The collaboration to test the world's first distributed ledger-based property market place was undertaken by 40 organisations in 23 countries across five continents representing the full spectrum of traditional transaction participants. Bringing all the participants together on a secure network vastly improves the transparency and speed of the transaction. As a result it has the capacity to transform the whole buying and selling process.  The trial used the secure Corda network to create a digital record for each physical real estate asset. It was then possible to update the property record and link it to relevant property report, contracts and other documents on the distributed ledger. This provides visibility to all participants and allows the transaction to automatically complete using a smart contract. 

However while the "process" side of conveyancing can be made more efficient, it is often the information gathering and due diligence workstreams that slow transactions down.

Time will tell whether other technologies, such as artificial intelligence, can play their part in driving efficiencies in these areas.

How does a smart contract work?

Traditionally, the documentation needed for the purchase of a real estate asset, such as finance agreements, searches, title deeds surveys, property valuations, etc, are in the possession of different stakeholders and sharing information can be a time-consuming exercise.
With blockchain technology, all the information can be assembled into one distributed ledger, and authenticated at the point of creation by consensus mechanisms, which govern the data.

Each stakeholder has instant access to all the information, and can track the "live" progress of the transaction. Each participant would be able to provide a digital confirmation that their element of the transaction was complete so that the transaction could proceed seamlessly to the next phase until it is completed.

Smart contracts can automatically monitor and execute transactions once certain conditions are satisfied thus reducing the chance of manual errors. They can reduce the number of intermediaries needed and enable automatic payment either directly from the buyer's bank account or from the escrow account, thus enabling completion to occur more quickly.

Therefore, the combination of blockchain technology and smart contracts could reduce overall cost for real estate transaction participants.

However a smart contract is not a contract as we know it.  It is computer code which creates a self-executing agreement. Of course, in real life contract terms may need to be altered or the contract itself may need to be terminated, but the blockchain technology underpinning the smart contract cannot be changed. Neither is it possible for a smart contract to recognise contract terms which require interpretation. For example, terms such as "complete within a reasonable time", "use reasonable endeavours", co-operate in utmost good faith".

So, smart contracts have their limitations but there is no doubt that they will continue to evolve as the technology improves and in time may well be able to handle more complex transactions. 

Can blockchain streamline asset management?

Asset management could also be streamlined by blockchain technology by holding all the relevant data for the particular real estate asset on one online platform. A smart contract could be used to run the tenant rent and service charge accounts.
So, using blockchain it would be possible to keep all the technical and maintenance information for a building in one place so that it can be readily accessed and updated. Maintenance and service schedules could be stored on the distributed ledger enabling property managers to track routine maintenance visits by contractors, and smart contracts could be used to automate payments to the relevant service providers. The ledger would keep a complete record thereby giving property managers a complete and transparent audit trail.

It is possible to see how blockchain technology and smart contracts could automate the payments of compensation under a service level agreement in instances of failure to meet the required service levels.  If the service provider failed to meet its service level targets then this would trigger an automatic credit to the client.  This would streamline the whole process and avoid the need for manual intervention.

What is tokenisation and fractional ownership?

In simple terms, a token is a digital representation of a physical asset, value, or function. Many types of blockchain-based applications either utilise tokens as a currency to use the application or complete transactions using the application, or allow tokens to be created and traded within the application. Cryptocurrencies are the most well-known types of tokens.

So, it is not difficult to see how blockchain technology could allow the tokenisation of real estate assets. This will not only increase the liquidity of traditionally illiquid assets, but it will also make it possible to fractionalise interests in those assets and then trade them.  Instead of buying the whole or part of an interest in a property, you are buying tokens which will be more readily tradable on blockchain-based exchange.

One of the most interesting possibilities of tokenisation is the concept of fractional ownership. Instead of one individual person owning a single real estate asset it would be possible for a number of individuals to jointly own the asset.

So, instead of having all of your money tied up in one single asset you can spread your investment by purchasing fractions in a number of different properties which brings greater diversification and reduces risk.

For example, the European fintech company BrickCoin has introduced a new cryptocurrency called BrickCoins.  Each brickcoin represents a fractional investment in an unmortgaged real estate asset which is held in a highly regulated real estate investment trust (REIT).

Each brickcoin transaction is designed to be completed, authenticated and recorded using blockchain technology. The appeal of BrickCoin over other more volatile and unsecured cryptocurrencies is that it is secured against real estate which is a robust asset class.  This means better liquidity, more stability against market fluctuations and better regulatory safeguards.

What are the challenges ahead?

Blockchain technology has the potential to radically change the property landscape, but real world commercial applications remain few and far between. If blockchain technology is to become more widely adopted, it is crucial that the technologists and lawyers work together to build solutions.

Data protection is also often cited as a potential challenge to the adoption of blockchain technology.  The General Data Protection Regulation (GDPR). Includes the right to have your personal data removed if such data, which has been processed and stored, is no longer needed. However, one of the fundamental principles underpinning blockchain technology is that once data is recorded on the ledger, it cannot be erased or removed. Now, in reality there are mechanisms which can be built into the rules of a blockchain network to allow for data to be amended if required. But, this needs to be addressed up front in implementing a blockchain-based solution and made clear to all participants as to how the rules work in practice.

Blockchain’s core quality is its power to connect and distribute information among its users, but its sheer complexity could prevent its universal application. Real-world commercial applications remain few and far between. The Land Registry's partnership with R3 is an exciting leap into the future of conveyancing, but it is clear that there are many more incremental steps to be made before the benefits of blockchain can truly be unlocked.

In order to deliver the wide scale integration needed, the technology also requires further standardisation and a clearer regulatory structure. However, the lack of collaboration among blockchain firms and the inherently complex nature of blockchain could mean that the law struggles to keep up.

Many other questions still remain, particularly where global participants are involved; for example, choosing the appropriate jurisdiction and governing law, how to deal with liability issues when the technology goes wrong and how the different regulatory authorities will adapt to the challenges of blockchain technology. But it is already clear that headway is being made and the future looks bright in terms of the benefits blockchain technology can bring to real estate.