Real Estate Investor Magazine South Africa December/ January 2018/2019 | Page 19

BLOCKCHAIN
W
hile cryptocurrency already achieved widespread
notoriety with extreme value growth, business
blockchain applications for the real estate vertical
are still in their “first inning”. Operators, owners and investors
are now starting to learn about the technology and what strat-
egies to consider for leveraging blockchain.
To help gain a greater level of clarity around those difficult
questions, we summarized our research and key findings of
this paper into a few key takeaways:
Key takeaways for real estate executives and
practitioners
Real estate is ripe for blockchain adoption due to its size,
fragmentation, multi-party transactions, and illiquidity.
Cryptocurrency wealth is real (Market cap of ~$250B as of
August 2018) and offers a significant new source of capital
looking for investment opportunities, not unlike investors
under the EB-5 visa program.
Blockchain has the potential to unlock liquidity in certain
real estate assets by allowing investors to freely trade previously
illiquid positions, while simultaneously providing long-term
committed capital for owners. This represents the largest
opportunity in real estate as it can lead to a liquid secondary
market.
2019 will be the year that large commercial assets become
‘tokenized’ and traded via blockchain based compliance
platforms.
Blockchain will enable secure digital identities for investors.
Future blockchain adoption will not eliminate the need for
third party service providers; instead it has the potential to
automate workflows and accelerate transactions.
Until critical underlying industry data is digitized and
structured, blockchain powered applications will have limited
use cases and adoption.
Clear government regulation for cryptocurrency and
blockchain platforms is required to allow for more institutional
adoption.
Leading real estate players will likely need to embrace
blockchain technology within their operations (a la the
internet in the 1990s), or risk being left behind competitively.
How can Blockchain help real estate opera-
tors ?
Given its size, lack of digital infrastructure, transaction
complexities, and illiquidity, the real estate industry stands to
greatly benefit from blockchain’s value proposition of helping
digitize and exchange assets in a decentralized and secure
manner.
Blockchain’s inherent trust mechanism can be a compelling
concept for reshaping businesses and transactions that are
traditionally bogged down by inefficiencies. As such, the
$200T+ real estate asset class - from landlords, to service
providers, to data providers and others - needs to pay careful
attention to this emerging technology and develop a strong
understanding of the potential changes that could take place
in the market.
Blockchain can be the technological foundation to
create and trade security-law-compliant representations of
traditional private assets via platforms like Harbor (a Navitas
portfolio company) Polymath, tZERO or Meridio (See
notable blockchain start-ups in appendix D). These so- called
security tokens represent ownership claims of private securities
on blockchain. Security tokens allow asset owners to easily
convert the rights of individual properties on to a blockchain
network, subdivide the asset into individual parcels and create
tradeable fractional ownership of property rights.
In practice, blockchain-based security tokens give real
estate owners the ability to:
1. Compliantly leverage new sources of equity in the form of
crypto-wealth looking for quality investment opportunities
2. Increase liquidity for investors.
As a result, the security tokens can potentially transform
capital formation as owners can obtain long term committed
capital, while investors can freely trade the tokens on a
secondary market with other accredited investors. Investors
will eventually be able to get in and out of previously illiquid
positions instantly, and more importantly without the
involvement of intermediate fund managers. This represents
the largest opportunity for blockchain in real estate as it can
lead to a liquid secondary market that potentially enables the
true democratization of real estate access.
Democratization will first require regulators to form the
necessary guidelines, similar to how Title III of the JOBS
Act established crowdfunding provisions. The continuous
regulatory process will be the only viable path to create a
truly liquid, blockchain enabled marketplace for real estate.
Blockchain adoption will therefore depend on the progress
of the technology alongside the advancement of regulations,
making it impossible to forecast its full impact and the timing
of that impact. However, the eventual efficiency gains that can
be achieved are significant, especially in regard to broadening
the investor base for commercial real estate transactions,
where an added layer of security and verification can provide
significant value.
Looking ahead, blockchain also has the potential to lower
transaction costs, as the ease and security of transactions would
permit the efficient unbundling of property rights.
SA Real Estate Investor Magazine DECEMBER 2018/JANUARY 2019
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