Blockchain and Bitcoin are rarely out of the financial headlines, but are they set to revolutionise property markets? Tom Bill finds out
The proponents of Blockchain are nothing if not audacious in their promotional hype. Some describe the technology as the biggest change to finance since the Medici family laid the foundations for modern banking in the 15th century, while others say it will be as transformative as the internet.
Such claims may sound far-fetched for something as mundane-sounding as a decentralised and immutable online ledger that simplifies the trading of assets, including real estate.
But as national land registries start using Blockchain technology, now is the time to look beyond the hype and ask more profound questions about how it could influence buyer behaviour and pricing in real estate markets.
Key to this is the role of liquidity. Real estate trades at a relative discount to stocks and bonds because it is less liquid, but Blockchain could theoretically close that gap in two ways.
First, transaction times and frictions would reduce as more of the legal process becomes paperless and moves on to the Blockchain.
The UAE, Georgia, Honduras and the UK are among the countries exploring Blockchain technology for property transactions, while Sweden has already trialled it. “It’s possible to shorten the process a lot but one of the most successful aspects of the trial was security and the verification of contracts,” says Mats Snall, chief digital officer at the Swedish Land Registry.
Mr Snall expects the use of Blockchain to grow over the next several years but emphasises that it remains an emerging technology. His view is underlined by the results of our Attitudes Survey, where 41% of respondents – the most common response – said their clients had heard of Blockchain but had not considered its impact.
The second way that Blockchain could increase liquidity in property markets is through a process of “tokenisation” or “unitisation”. Enabling buyers to trade “units” in real estate online, the impact of this on markets and pricing is potentially far greater than removing frictions from the sale process.
The argument is that Blockchain would provide the platform for something that is possible today, but which nobody has yet been able to implement on a meaningful scale.
Ambitions are not limited to real estate and there are plans to grow tokenised trading in many financial markets, including luxury investments. However, whether this represents the property industry’s very own “disruptor” moment depends on who you ask.
Abimanyu Dayal is the chief executive of Estatechain, a company that acts as a marketplace for the tokenisation of property. It plans to carry out its first transaction this year. Complex algorithms create an exchange through which vendors can sell tokens in residential property without needing to find a buyer.
This is possible because investors pay for a finite reserve of tradable tokens on top of the value of the property itself: in other words, a liquidity premium. Though the technology determines the pricing of a transaction, this happens within the framework of quarterly valuations by a chartered surveyor.
“This could revolutionise 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.”
While the regulation of tokenised assets is still evolving, the rollercoaster ride that cryptocurrencies have experienced on currency markets will not affect values, Mr Dayal says. While investors need a cryptocurrency to trade, assets will be denominated in the home currency.
For others, the more fundamental question is whether a more liquid property market is feasible or desirable. Professor Andrew Baum of the Said Business School at the University of Oxford has been involved in various attempts to unitise real estate and authored a research document called Proptech 3.0.
“It is not obvious that everyone wants a more liquid real estate market,” he says. “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.”
Professor Baum also points out that higher levels of liquidity would also mean real estate losing its inherent appeal for many investors seeking a higher yield by diversifying away from stocks and bonds.
While Professor Baum concedes that Blockchain is likely to reduce frictions and costs around transactions, he believes its impact will ultimately be comparatively limited. “If you accept the argument that Blockchain will be as big as the internet all over again, ask yourself how much the internet changed liquidity in property markets. Perhaps a bit, but nothing seismic.”
For now then, believe only a fraction of the hype.
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