Real estate is seen by many as the best vehicle by which to grow wealth. However, it has traditionally faced two major problems for its investors: high costs and illiquidity.
Investors in commercial real estate generally face high costs when looking to acquire an income producing asset. In most cases an investor must provide a minimum of 25% of the value of the property as a down payment with the remaining 75% being financed by an increasingly expensive (in current times) mortgage. Given the high level of competition in the US market, which is driving up property prices, as well as the various costs associated with closing a deal (legal fees, due-diligence costs, broker fees, etc.), investors face considerably high barriers to entry into the market.
Furthermore, in comparison to investment in the stock market, real-estate investment is significantly less liquid. Once a building is acquired, it is ordinarily a long and arduous process to sell and liquidate its equity. The seller must first put the property on the market usually utilizing a real estate brokerage. Then, once a buyer is found, often following a bidding stage, the prospective buyer is given a period of typically 30 days to carry out due diligence on the property, followed by a further 30-45 days in which to secure the debt and equity financing and close the deal. Only after this lengthy, costly process and given that all the terms of the deal are acceptable to both the buyer and seller, the asset can be liquidated.
These two factors have historically hindered investment in real estate for many people who do not have the disposable income available to be tied up in a property for an extended period of time. However, many tech enthusiasts believe that the emergence of the new blockchain technology may go some way into solving these problems.
What is blockchain technology
and how can it be utilized in commercial real estate?
Put simply, blockchain is a technology that allows a piece of data to be sent digitally from individual to individual in a way that is secure, transparent, anonymous and without any intervention from a third-party or middleman.
Blockchain networks are decentralized and are therefore not subject to any governmental or centralized authority. They are managed by a global network which has no borders or restrictions. Transactions are carried out peer-to-peer without any need for banks or third parties. This means that transactions can be completed far more quickly, efficiently and cheaply than can be done on conventional trading platforms.
Cryptocurrencies, such as Bitcoin, are the most well-known “products” that are traded on blockchain networks and can simply be described as digital coins that represent real potential monetary value.
The intrinsic characteristic of blockchain technology is known as “tokenization” and allows for the rights of a real-world asset to be converted into digital tokens (cryptocurrencies are real monies converted into digital tokens). This allows the ownership of the asset to be divided by multiple people and traded freely and easily on their platforms.
These two factors could have a profound effect on the real estate market as the division of ownership in a single property and the ability to transact on a peer-to-peer decentralized network will greatly reduce the high barriers to entry and illiquidity of real estate investment.
AN EXAMPLE of this concept in a real estate setting is as follows:
There is a building worth $10,000,000. Traditionally, for an investor to acquire such a building, he would be required to pay a substantial down payment of around 20%, or $2,000,000, and secure a mortgage for the remaining $8,000,000. With tokenization, the same building may be broken up into 1,000,000 tokens each with a value of $10. Investors can then purchase the tokens on their blockchain platforms and be credited as the owner of the property according to the number of tokens that they buy. If an investor buys 5,000 tokens he will own a 0.5% stake in the building. The tokens can then be freely traded between users at all times with almost no restriction.
Although division of ownership already exists in real estate with REITs, blockchain technology is beneficial for various reasons. A REIT, which is essentially a company that owns cash-flowing properties, is made up of “share holders” who are the collective owners of the REIT. Many REIT’s known as non-traded REITs, do not allow for their shares to be liquidated and cashed-out for a given number of years. Other REITs do allow their shares to be traded and in the case of public REITs can be bought and sold on stock exchanges.
However, the major drawback with an REIT is the many rules and regulations that must be complied with in order for it to legally operate as an REIT. For instance, an REIT must have no less than 100 shareholders. It must also have no more than 50% of its shares held by five or fewer individuals. Blockchain real estate, due to its decentralized nature, is free from the heavy regulation that is associated with REITs. The technology also massively reduces transaction costs, opens up access to a much wider pool of international investors, and enables portions of real estate to be traded with a much larger degree of freedom.
The Singapore-based blockchain start-up REIDAO is the first to attempt to launch a system whereby real estate can be represented in token form on a blockchain network. The company has recently launched its first token offering, for the purchase of hospitality properties around the world and plans to complete its first acquisition in August 2018. Alongside “ownership tokens” in the hospitality properties, token holders will also be provided with “utility tokens,” which will enable them to personally use the properties for vacations.
This idea is very much still in its infancy stage and progress for the start-up has therefore been slow. However, once more exposure is gained for this methodology and the uncertainties of a decentralized product ironed-out, REIDAO and companies that are attempting to initiate similar systems have every chance of causing a stir in the real estate market.
In theory, blockchain and real estate is a match made in heaven. It has the potential to solve the two traditional obstacles to real estate investment; illiquidity and high costs. If blockchain does indeed overcome its obstacles and take off in a way in which many believe it will, it may very possibly become the next revolution in real estate ownership and trade. The author is owner and CEO of Pancho real estate and Yehuda Lieberman Markets Analyst Pancho real estate.
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