The blockchain real estate and smart cities use cases are varying from incredibly exciting all the way to super boring, depending on who you talk with. Boring or not, the professionally managed global real estate investment market continues to rapidly increase year over year, according to New York based MSCI. We’re talking $9.6 trillion in 2019, a 4.1% increase compared to 2018. When we look at the value of all real estate property globally, we’re talking about estimates between $217 to $300 trillion, 3.5 times the entire global Gross Domestic Product (GDP). If you look at India alone, the real estate sector accounts for 7-8% of India’s GDP, and is expected to increase to 13% by 2025. India’s real estate sector will reach US $1 trillion by 2025. We’re talking massive numbers, almost impossible to comprehend. To understand where blockchain technology fits in real estate beyond the obvious use cases you may already have heard about, we have to zoom in on very specific challenges you might be knowledgeable in. (Certainly more knowledgeable than yours truly)
The blockchain use cases for real estate and smart cities we cover today include:
- Sustainable construction and city development
- Carbon emissions tracking
- Integrated Proof Reports and real-time visual data dashboards with IoT devices and other sensors
- Blockchain combined with other emerging technologies including artificial intelligence
- Energy management such as storage and distribution
- Self-learning systems
- Increased productivity with smart contracts automation for processes, workers safety, and building permits
- Proof of property management and maintenance
- Process efficiency improvements including insurances and government payments
- Compliance, safety, and legal regulations
- Decentralized identities not just for people, but machines and devices too
- Emergency management
- Supply chain management and logistics
- Green Certificates
- Considerations for portfolio investors and fund managers
- Shared ownership and investment
- Tokenization and NFTs
- Decentralized Identity Integrations
- AML and KYC
Blockchain tackles many of the problems facing CRE today. It allows for real-time settlement of transactions with enough censorship resistance and protection against chargebacks or cancelled transactions. In a trustless environment, all parties involved can maintain the same records while working simultaneously on modifying property information. This can be particularly helpful in the case of a multiple search listing service or aggregator, where property information is collected from private databases of realtors and agents. Deloitte has laid it out well in figure 3 of their blockchain in real estate paper. ‘A transparent blockchain powered MLS system enables all parties to view the available listings based on their requirements.’
New to blockchain? Start with some of the basics here:
- What are some benefits of blockchain technology?
- What is blockchain?
- What are the differences between public, private and hybrid blockchains?
- Quick take on decentralized identity
Working on a real estate project? From independent realtors to enterprise consortiums, contact Dragonchain today to spark the imagination.
Sustainability in Real Estate
In an attempt to make this article interesting for everyone, let’s kick off with impressive sustainability initiatives. Two projects in particular can really spark your imagination. The Dutch Windwheel project in Rotterdam, The Netherlands aims to be a sustainable icon and landmark in Europe’s largest port city. And we also have ‘blockchain powered’ eco-towers in Hangzhou, China envisioned by French XTU architects. Both projects not only have fascinating architectural components but also break barriers and combine all sorts of innovations with sustainable real estate.
In the ‘French Dream Towers’, a blockchain supported network could be able to manage air quality, the distribution of stored energy, and allows the multitude of environmental systems to interact. Sensors and other IoT devices are all connected in an infrastructure of cloud computing, AI, and blockchain. Self-learning systems continue to improve tower efficiency while at the same time managing to preserve more energy.
All the actions triggered by sensors, devices, Ai, and smart contract automation can be captured on a blockchain. From granting someone access to the building or elevator based on their identity, down to the storage and distribution of sustainably generated energy. Or even rewarding residents and companies inside the building for being conscious with energy usage. Blockchain based proof can also be important in cases of liability, for instance when a heater overheated and caught fire. Was it maintained properly? Could anything have been done to prevent the heater from malfunctioning? Who is responsible? Which actions can be automated with smart contracts following a fire? Due to the immutable nature of blockchain, it’s the perfect technology to capture so much data from everything that is going on in a hyperconnected building. Without needing to trust all parties involved, you can be assured nobody changed the information. Blockchain can also be used in a more positive example, to prove to governments, investors, or residents how much carbon dioxide was saved from going into the atmosphere. What is the origin of the materials used in the building and were they really recycled or sustainable? This way, blockchain allows for more traceability and transparency. This is a limited array of use cases where blockchain can be applied in combination with other technologies.
Both projects mentioned above, and their architectural and technological ventures are still being developed and reviewed, but it gives a sneak peek into carbon neutrality in real estate packed with transformative digital innovations. The first time for us to really think about real estate and sustainability, in combination with blockchain technology, was when we came across the Dutch Windwheel, and actually were fortunate enough to meet with them and visit the concept mock-up that was set up in Blijdorp Zoo. While these projects are immense, anyone in real estate can start using blockchain by just starting with one small use case and go from there.
Insurances, Liability and Proof Reports
If there is one miracle that comes to mind when talking about real estate, it must be Dubai. The impression this one out of seven Emirates in the UAE leaves you after visiting can hardly be described. Whether you go up the Burj Khalifa by elevator or take a helicopter tour over the heart of the city, it is impossible to not fall in love with real estate or architecture in Dubai. Whether it’s the indoor skiing, the massive Dubai Mall, the Dubai Opera, or the impressive twisted ‘infinity tower’ from the Cayan Group the sights are breathtaking. The famous Dubai Frame, Jumeirah Mosque, the 7-star hotel, Burl Al arab, and The Palm hotel by Atlantis all offer unlimited beauty for every taste.
From October 1st 2021 to March 31st 2022, Dubai will even be home to Expo 2020, postponed due to covid-19. Expo 2020 aims to increase awareness about the challenges faced by humanity on a global scale, and 173 countries will be exhibiting their innovations and solutions in this collaborative event where minds are connected and the future is created.
The beauty of Dubai will forever overshadow any tragedy. But even Dubai is not immune to disasters. One of the most tragic events is when a fire occurs in one of the larger buildings. You can imagine how many precautions are being taken to keep some of the tallest residential buildings in the world safe at all times. In the Marina district, the same building caught fire twice in just 2 years in between. Unfortunately, this happened more than once. Though blockchain technology is not able to fight the fires, it could make legal processes more efficient and transparent, allowing residents to take more time to process what has happened to them and their belongings. From automated insurance payments to cover the damages and the rental of a hotel room to spend the night, all the way to immutable proof on distributed ledger technology showing if the building was maintained properly (infrastructure, electrics, air conditioning) and if emergency systems (sprinklers, alarms) were functional, acted appropriately and in a timely manner.
Data from a research paper in 2010 teaches us that electrical faults (53) caused the most fires, followed by candle flames (23), heating machine (20), and chimney flames (17). To make things worse, there is often miscommunication and misconception about the responsibilities after a tower fire. Property owners, developers, insurance companies, tenants, lease agreements, the Dubai Rental Committee, residents, laws, lawyers, and policies. There are so many moving pieces and sometimes exceptions to the rule, automation with smart contracts could prevent residents from making expensive mistakes in times of stress. Situations have happened where residents ended up bearing the costs themselves. Or even needing to pay rent for their new apartment ‘while still having a financial obligation to continuing to pay rent pending lease cancellation’.
Nowadays real estate is much more than just brick and mortar. Dubai specifically is investing a lot in innovations to enable. The Dubai Smart City project was launched in 2013 by H.H. Sheikh Mohammed Bin Rashid Al Maktoum,, aiming to transform Dubai into a hub of livability and sustainability. Guided by 6 key pillars (transport, communications, infrastructure, electricity, economic services, and urban planning) and over 100 initiatives, Dubai is heading towards a paperless society, eliminating 1 billion pieces of paper every year for government transactions alone.
Blockchain will play a critical role in improving efficiencies, providing transparency, and guaranteeing citizen’s privacy with decentralized identities. From utilities, transportation, smart parking, electric car charging stations, and live traffic monitoring to religion, health, residency, security, and justice, real estate is more than just lifeless buildings or land and property registries. It’s urban city planning with parking garages and connectivity too. Governments want live traffic monitoring, citizens want live updates on traffic situations, emergency responders want accurate location services. The list goes on. All this (sensitive) data needs to be secured, shared, acted upon, and visualized. Dragonchain’s hybrid blockchain platform together with Factor’s decentralized identity solutions is positioned well to handle this broad range of applications, integrated with traditional systems, software, and IT infrastructure to empower governments and residents.
Supply Chain, Regionalization, Logistics and Construction
It is projected that supply chains will make shifts in many industries. Due to climate change, Covid-19, and the US-China trade war, the risks we already knew existed sometimes actually played out in 2020. If we look at medical supplies alone such as face masks and other protective gear, the manufacturing countries had a clear advantage. This results in countries and enterprises no longer looking at labour costs alone but also taking regionalization into account to determine supply chain procurement decisions. We’ll leave it up to the industry experts to predict what this exactly means for the real estate supply chain, but it’s something to consider. The solution is not simply closing a factory in China and opening a new one in Europe. The resources still need to be shipped from one continent to another. Technology, and in particular automation, will protect against the higher labour costs in higher-cost markets, Savills projects.
Automation with smart contracts in the real estate supply chain is the part we’re interested in. Similar to the energy, oil, and gas industry blockchain technology offers unique capabilities and benefits over traditional supply chain and logistics in real estate as well. While cheap labor costs are attractive, we also live in an ever expanding world with higher demands by the day. Automation can reduce labor intensive processes, but can not reduce the shipping time from China to Europe. We’re also seeing an increase in 3D printing on demand for construction and real estate. And, sorry for the truckers we love so much, but autonomous vehicle technology is coming our way. If we go back to Rotterdam, The Netherlands one last time, we can even see how a more regional supply chain may look like. It comes in the form of a… Floating dairy farm! Milk is produced in the heart of the city, delivered to local shops, all starting in a transparent floating farm with an open design, so people can see where their product comes from and how it is processed. It is a remarkable visual representation of what blockchain technology is capable of doing too beyond improving efficiencies and automation. Offering transparency to consumers, and enabling anyone to verify this proof. Whether it is proof of sustainability or carbon neutrality or proof of the origin of materials used in real estate.
The floating farm segment starts at 5:44, but if you love real estate and architecture, you’re going to love the full video. Jeffrey Brown from PBS NewsHour visited Rotterdam in 2019 and reports on how the city’s history and culture fostered its remarkable architectural diversity.
It is hard to determine where blockchain fits exactly because there is no one solution for all. For Dragonchain, proof is an integral part of any blockchain based solution. Certified Proof Reports for data integrity, the origin of resources used to 3D print or even the exact units, if all safety measures have been followed on-site for workers, if automation processes and newly built logistics facilities run smoothly if all construction and transport permits have been granted. A brainstorming session for your specific area of expertise in real estate could bring up dozens of interesting ideas on where and how to apply blockchain.
Compliance and Green Certifications
Green building certifications are on the rise and exist in various forms. The certificate represents approval granted following processes of a rating tool or system, sometimes with more than 1,000 points to consider. From the World Green Building Council, the Green Business Certification, the US Green Building Council LEED rating system, Green Globes, WELL Building Standard, BREEAM to the Living Building Challenge every region or geographical area has its own certifications and each certification has somewhat different rating requirements. The Living Building Challenge for example requires buildings to be self-sufficient, creating a positive impact for people and wildlife. Whereas a LEED platinum certification is granted if you surpass the threshold of 83.5 credits. Any project with the LEED platinum certification had to go through a series of field inspections on all installations, execution of energy components, building performance testing, and many more.
The first and simplest use case for blockchain here is to put green building certifications on chain. More complexity is added when we take a different approach, the one of automation. Imagine you live in a certified four-story, 277-unit multifamily residential building. Where residents happily spend $172 more per month for living in energy efficient multifamily housing. Before, during, or even after a certificate is granted, it would make sense to allow automated checks and transparency to residents.
Worst case scenario, a certification might be withdrawn. Why? Because residents would like to trust they get the energy-efficient housing they pay for. How? Let IoT enabled sensors track as many aspects of the rating criteria in real-time, captured in transactions on a blockchain. From irrigation systems to the performance of solar panels, which is then shown to all parties in a visual dashboard. The US Green Building Council, the residents, and the property owners can all agree the green certificate is still valid without needing to trust each other. If something were to happen, say the fresh air system malfunctions and isn’t repaired or replaced on time, they might drop from a Platinum certificate to a Gold or Silver certificate. And residents pay less (automated with smart contracts) until the situation is resolved.
According to Proud Green Building, ‘the national average rent for a LEED-certified apartment is $2,260, while that for a regular apartment is $1,700’. Portfolio managers are also increasingly looking to expand their sustainable portfolio holdings. The Global Real Estate Sustainability Benchmark (GRESB), founded in 2009 in The Netherlands by pension funds, has grown to a $4.5 trillion initiative in 2019. Over 1,000 participating funds, developers, real estate private equity firms (REITS), and property companies represented over 100,000 assets
Tokenization of Real Estate
That leads us to a nice bridge into the world of investing. Blockchain and cryptocurrencies open up a whole new world of possibilities for those interested in real estate investing. From automation of collecting rental payments to the automation of dividends if you’re not a real estate investment trust, but an accredited investor, it’s still not easy to invest in real estate. Median home prices are skyrocketing and for many investors, a better route may be to invest collectively. Fractional ownership in properties can easily* be achieved with blockchain technology and tokenization, without exposing yourself to high leverage risks. Not everyone has enough money in the bank to purchase a property for investment purposes.
Hypothetically speaking you are investing $50K into a $500K real estate project with some apartments, in a group of 10 investors. Everyone invests the same amount of money, so every investor carries 10% of the investment. Every investor will receive, let’s say 50 tokens, representing their 10% share of ownership. So every token equals 0.2% ownership, remember this. To celebrate the investment we’ll have a ceremony where we lay the first stone of the property and pop the champagne. The tokens are non-fungible tokens (NFT) and are linked to the first physical stone, just because it’s a cool thing to do.
This also allows us to automate many processes transparently for investors, for payment purposes, income tax, and other recurring events. Every month rent is due, and the renting party makes a payment to the contract address. From there on, profit is proportionally and automatically shared across all investors. Perhaps one of the investors would like to decrease their ownership from 10% to 5%. The investor can simply sell 25 of the 50 tokens to another investor, from the same group to a family member or friend, or maybe even put it up for auction online. The new owner now owns 5% too, and everything is legal, transparent, and automated from there on. This is a very simplified explanation to demonstrate that investing in real estate can be more fun and accessible to anyone.
- Regulatory hurdles always remain, especially when tokenizing assets such as real estate. In the United States, this process is overseen by the Securities and Exchange Commission.
Accounting and Payments
Accounting in property management can keep you so occupied, you’d almost forget to analyze your real estate assets to measure profitability year over year and to reassess processes. Accounting in real estate faces technological challenges like any other industry. Employees need to keep up with systems, new functionalities, Federal and State laws, and emerging technologies like Ai taking over certain tasks. Fortunately, accounting and payments are the ‘simplest’ place in real estate to explore the benefits of automation with blockchain technology and smart contracts.
Bookkeeping tasks can be simplified and follow a set of standardized rules. From collecting financial information to collecting and visualizing all data in a tracking system with blockchain powered proof. Not to mention following local guidelines and compliance rules all the way to keeping all legal documents nicely organized. From there on, payments to employees and contractors can be automated. It works the other way around as well, whereas renters automate their payments to landlords and perhaps even partake in a tokenized incentive program to encourage and reward good behavior. Another great perk Dragonchain’s blockchain technology has to offer is real-time visualization of cash flows for investors or property owners.
AML and KYC
Decentralized identity (DID) is one of the custom solutions Dragonchain has developed in-house. Across many industries, enterprises will actively develop integrated decentralized identities within blockchain based applications. In real estate, decentralized identities can support the efficiency and automation of payments. But it can also play a significant role in background checks for Anti Money Laundering (AML) or enhanced Know Your Customer (KYC) processes.
In a 2019 report, the European Parliament Research Service (EPRS) documented the current money laundering issues in the real estate market. These transactions allow criminals to camouflage illegal funds into the legal economy. This is not limited to property, but includes land titles, registries, or even vineyards. It should come as no surprise that one of the recommendations in the EPRS report is to ‘be able to identify the owner of the real estate’. With proper implementation of blockchain, compliant with anti-money laundering requirements, risks can be identified and flagged. It also provides a clear overview of all professionals involved in real estate transactions for compliance assessment. In 2017 in Germany alone, around $34 billion of dubiously sourced international money with an unclear background made its way into the German real estate market.
Blockchain transactions are traceable and transparent by nature, though of course access and visibility can be permission-based. Decentralized identities can be tied to banks, insurance companies, land registries, realtors behind property listings, and many other services. It helps to develop an end-to-end solution with transparent, verifiable processes in a trustless environment. Without sacrificing privacy or the security of sensitive information, whether it’ll be on the personal, business, or government level. In real estate, many processes are still being done on paper. This can be cumbersome, expensive, and allow for more manual errors to occur. From purchasing a new home to rental agreements, a blockchain based system (with or without decentralized identities) can streamline time consuming processes while reducing costs and errors.