Real estate has been considered as an asset class long before the advent of equity and bonds. Yet, it has never been classified as a traditional asset, rather an alternative investment due to certain features such as illiquidity, information asymmetry and non-distribution of returns. So, how can real estate be made more tradable, properly valued and easier to transact? The answer might be blockchain, the technology behind the trending crypto currency Bitcoin.
Bitcoin is a decentralized digital currency that relies on the decentralized ledger that records peer-to-peer transaction. It was introduced as a currency for transacting digitally, however, owing to its increased acceptance and speculation, bitcoin has turned into a volatile asset. Controlled by no central bank, its price has jumped from almost 0 in 2009 to reaching $ 12,000 recently, with prices getting corrected several times during its regime.
From just buying a pizza in 2010 to buying real estate globally now, bitcoin has marked itself as an imperative global currency. However, several times since its inception, bitcoin has been held responsible for providing a means for drug trafficking and terror financing. There have been cases caught by Indian security which involved illegal activities transacting through bitcoin. However, blaming bitcoin for illegal activities seems to be like blaming cash for corruption, both being untraceable as they change hands!
Reserve Bank of India (RBI) and Department of Economic Affairs (DEA) has not legalized the crypto currency yet and are working on a framework for these virtual currencies, an important initiation by Government of India (GoI) that will decide the future of crypto currency.
Bitcoin has been used to buy real estate assets in many countries across the globe. Bitcoin being divisible, durable, price independent and limited in supply is easy to transact. However, real estate being a leveraged asset involves savings of people’s entire life. So, transacting with bitcoin, something which is highly volatile and risky, is not advisable for people investing their hard earned money in real estate.
Other than bitcoin, real estate can still leverage from this crypto currency by incorporating blockchain technology in its primary processes and functions. Blockchain has already penetrated financial service industry and is set to disrupt the real estate industry. Blockchain is basically a ledger that records value as well as transaction into a time-stamped ‘block’, which prevents duplicate entry. Once a block is completed, it adds sequentially to other blocks and contains a hash (cryptographically secured fingerprint of a block) of the previous block. This is how one block is connected to other. All the nodes connected to blockchain stores its data, makes it very difficult to alter any information on the block, as the altered hash won’t match anymore with the next block. Hence, making blockchain very secure and fool-proof!
States like Andhra Pradesh and Telangana are already planning to integrate blockchain into its land registry system. Once the digitalization of the land records over blockchain happens, this land parcels can be traded as digital tokens. This would lead to the establishment of smart contract over blockchain that would regulate rights and obligations of both the parties. As defined by Goldman Sachs, a smart contract is a piece of computer code that describes a transaction step by step. It can connect to multiple blockchains, tracking multiple assets, so it can swap those assets as needed to execute the transaction. However, the legal veracity of the smart contract is yet to be evaluated by Indian government. However, blockchain can render the much needed transparency, resilience and security to the India real estate.
The utility of blockchain in real estate market is multi-fold. Some of the advantages of blockchain are following:-
1. Digital tokens will allow fractional ownership, making investment in real estate more lucrative. This will make real estate asset more tradable and probably eliminate its age-old illiquidity aspect. This would make the real estate market more efficient and prices being more accurate.
2. Digitalization of land and property records would remove the traditional problem regarding the tracking of real estate ownership. Information regarding real estate such as location, rental, age of the property, ownership history, title details, tenancy details, etc would be accurate, updated and easily available at a much lower cost than subscription-based platforms. Hence, evaluating the financial performance of a real estate asset becomes easier.
3. Blockchain will optimize the real estate transaction. Intermediaries cost cutting will attract real estate and make the transactions faster. Integration of region specific cost associate with real estate such as registration, stamp duty, maintenance charges, etc with blockchain technology would further enhance the effectiveness of the real estate sector. Even, the distribution of profits or rentals among the investors would be easy.
4. Transactions through blockchain are secured, transparent and fair which reduces the transaction risk in real estate. Even, government can act as intermediaries that validate real estate transaction in the blockchain.
5. Banks and other lending firms would be able to instantly check the credit history, income and other demographic factors imperative before lending. This will add depth to the current Housing finance industry.
In order for blockchain to be beneficial, following challenges need to be overcome –
1. Digitalizing the existing accurate land record and land title will be time consuming and cumbersome, as these records are existing in multiple jurisdictions and states.
2. Tokenization of real estate assets and creation of a platform that uses blockchain as a technology are some technical hurdles still in play.
3. Currently, blockchain has not been designed to make volume transactions. Hence, for making real estate more tradable, technological infrastructure for blockchain should be in place.
4. Real estate involves a physical asset and hence complete automation of the real estate industry as a whole is difficult, as certain activities like inspection are crucial in a real estate deal.
5. Blockchain is a technology and technology all over the globe is still evolving. So, it may happen that due to technological obsolescence, some other technology that works better might replace blockchain.
Bitcoin is still not a recognized tender by the monetary authority of many countries. Hence, its penetration in real estate is limited. Furthermore, the adoption of a perception about a digital transaction for real estate is yet to be developed. Innovations through blockchain technology are not going to happen overnight, but it is the distant future! One of the possibilities of using blockchain to capture the asset value might be that number of investors in a real estate would increase, which will further enhance the speculation quotient and might lead to a bubble.
According to the survey of World Economic Forum, 10% of the global GDP information will be stored in blockchain. As the real estate industry is the second contributor of GDP, blockchain is bound to be a key enabler in real estate.
Whether the Indian government legalizes bitcoin or other crypto currencies is questionable, however, blockchain is expected to penetrate the real estate market and bring out various operational, marketing and financial innovations in near future.