Traditional real estate companies have cashed in on keeping secrets. Try to invest in a property and you’ll likely have to wade through a bureaucratic nightmare and dodge widespread fraud. So why would blockchain real estate startups want to introduce transparency?
Blockchain real estate startups
Interestingly, several blockchain real estate startups have emerged over the last few years. Each intends to disrupt the way property sales work. Secrecy is not profitable anymore, especially when you cut out the middlemen.
A blockchain network, after all, can reduce risk aversion through a trustless environment. In turn, this makes property transactions easier and removes the need for trusted third parties. Greater market demand for transparency in the global economy has spurred innovation in real estate tokenization.
Tokenizing assets makes many processes associated with property transactions happen faster and at a considerably lower cost. This, in turn, enables greater liquidity in the market. Earlier this month, a $30 million New York property became the first asset to be tokenized using blockchain technology.
This article will shed some light on real estate tokenization and ways real estate startups are increasing returns for property investors.
How blockchains work
In order to unpack some aspects of property tokenization, it’s essential to understand the basics of blockchain technology. At its core, blockchain is an ever-expanding decentralized public ledger. Individual blocks contain data, secured with cryptography that you can’t change.
Moreover, each block will have access to a cryptographic hash of the block prior to it. This includes a timestamp and transactional data. Having a publicly-accessible unchangeable ledger adds transparency to the real estate market.
Through smart contracts, blockchain real estate startups remove trust from the equation as well. In such a risky market where parties might not trust each other, smart contracts greatly reduce risk. Buyers and sellers can streamline the process of a property transaction.
Real estate tokenization
Blockchains prevent any data manipulation once the information is on the distributed ledger. As a result, the technology records data permanently, efficiently, and transparently so that all parties involved can see the history of transactions.
Moreover, blockchains prove very difficult to attack due to their decentralized, distributed nature. All these features encouraged the development of peer-to-peer transactions with cryptocurrency. Though since the advent of cryptocurrency, investors have sought a way of tokenizing other assets. Real estate tokenization is one such example.
Blockchain real estate startups tokenize an asset ensuring that sellers actually own the property and that the buyer has the funds to cover it through cryptographic smart contracts. A blockchain can seamlessly verify all this data instantly, reducing the time and the total cost of the transaction.
Tokenizing a property into cryptocurrency increases the security and viability of the purchase, and opens up a global market. To many, blockchain technology has a clear application in the notoriously opaque real estate market. Several blockchain real estate startups have filled this niche by driving innovative solutions.
New opportunities, new risks
In an interview with Tom Bill of Knight Frank, real estate expert, Abimanyu Dayal, said blockchain has the ability to revolutionize the property market due to its ability to increase liquidity rates.
“This could revolutionize the real estate market because it provides 100% liquidity 24/7,” says Mr. Dayal. “If you want to invest in London residential property today you are looking at £700,000-plus and are locked in for seven to nine years. Now you can enter and exit whenever you want and that is how people want to invest.”
However, the regulation of real estate tokenization is still something that is yet to fully settle. Mr. Dayal, however, believes that this will not affect property values, as the currency will always be based on domestic currency and not the token itself. If a dollar appreciates against a crypto, the liquidity of the cryptocurrency allows for an immediate adjustment that offers no arbitrage.
Conversely, Oxford professor and real estate expert Andres Baum believes such a liquid market is neither achievable nor desirable. His research document Proptech 3.0 is the leading word on technology and property.
“If real estate traded more like a stock or a bond, prices might rise due to increased liquidity, but equally they might fall because of greater volatility and risks. The global banking system has survived over the last decade because it has not been forced to mark property assets to market.”
This follows a similar theory which states that the banking system relies on marked property asset value. Investors who seek a different avenue than stocks and bonds may suffer from a lower yield due to a lack of diversification.
Blockchain real estate startups
Despite the risk associated with property investment, there have been a few startups who are breaking down the barriers with blockchain. No doubt these companies are some of the pioneers in the industry and their experiences could aid those seeking to venture into real estate tokenization.
For those looking to invest in U.S. real estate, Seattle-based RealT offers fractional ownership opportunities empowered by ERC-20 tokens. The real estate startup is helping to revitalize parts of Detroit and other American cities by encouraging fractional ownership of real estate assets. While the physical property is held by a limited liability company, RealTokens, or the firm’s native cryptocurrency represent shares of the company.
This is especially useful because it introduces greater liquidity to traditionally illiquid real estate assets, opening up property investment to more people. Investors can make much more accessible investments and still make attractive returns. The company uses Dai stablecoins, which are pegged to the U.S. dollar, to help reduce volatility.
With an initial coin offering that attracted over $15 million in investments, Propy is definitely a must-watch company in the blockchain property sector. Founded in 2015, the company allows investors to purchase real estate through blockchain in a variety of locations, the most prominent being in the U.S., Dubai, Europe, and Hong Kong. The company claims to aid cross-border property transactions.
As the company matures, the number of Propy users is likely to grow substantially, so early investors may see a reward for adopting the trend early.
Launched in 2017, Harbor exceeded Propy’s fundraising. The blockchain real estate startup attracted over $38 million from its initial coin offering. The token sale has funded Harbor to the point where they now hold a large share of the market in North America.
Meanwhile, the Harbor token is further backed by Ethereum ERC20, which allows for the resale of the currency as a security. Liquidity aspects are an obvious attraction with Harbor’s model.
ShelterZoom is an easy-to-use platform that offers potential investors a way to infiltrate the blockchain property market from the comfort of a mobile platform. This includes other functionalities like widgets and a dashboard.
Additionally, the property aspects are straightforward and easily accessed. The company seeks to increase the number of sales over the Ethereum network. Transactions are founded by smart contracts, attracting users from over 22 countries.
Espeo Blockchain is proud to be involved in StreetWire’s mission to innovate the real estate market. Through our blockchain consulting project, we designed their technical architecture, wrote their whitepaper, and optimized the company’s landing page for seamless UX. In the future, we plan to support their backend operations. StreetWire is building a decentralized clearinghouse for real estate data and transactions. It will streamline processes around closing, lending and valuing property while returning value and control to data producers.
The project leverages blockchain technology to support the global adoption in an evolution of the technology in real estate.
While many industries are thinking of ways to apply a distributed ledger ( and whether it’s worth it), blockchain real estate startups have begun to use the technology. Cutting out expensive middlemen, streamlining financing, and removing trust from transactions are just some of the blockchain’s advantages in this traditionally conservative sector. Cross-border property investment may also increase as decentralized technology reduces risk and verifies financing. Blockchain technology is poised to disrupt a market in dire need of an update.