Blockchain Technology is the most popular topic of today as the soaring Cryptocurrencies make incredible use of it. If we observe blockchain technology in more detail, it is not only revolutionizing the Crypto Market but will also disrupt more sectors in the financial world. One such sector is Commercial Real Estate. Commercial Real Estate has been one of the most favored real estate investments for its ability to generate phenomenal capital appreciation as well as a great source of revenue through leasing options. However, the anomalies involved in the process of buying or leasing Commercial Real Estate properties discourage certain groups of investors. Blockchain technology seeks to address these anomalies and transform the way how Commercial Real Estate works in India. In this article, we aim to explore the potential innovations which can be brought in by Blockchain Technology in the Commercial Real Estate space.
How does Blockchain work?
Blockchain Technology is a uniquely designed ledger system that records transactions digitally on a network with validation from all the stakeholders involved in the transaction.
To put it simply, when a transaction takes place, the details of a transaction are entered in a new ‘block’ by any one or more stakeholders in the digital network. This transaction needs to be approved by all the parties or stakeholders in the transaction for validation of the block. Validation creates a unique code that gets attached to the block created. Furthermore, this new block is connected to the previous blocks of transactions using the matching system of the unique codes formed for each block. This creates a blockchain and is accessible to any party who connects to the network.
This technology of Blockchain offers immutability of the information inputted in the block. It means that no person can hack or change the information once it is approved by all the parties. In addition to that, no party can input false information as the same will be rejected by other parties and the block won’t be created. Thus, blockchain is a stringent technology providing transparency, accountability, and authenticity to the stakeholders of a transaction.
Blockchain Revolution in Commercial Real Estate
Commercial Real Estate is dominated by a strong network of High Net-worth Individual investors and property dealers. Moreover, this dominance remains evident in the leasing sector too. Thus, the centralized dominance of few groups discourages new entrants to invest in Commercial Real Estate due to less transparency and centralized oligopoly controlling the prices. The entry of Blockchain will disrupt this dominance and thereby create a level playing field for all. It can also open up the oblivious entry barriers and more inflow of investors will be witnessed. Here are the 10 upgrades that Blockchain Technology will be instrumental in making the Commercial Real Estate Investments and Leasing more affordable, accessible, and convenient for investors.
# Improve Commercial Property Listings on Blockchain Network
Commercial properties lacked a robust listing network where buyers can identify potential commercial properties for investments. Most of the premium commercial properties were only accessible to the internal network of HNIs and property dealers. However, with the help of a Blockchain-enabled property listing network, more investors can access the details and past records of the listed property. This will ensure equal opportunities for all and also maintain transparency of details in terms of property location, age, title clearance, price comparisons, and so on.
# The easy evaluation process of the property
Since the listings on the Blockchain network provide a wide range of details of the property including the historical transactions, location, structural audit, pricing rates, legal compliance, title records among others, the investor or lessee can conduct a proper financial evaluation of the investment and forecast the probable returns arising out of the property. This evaluation process can be done before initiating any interest in the property towards the seller or lessor.
# Property Due-diligence through Blockchain
When the property evaluation fares on the buyer of the lessee’s expectations, he/she can initiate the process of purchase or leasing and conduct digital due diligence of the property through inspecting the previous transactions on the blockchain. If the title records deem clear from the due diligence along with meeting the legal requirements, the buyer or lessee can proceed with arranging the capital or exploring the leverage options.
# Faster Loan processing through Blockchain
Usually, the loan application process takes months to get approved and sanctioned due to a manual process of inspecting the property and credit capacity of the applicant along with frequent clearances requiring the applicant to visit the bank repeatedly. Thus, the process becomes longer and tiring. However, with the power of blockchain technology, all the details of the buyer or lessee will be stored as a digital identity on the network and will be easily accessible to the mortgage institutions. Moreover, their credit history will also be accessible and thus making it less time-consuming for banks to process the loan application through blockchain with a smart contract.
# Execution of transaction through smart contracts
After the due diligence and availability of capital, a smart contract is formed between the buyer and seller or lessee and lessor which is a digital contract stored in the block. In this smart contract, all the terms and conditions of both parties are encrypted that enables the smart contract to review their adherence and ensure their fulfillment. If any breach of the conditions occurs, the smart contract terminates itself resulting in a void transaction. Such smart contracts don’t require any external regulation of law as they are self-regulating in nature and unbiased. Thus, costs are saved in terms of legal representation in case of breach by any party to the transactions.
# Smart contracts regulate leasing
Leasing agreements require continuous regulation to ensure timely transfer of cash flows from the lessee to lessor. This process involves a lot of stakeholders right from the landlord, tenant, agents, and so on. Thus, manual tracking of all such transactions is difficult and may lead to misrepresentation or omission of some transactions. To avoid such scenarios, Blockchain Technology enables smart contracts which can be fed with all the information on the amount of lease, payment intervals, bank account details, maintenance charges, and so on. With optimized instructions for automated payments, smart contracts enable the system of an escrow account which can block the lease amount for payment on the due date. Thus, the processing of automated payments on the due dates is also possible through smart contracts. This will eliminate the hassles for the lessee to remember lease due dates and ensure timely payment security to the lessor.
# Efficient tracking of transactions by regulators
To comply with the regulating authorities, a lot of paperwork is required. This includes Government authorities, Auditors, Legal authorities, Income Tax Department, and so on. The use of Blockchain Technology can efficiently manage to track transactions complying with the regulators through shared access to anyone joining the network of blockchain. Thus, time is saved through the elimination of paperwork and digital tracking enhanced with real-time access to all at once.
# Use of cryptocurrency to make payments
Blockchain-enabled cryptocurrencies can be used to make payments particularly for transactions involving investors of NRIs or foreign national categories. A major portion of Commercial Real Estate investors includes NRIs who appoint third-party management for their properties to look after the timely inflow of cash flows and their conversion. However, with enabling cryptocurrency for making payments, the need for conversion of currency and other formalities will be omitted. This will ensure a smoother and efficient flow of lease payments for cross-border properties.
# Reduction of Title Frauds
Blockchain Technology ensures the immutability of data inputted in the blocks. This is possible due to the ‘proof of work’ system enabled by blockchain. Under this system, any change to be made in a block changes the unique code of the block. However, this change is not represented automatically in the connecting block and thus the blockchain becomes void. To make it valid again, the hacker will have to manually change the codes of every block in the chain. But one catch here is that it requires almost 10 minutes to process a change in one single block. Thus, it becomes impossible for the hacker to distort the whole blockchain. Using this in Commercial Real estate will be instrumental in reducing title frauds and misrepresentation of distortion of facts.
# Tokenization of Commercial Properties
Blockchain Technology offers tokenization of assets that enables trading of huge commercial properties in small shares or pieces. These tokens can be easily traded in the secondary market. Trading of tokenized properties works similar to trading of shares in a stock market. Thus, faster processing of transactions provides greater benefits of liquidity and affordability by purchasing only small chunks of the property rather than the whole. The ownership of tokenized properties is free transferable.
To put it in a nutshell, blockchain technology will eliminate all the loopholes in the commercial real estate system and thus make the experience of investing in commercial real estate more fruitful and hassle-free. Though the use of blockchain in real estate is at its nascent stage, a few years down the line will witness the major revolution in how real estate works. With tons of benefits in the commercial property sector, blockchain will prove to be a valuable addition to the ecosystem. The distribution of trust will eliminate the dominance of few players and common investors can also be part of commercial real estate investing. Moreover, blockchain empowers the process of investing through REITs, Real Estate Crowdfunding and Fractional ownership contracts and makes it more efficient and transparent.
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