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Blockchain in Real Estate Sector: Benefits and Challenges

Conference Paper · January 2021

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 Blockchain in Real Estate Sector
Muhammad Umer Shabbir

(s5080882)

Department of Computing and informatics

Bournemouth University

Bournemouth, UK

Word Count: 2490 (Excluding images, references)

Problem Contextualisation:

The Real Estate Sector:

Real Estate is a physical property which consists of land and improvements on it such as buildings, roads and
structure etc. There are different types such as land, residential, commercial or industrial real estate. Real Estate
(RE) is considered to be among the safest options to invest. RE investments are available for everyone and not only
just to experts. It acts as a hedge against money inflation and gives investors a sense of security towards their
investment. It is a physical asset which looks great on an investors’ portfolio essentially for expansion. RE is non-
volatile and is considered to be risk-free for a long time. According to MSCI, in 2019 the size of global RE
investment market increased by 7.8%. Size of RE investment market increased from £ 6.55 trillion in 2018 to £7.06
trillion in 2019. This includes the inclusion of 2.18 trillion from the U.S, 0.60 from China, 0.58 from Japan, 0.53
from the UK, 0.38 from Germany (Staff 2020). RE class is the single largest asset globally with over 147.08 GBP.
Despite its value, the way business run in this asset class is complicated, costly, inefficient, non-transparent and
most importantly out of reach for newcomers and individual investors. This business class is dominated by either
institutional investors or by individuals with high net worth. This prevents ordinary and low-level investors to gain
return profit from their growing RE investments. RE investments provide owners with security towards unexpected
and miscalculated possibilities. However, it is not liquid wealth and to access wealth trapped within, investors have
to sell their equity or seek financial aid to secure their release. In addition, Commercial Real Estate (CRE) is slow
and problematic to transform its core business methods. CRE brokers and middlemen are struggling to cope with old
technology and its mechanism to share data. They also struggle to manage cash flow, gather real-time performance
data. These drawbacks in currently run methods affect tenants, owners and investors. According to IBIS World,
CRE industry globally has total revenue of £ 2486 which shows how competitive CRE market is while operating in
these conditions, where sale comparison, rates and other valuable transactional values are kept secret by key players
of this market (Staff 2020).

Challenges:

There’s a higher Fraud risk using the traditional methods since agreements are on a paper and trust is human-based.
Around 1.48B records were found fraudulent from 2005 to 2019. In California, 24% of mortgage cases were found
to be fraud and scam (Singh 2020).

Expense is also an issue due to the involvement of multiple intermediaries and multiple fees such as fees of the
broker, attorney and tax etc. All these expenses are added to the value of the real estate which makes these
investments expensive (Singh 2020).
Trust in current RE methods is based on human factors and two parties have to involve another party to build trust
among themselves for these investment process. This is another issue which needs to be resolved by the use of
technology (Bhanushali et al. 2020).

Due to the involvement of multiple agents, RE Investment process suffers from transaction speed as well. As per a
survey carried out by Chinese officials, 44% of investors fix an appointment with RE agents before looking to invest
in a new place. 74% of investors contact more than one agent to find the best deal for them and to decide in which
area they should buy the property. This involves a lot of time which can be used to better the outcome (Singh 2020).

Figure 1: Challenges of traditional RE methods

In this paper we are going to discuss how blockchain can be used to solve these problems but before we do that, let’s
discuss basics of blockchain, work process and its properties and features.

Blockchain Technology:

Blockchain technology can seem to be a difficult concept to understand but its core concept is simple. It is an
information recording system in a way that is difficult to alter and hack. It is a digital ledger that is distributed across
a network of all systems linked on a blockchain (Conway 2020). In general, it is a type of database, which itself is a
collection of information stored electronically on a computer system. The core difference between Database and
Blockchain is that of centralization. Records are centralised in the traditional database whereas each participant in
blockchain has a secured copy of all records and changes so each participant can view any changes and provenance
of data. When a new transaction occurs, every participant is notified and their ledgers are updated. Due to a
decentralised database managed by different participants, this technology is also called Distributed Ledger
Technology. Each transaction in the blockchain is recorded with an unchangeable signature called a hash.
Blockchain collects information in form of a group which is also known as a block. These blocks have storage
capacity, hold information and are chained onto the previous block using the hash to form a chain. (Conway 2020)
 Figure 2: Block diagram of blockchain

Work process:

Blockchain is a distributed ledger which keeps a record of all transactions in form of a block and each block is
connected using a cryptographical code called the hash. When a transaction occurs in the blockchain it is store in the
block which is connected to the block before and after it in form of an irreversible chain. The transaction is
transmitted to a network of peer-to-peer systems scattered and when they validate the transaction and these
transactions are clustered together in blocks (Singh 2020).

Figure 3: Working of blockchain

Key features of blockchain technology are:

Immutability:

Anything within the blockchain cannot be altered or changed. Data stored is permanent and unchangeable and it
cannot be updated without validating. Blockchain features through nodes and each node have a copy of a digital
ledger. Every change is authorised by each node before adding it to the ledger. Any validated data cannot be altered
or changed. This is important to promote transparency and avoid corruption (Iredale 2020).

Decentralisation:

Blockchain is decentralised which means control and decision making is distributed among the network. No one has
to trust anyone in a decentralised blockchain network as each member has an exact copy of data. If a member tries to
alter data, it will be rejected by the rest of the participants in the blockchain. It makes the blockchain system
transparent, authentic and avoids scams (Iredale 2020).

Security:

Cryptography is another important feature which makes blockchain even more secure for its users. It is a complex
algorithm which acts as a firewall against attacks to the blockchain. All information is hashed cryptographically and
hides the nature of data. It gives a unique identification to data. Every block has details of its hash and hash from the
previous block and changing data means changing the hash which is not possible without alerting the participant
(Iredale 2020).

Literature Review:

Ioannis Karamitsos et al. (2016) explained work process and functions of each use case which were beneficial for
current real estate problems and offered a design for the secure paperless transactions for better management of
assets within a smart city. Smart contracts with his design provide a secure ledger distributed along with
decentralised ledger of each transaction and all assets between buyer and seller.

Konsatantinos Christidis (2017) wrote a paper to describe the work process of blockchain and feature of smart
contracts. It explained the benefits and drawbacks of using this technology in the system.

Avi Spielman (2016) compared blockchain technology with the current system and discusses benefits and
challenges linked with it. He also explained how blockchain is the future of record keeping due to its rapid growth
and benefits of blockchain technologies over current traditional systems.

Blockchain in Real Estate:

Real estate process in blockchain can be divided into multiple steps:

1 Buyer and seller will meet online at a marketplace, where the property is listed and details are available
to everyone, including details of owner, location, custody chain, area etc. The market is integrated with
systems to make sure of the authenticity of users (Heartz 2020).
2 Blockchain identity verification method will be used to identify users. These verification methods can
be run by investors, agencies, banks, government etc. Identify will be verified through different
sources such as bank transactions
3 Once both parties involved decide to go ahead with the agreement, all details will be stored in form of
a smart contract
4 Based on set terms and conditions in the smart contract, payouts will be credited to seller and
acknowledgement of ownership is provided to the buyer. All data will be recorded on the blockchain to
be later utilised for analysis (Heartz 2020).
 Figure 4: Blockchain process in real estate

Discussion of Blockchain approaches:

Smart Contracts:

Challenging issues in RE investment process are to manage a lease agreement, manage operations within a property
and cash flow. Transactions are documented on daily basis from the start of a contract. These complex tasks can be
achieved by the use of “Smart Contracts” which are based on blockchain. Traditional contracts can be replaced by
automated smart contracts which automatically records all data related to payments and transactions on regular basis
without any required intervention. Payments and cash flow management can be complicated in real estate. Payments
for tenants are not only limited to the landlord but also other parties involved such as auditors, brokers, banks, and
other institutes. This is the reason why real estate companies invest greatly in accounting and cash flow managing
activities. This issue can also be resolved by use of smart contracts based on blockchain technologies. All parties
which are involved can sign a smart contract which holds details of transactions among other required information.
These contracts can use this information to begin a lease payment to the landlord. This method can also trigger the
return of deposit payment to the tenant at the end of the contract. In this way, all parties involved can get the
required information from a single source without and corruption through the use of smart contracts. These contracts
can be used to transfer the property title from seller to buyer. Current manual registry procedure to take details can
be changed with smart contracts as they can complete entire land sale transaction which can save investors
significant time and money. These contracts increase the assurance of execution, simplify the process, and reduce
the financial costs (Karanwal 2020).

Property Diligence:

The first step after liking a property to invest is to perform careful checks related to the property and to perform
necessary background checks. One of the important issues is to ensure the buyer will not face any issue in future
related to the property. This requires making sure the seller is the actual owner of the property. Records should be
transferred keeping sure of the seller’s rights and to ensure ownership is transferred to the buyer correctly (Karanwal
2020). Review of all legal documents becomes paramount. In current methods, these documents are stored
physically which are missing sometimes and verification is done manually. This process is often lengthy and most
like to be prone to human fault. Blockchain can simplify this tedious method. Data can be stored digitally in the
blockchain platform. This data can include records of property such as ownership, records, ledger data, and financial
information. This eliminates the need for third-party involvement. Whenever an owner needs to be verified, history
can be checked and authenticity can be identified. This can reduce inefficiency, inaccuracy and save time in the
background checking process (Karanwal 2020).

RE investment process mainly consists of careful and persistent work and effort to find the right property for
purchase or rental opportunity. To avoid any legal, financial or technical issue intermediaries are involved to inspect
documents. In current methods, all legal work is paper-based and can be changed or corrupted easily. This can be
improved by the use of Blockchain-powered platforms which allows viewing of authorised data publicly and to all
parties involved which cannot be altered. This makes financial evaluation method quick, accurate and automated
(Breker 2020).

Tokenization:

Security of assets is another issue in traditional RE methods and it can be resolved by securing digital assets. This
process is called tokenization. Blockchain issues tokens to assets and these tokens can be used to assign ownership
rights, store rules and transactional history. They can also be traded in the market similar to stocks and
cryptocurrency. Tokens can be divided into pieces and become available to a larger audience. This reduces the cost
of investment, allows faster transactions, and pace up the procedure in the RE industry (Singh 2020). This results in
more people investing with minimum capital and offers the possibility to establish a new business. Tokenization
benefits both seller and buyer to make RE investment procedure easier. Tokenization removes middlemen which
make investments a lot cheaper and easier. These tokens can be traded almost instantly and for a low price. Using
tokens, investors get high returns on their investment by investing very little. These tokens carry little risk as they
are backed by an actual physical asset (Breker 2020).

Current System Analysis:

Blockchain is a solution to current real estate problems and because of that not only private but Government sectors
are also investing in this technology. Sweden’s land registry authority along with banks and other startups are
introducing blockchain in their real estate methods and are currently in final stages of implementation. Vermont and
Arizona have recognised Smart contracts authentic for their transactions related to Real Estate (Breker 2020).

ShelterZoom is a New York based startup and they are in final stages to implement real estate application for buyers
and sellers to communicate and transact over a blockchain network in real time (Heartz 2020).

Another application, Deedcoin is reducing the cost of commission from 6% to 1% for their service of connecting
buyers and sellers for real estate exchange (Heartz 2020).

Challenges:

Currently the biggest challenge to adopt blockchain is infrastructure required to build to make process seamless.
Such a large scale transformation is difficult especially in industry like real estate which is established from decades
and people are resistant to change. Although, blockchain has potential to change landscape of RE industry but real
world applications are still few and far between. There’s a crucial need of lawyers to work together with
technologists if blockchain technology is adopted widely.

Data protection is also a challenge in blockchain. General data protection regulation (GDPR) allows the right to
have data removed when no longer needed in a process. However, data stored in blockchain cannot be removed
from ledger or replaced. In reality, there are methods to amend data but this need to be made clear to participants
(Waters 2020).
Blockchain is used to distribute information but complexity of this technology can prevent from implementation in
universal application. It is clear that blockchain technology has many benefits for real estate world but there are few
drawbacks which need to be met before its implementation (Waters 2020).

Appraisal of the process and judgment:

In this paper we discussed about blockchain, its application and work process in field of real estate. Issues related to
traditional real estate methods were explored. Literature review, current system analysis was also discussed.
Unavailability of blockchain solutions for real estate made it difficult to discuss results and success of current
solutions. However, Principle discussed and research I have shown in this paper shows great potential and suggests
reliable solutions to issues currently with real estate methods. I have also discussed different approaches which
blockchain applies to industry to improve performance and reliability. Although, blockchain currently has issues
implementing in real estate industry, I believe this is a promising technology with lots of potential in future.

References:

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4 November 2020].

Ioannis Karamitsos, Maria Papadaki, Nedaa Baker Al Barghuthi, “Design of the Blockchain Smart Contract: A Use
Case for Real Estate ”, Journal of Information Security-January 2018.

Konstantinos Christidis, Michael Devetsikiotis, “ Blockchains and Smart Contracts for the Internet of Things”,
Access IEEE vol-4, 2016

Avi Spielman, “Blockchain: Digitally Rebuilding the Real Estate Industry”, Massachusetts Institute of Technology
September, 2016

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