Howard Marks does not like Bitcoin – or any cryptocurrency, for that matter. “They’re not real!!!!!” the Oaktree Capital Management founder exclaimed about cryptocurrencies in a late July client memo, citing concerns about investing mania.
A summer of volatile currency fluctuations has led Marks, and less-famous financiers, to speculate about the future of these currencies. In real estate, the more salient question for investment professionals is not what seemingly outsized price Bitcoin and its peers are trading at, but rather how blockchain, the technology underlying cryptocurrencies, can be harnessed for industry-specific needs.
The nascent blockchain lacks a standard definition for the technologies, but Avi Spielman, who wrote his MIT master’s thesis on the subject last year and now advises companies and blockchain start-ups in the space, defines blockchain simply: “It’s just a database system” – albeit one that is immutable and transparent.
Few private equity real estate firms with whom PERE spoke are currently exploring this blockchain technology, with requests for comment met with blank stares from some of the executives who control the space’s largest companies. A handful of other companies are working on building models or are seeking out startups in which to invest, but all declined to comment.
Yet parts of the real estate world are slowly turning their focus to the potential for blockchain to eliminate the need for myriad types of middlemen. Currently, high-net-worth investors and family offices are leading the charge investing in the space, multiple sources say, with more freedom to invest capital outside of traditional mandates.
One New York-based executive who invests in real assets for a boutique investment firm – and is exploring real estate-related blockchain investments himself – likens today’s environment to 1998, in that volatility has led to speculation of an initial bust. “What were you doing in dotcoms then? You knew the internet would be big, but you didn’t know what to do with your capital.” The metaphor continues, with the late 1990s dotcom rush turning into a bubble that, despite a burst, remains relevant today – just ask brick-and-mortar retailers, suffering with e-commerce’s meteoric rise.
Cutting out middlemen
In these early days, real estate applications for blockchain center largely around transfer of information and assets.
For example, pilot programs across the world have proven effective for small-scale title transfers. Rotterdam’s city government asked global consultancy Deloitte to test a concept to transfer land titles on the blockchain. The consultancy has about 800 people working on blockchain concepts across industries.
“We’re very excited because it’s a big impact to the city and the way they operate, not only from a land title transfer perspective, but also the management of the real estate and tax recovery of the activities,” Eric Piscini, Deloitte’s global blockchain leader, tells PERE.
For developing countries that struggle with government and business corruption, title transfers offer an alternative to storing records that could potentially be duplicated or edited in a local bureaucrat’s office.
For all markets, eliminating the need to work through government offices can speed up paperwork processes, cut down on human error and create more transparent trails. Ragnar Lifthrasir, the founder of the International Blockchain Real Estate Association and a startup called velox.RE, tested a program in Chicago’s Cook County to transfer a property on the Bitcoin blockchain, successfully demonstrating the ability to enter a blockchain conveyance into the public record.
“If you can do something with a government, you can do something with anyone,” he says.
Spielman notes that blockchain is useful for taking out middlemen in a variety of situations beyond title transfers.
In transactions involving escrow accounts, for example, a smart contract could include agreed-upon obligations for two people; when those obligations are fulfilled, both parties digitally sign off, potentially along with lawyers, government agencies and other engaged parties, and money is then transferred automatically without the need for an escrow company or other intermediary.
In the more speculative world of cryptocurrency, this summer, token offerings – commonly called initial coin offerings – grabbed headlines as start-ups raised millions for early-stage projects. Like initial public offerings, ICOs allow investors to buy stakes, referred to as tokens, in a platform through cryptocurrency. If legal and technological considerations evolve, real estate investment trusts could offer tokens in a company, similar to stock, or in a particular building, more akin to crowdfunding.
Commercial real estate is likely to adopt blockchain before the more individualized residential marketplace, Lifthrasir predicts, because companies have the potential advantage of achieving economies of scale.
“Once one of these big real estate companies moves toward this system, everyone else will move toward it, and it becomes the new standard. It works better as a network,” he says.
Before widespread adoption occurs, Spielman cautions firms to evaluate potential blockchain uses to avoid speculative bubbles.
“Look at blockchain like the early days of the internet. The internet was a new protocol, and people built applications on top of that protocol that was useful for real estate. I don’t think right now that a private equity company would want to create their own blockchain, for example, to operate their business. I don’t see how there would be value for that, based on the cost to create one for scratch.”
Instead, he recommends companies assess their current software systems and third-party vendors to understand if there are potential cost-reduction areas through implementing blockchain solutions and then investing in a start-up in that area.
Grant Fondo, chairman of law firm Goodwin Procter’s digital currency and blockchain practice, says blockchain adoption could both cut costs and offer a point of differentiation.
“Blockchain is still in its infancy so it’s not seamless yet. But I do think that it’s something that people in the real estate industry should keep an eye on and continue to evaluate whether or not it makes sense for their industry. It has the potential, depending on the industry, to be a difference maker.”
While Oaktree’s Marks is not bullish on cryptocurrency, he may want to consider blockchain. The nascent technology may be years from institutional adoption, but it is, at least, real.
Blockchain in action
Title transfer is one of the earlier uses of blockchain that has showed promise in test programs on multiple continents.
In Chicago, Ragnar Lifthrasir, founder of startup velox.RE, worked with the Cook County Recorder of Deeds to test real estate ownership transfer. Through the eight-month pilot program, the startup and its legal partners found that a blockchain real estate title transfer can be legally recorded in a government’s public records.
Velox.RE’s pilot program tested a peer-to-peer blockchain deed that could, in practice, replace a paper deed that could also be recorded on the government’s traditional ledger.
Lifthrasir says the test was conceived to solve the problems of fraud, asset liquidity, transaction costs and friction. “If you make the deed digital, that makes the assets more liquid. Then you can trade a billion-dollar building in an hour or so versus the usual brain-melting exercise of conveyance.”
He likens the pilot program to testing the legality and functionality of signing and sending contracts digitally with the advent of email.
“Just because it’s digital doesn’t mean it changes the law,” he says. “The long and short of it is anyone in the US can right now use blockchain to convey their property legally and have that entered into the government record. You don’t need special permission or a law change.”