Blockchain and the Future of Real Estate Investing
The professionally managed global real estate investment market grew from USD 7.4 trillion in 2016 to USD 8.5 trillion in 2017, according to an MSCI report. Additionally, Nareit estimates put the total dollar value of commercial real estate in the US in 2018 between USD 14 trillion and USD 17 trillion, with a midpoint of USD 16 trillion. Unusually for a market of this size, the real estate industry is still primarily a “pen and paper” business, employing archaic and inefficient methods to maximize security and minimize the potential for machine failure.
Given the size of the market and the high price of most real estate investments, the need for an extremely secure system, even if it comes at the cost of efficiency and speed, is abundantly clear. But the average size of the investments is not the only problem keeping this market from modernizing; different investment structures between legislatures means that approaches to investments vary. However, one investment structure, Real Estate Investment Trust (or REIT), lends itself perfectly to modernization, using blockchain technology to do so securely.
Real Estate Investment Trusts
Commonly, people think that investing in real estate simply means buying a building or portfolio outright. However, this is only one investment structure, known as sole ownership, and is the most rigid type of investment as it does not facilitate diversification for investors. Other structures include Tenant-in-Common Ownership, Delaware Statutory Trust Ownership, Real Estate Investment Trusts, and Real Estate Funds, which are generally in a limited liability format.
Out of all these, Real Estate Investment Trusts (REITs) are the most liquid and act the most like a passive investment for shareholders. REITs are required to pay at least 90% of their annual taxable income out to investors. These companies are similar to mutual funds – investors pool together resources to buy shares of commercial real estate; however, unlike most of the other investment structures, shareholders don’t participate in day-to-day decisions pertaining to the properties. The vast majority of these decisions are left to management, and they also often get a share of the profits. As such REITs are an attractive option for newcomers in real estate investment, because they do not require the same amount of previous knowledge or time-dedication that other structures do.
However, REITs often come with a higher price tag for the high maintenance and management fees required by the complexity of these portfolios. The processes surrounding them are also often slow and laborious, and the sheer scope of the paper trail can leave them less than transparent for all parties involved. This is where blockchain comes in.
A blockchain, or distributed ledger technology (DLT) as it’s sometimes known, is a shared, tamper-evident, and immutable ledger. Its decentralized nature means it does not have a single point of failure and the cryptography-based security system is designed to corrupt the entire database if changes to any of the records occur. Additionally, every transaction is visible to every participant in the network – resulting in a fully auditable record.
While these attributes were what first made blockchain the perfect technology for an e-currency, many other industries have realized the potential blockchain offers them. The shared ledger offers every participant equal access and an overview of every detail and transaction, which has gained extreme interest from the supply chain industry. Blockchain enabled supply chains can speed up processes and even host payment methods without compromising the funds, as participants can see the transactions, but not access them (unless they are the receiver) or reverse payments.
REITs can similarly benefit from blockchain. Blockchain offers several advantages compared to both paper-trails and even other electronic means, which are facilitated by its unique nature. These include:
● Shared database
One of blockchain’s biggest advantages is the fact that, at its core, it is a shared database with no single authority governing it. In many cases (depending on the consensus algorithm in place), the weight of a user’s vote directly depends on the amount of tokens they own. In this example, the tokens would represent the percentage of ownership in the REIT, which then would directly correlate to the voting power of the investor.
The shared database also means every investor has a complete overview of all transactions, so they would know not only their own percentage of ownership, but also how ownership or the rest of the REIT is divided. Additionally, tokens could also be used to pay out annual dividends. This minimizes the risk of foul play, but also simplifies the process of selling one’s shares, whether the purchaser is a part of the existing shareholder group or not.
● Fractional ownership
Blockchain and REITs are both based on the possibility of fractional ownership, which makes them an ideal fit. Just as REIT investors don’t own any one single building outright — or, at least, not that they know of — the asset backing the blockchain’s tokens can be broken down into as many denominations as necessary to represent ownership.
A lack of trust — or, rather, a lack of need for trust — is a good basis for any business involving large investments and multiple members. A completely transparent database removes the need for trust, as participants do not have to take anyone’s word for it, but can check transactions directly. This offers much-needed peace of mind to all participants. And, the immutability of blockchain adds another layer of security, as participants are aware the data cannot be falsified.
● No need for intermediaries
As mentioned above, a large drawback of REITs are the high maintenance costs. These are significantly reduced when the whole process is moved to the blockchain, as the only necessary maintenance after the initial implementation is of the technology.
● Moving transactions to smart contracts
Computers do not think; therefore, they do not make mistakes. Once a program has been written and checked several times to remove the possibility of a human error, it does exactly what it’s told to do. This is the guiding principle of smart contracts, programs that trigger conditional transactions. Smart contract enabled transactions not only makes them less susceptible to mistakes, but also speeds up the entire process, as it is automated.
When all of the above is taken into account (tokenization, smart contracts, removing third parties from the equation), blockchain also adds more liquidity by speeding up all processes. Considering the size of the REIT space, this opens up the possibility of much higher transaction volumes than currently possible.
Realio facilitates the tokenization of assets, including REITs, and manages them throughout their life cycles. However, in addition to facilitating systems that utilize all of the advantages blockchain brings to the game, Realio also offers compliance with the regulatory requirements in all major global jurisdictions. The Realio platform also hosts a decentralized exchange for asset trading, which removes the risk of central point failure inherently present in all centralized exchanges.
In other words, Realio offers investors a more streamlined investment opportunity by eliminating fees, wait times, and security concerns, while adding a compliance layer. The Realio platform is designed to enable simple real estate investments, and remove high knowledge entrance barriers, such as the need to know all of the ins-and-outs of local laws. The user interface of the platform is intuitive, even for beginners, to make real estate investment a smooth and simple process.
In the End
When considering the new opportunities blockchain brings to the real estate market, the question of integration is when, not if. Given blockchain’s utility when securely handling large transactions, it is almost a given that real estate is the next big industry to be disrupted — and ultimately improved — by blockchain. The only real unknown at this time is which platform will lead the revolution.
Realio offers itself as the topmost choice. Not only does it solve the biggest problems facing the real estate market — speed, fees, and security — but it also offers a compliance layer, removing legal burdens from investors. Millennials already prefer technologically enabled platforms, and in the coming years, the advantages of blockchain (and Realio) in the real estate market will be increasingly difficult to overlook.
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