Indian real estate transactions are fraught with risks. At every stage, there are risks of fraud or risks of legal entanglements over the ownership title. As a result, the common man often does not have a choice of risk free properties to buy.
As a result, bulk of real estate transactions are handled in cash[1] - thus bypassing the organized banking sector. According to RBI report [2], housing sector accounts for only 16.6% of all the credit portfolios of the banks in India.
This contrasts sharply with the real estate loans represent a vast majority of outstanding credit portfolio in the USA [3], where 45.2% of the outstanding credit portfolio is in real estate sector.
This implies that there is a lot of opportunities in Indian real estate sector for banks to lend - provided banks can find ways to bring in transparency and developers can gain trust of borrowers. In this context, blockchain technolgies will be of big help.
Hernando de Soto, a renowned economist wrote that: No nation can have a strong market economy without adequate participation in an information framework that records ownership of property and other economic information.[4]
Property rights can be in form of any high value items such as:
- Real Estate: Apartment, agricultural land, house
- Art & Collectable Items of Value: Paintings, Antiques, cars, watches etc.
- Proof of investments: Stocks, bonds, certificates of deposit etc.
- Intellectual Properties: Copyrights, Patents, Algorithms, APIs etc
These records represents the owner's rights and majority wealth of an individual. It is therefore crucial to maintain completeness & correctness of these records to prevent unauthorized or fraudulent changes to these properties.
Historically, people had to trust the government agencies to provide a standard centralized ledger that represents the ownership. However in developing countries, and in times of uncertainties, we have seen that government routinely tramples upon individual property rights and in many occasions even usurp private property.
Even in developed countries or developing economies where there is stable government and a strong rule of law, trading in property is a hassle. Documents can be forged or fudged to create fraudulent transactions - which results in lost value and long time spent in court disputes.
Blockchain technology presents an alternative way to protect and secure the rights to these properties. Blockchain is a consensus based peer-to-peer network with a proof-of-work algorithms which makes changing these historic records probhitively expensive and correctness of the documents is guaranteed by block chain technology protocol rules.
Block chain technology ensures that the rightful owner can always be identified using public key cryptography. Blockchain technology allows creation of "colored coins" - i.e,. Non-fungiable bitcoin (see https://en.bitcoin.it/wiki/Smart_Property)
Smart property technology as described by Mike Hearn:
Smart property is property whose ownership is controlled via the Bitcoin block chain, using
contracts. Examples could include physical property such as cars, phones or houses. Smart
property also includes nonphysical property like shares in a company or access rights to a
remote computer. Making property smart allows it to be traded with radically less trust. This
reduces fraud, mediation fees and allows trades to take place that otherwise would never
have happened. For example, it allows strangers to loan you money over the Internet taking
your smart property as collateral, which should make lending more competitive and thus credit
cheaper.
The main benefit of blockchain technology is a distributed database, which cannot be hacked or misused by administrators. Even in case of natural or man-made disasters land records data cannot be destroyed. Blockchain will also serve as a virtual notary service - which authenticates all transactions. This authentication service can be used by banks & insurance companies to provide loans and insurance services.
Therefore block chain is very useful for keeping property ownership records. There are multiple benefits of block chain based property rights management system, that goes beyond the proof-of-ownership and fraud prevention.
1. Provide Transparency
2. Eliminate fraud.
3. Smart Contracts
4. Increase the speed of Transactions
5. Leverage & unlock Value of Assets
1. Provide Transparency
If I were to buy a property today in Bangalore. I need to get a copy of all the property documents from the rightful owner. Often, the owner of the property would have documents in a safe locker. The owner has to retrieve the original documents, make a photo copy and hand over the photo copy to the buyer. Then as a potential buyer, I need to verify the authenticity of the document with several government agencies, identify legal risks against the property by getting a legal opinion from lawyers, and then negotiate the final price and then pay via a bank, and then register the sale agreement/deed with government agency. All this will take several weeks for the transaction to complete and the buyer has to spend quite an amount of money.
In India, a significant amount of money - almost 1-2% is spent to verify and validate the ownership titles of the property before the transaction can occur.
With Blockchain based system, all this hassles are eliminated. All property related documents are hosted on block chain. Even the entire history of all transactions on that property can be hosted on the block chain. All relevant tax paid information, relevant clearances etc. are all on block chain. The owner of the property can provide read access to this data to potential buyers. The buyer in turn can trust this data, which results in total transparency of ownership rights.
2. Eliminate fraud
In India, real estate & property disputes form a majority of civil court cases. The prevalence of fraud and complexity of property rights has been a major obstacle for a vast majority of Indian citizens to buy/invest in real estate. No wonder less than 10% of the population owns property in India.
In India, a significant amount of money - almost 1-2% is spent to verify and validate the ownership titles of the property before the transaction can occur.
Since the original property records are on block chain, and these historical records cannot be edited/modified, it eliminates fraud and reduces the cost of transaction.
In case of real estate properties, there will be a common trusted registry service to authenticate the owners and record all transactions. With blockchain, the use of coloured coins to repersent the property. The ownership title of the property can be modified only with a combination of private keys of the owner and registration authority. This ensures that neither the property owner nor the registry - can modify the records individually, without the consent of the other party. This scheme provide safe & secure way to record all transactions. And ensures all transfers are properly recorded.
3. Increase the Speed of transactions
Block chain technology ensures total transparency in property ownership titles and it also eliminates fraud. This will encourage buyers to trust the seller, and close the transaction faster. A faster sale results in better economic gains to both buyer and seller. The seller gets a faster access to capital, and the buyer gets an assured property which he can use.
Furthermore, payments for real estate property transactions could be handled on a Blockchain using digital currencies. Thus eliminating the expensive bank transaction fees, and the seller gets faster access to cash.
4. Smart Contracts
A property can generate income and will have certain expenses. In case of real estate property, there are certain annual expenses such as property taxes, property insurance and there may be other maintenance charges.
With block chain technology, the owner of this property can build in rules into the block chain system which triggers payment of taxes or other maintenance charges based on predefined rules. In case of taxes, the rules will be defined by government agency and one can write in the automation tools to calculate and pay the required taxes - via the technology of "Smart Contracts".
Insurance companies can also evaluate the value of the property and provide better pricing and owners can pay insurance companies via smart contracts.
A property can also generate income. In case of real estate, this could be often seen as rents. Smart contracts can be developed to collect rents from tenants. Smart contracts allows for automatic collection of rents as per predefined rules.
Take an example of retail shops in a mall. The mall owner/mangers can use smart contracts to collect rents for all tenants -based on smart rules such as rent as % of sales revenue or rent as % of electricity/utility consumed etc.
Today, these rule based rent calculations are tedious and cumbersome. This implies the landlord has to spend money to have accountants go over all the calculations, generate an invoice and then go behind tenants to collect. Tenants can at-times dispute this calculations (human error) and delay payments.
With smart contracts, all the rule based rent collection can be automate.
Smart contracts will also allow the rents to be paid out to multiple owners - if the property is jointly owned by many investors. Smart Contracts will encourage investments in commercial real estate ventures.
5. Leverage & unlock Value of Assets
Block Chain technology provides total transparency and when merged with smart contracts, the entire transaction history on that property can be made available to banks or other financial agencies over the block chain. This will allow banks/lenders to evaluate the quality of the assets and quickly determine the quantum of loan that can be provided to the owner.
Property owners can quickly leverage their real estate assets quickly and use that freed up capital in other ventures.
Banks/lenders in-turn can bundle up the assets and create Mortgagee Backed Securities (MBS) and trade MBS to investment banks in the secondary markets. Credit rating agencies can quickly valuate the quality of the underlying assets that makes up the MBS, the risk rating of the MBS can be dynamically calculated on demand.
Unlocking the value of real estate assets can really accelerate a countries economy!
Closing Thoughts
Blockchain technology is ideal for real estate property transactions. However this will not happen overnight. The Blockchain technology offers great prospects for the future. Streamlining a slow cumbersome process in real estate transactions will unlock value for everyone.
However such an innovative technology will not get a wide spread acceptance quickly. It will take time and few innovative & forward thinking real estate firms will lead the way and create enormous wealth for themselves.
Retail Banks, Investment Banks, & Hedge funds will benefit greatly by having real estate on Blockchain. These bankers have the clout and money to clear off the hurdles and create adequate regulation or rules needed for real estate.
Blockchain technology is still in its infancy, but the potential benefits of this technology is too great to ignore.
References
1. www.iimb.ernet.in/sites/default/files/u201/Housing%20Market%20in%20India.pdf
2. Https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/T_11118A5AFCC55634D2F8AA62E5CB885E233.PDF
3. Http://www.forbes.com/sites/greatspeculations/2015/06/17/q1-2015-u-s-banking-review-outstanding-commercial-loan-portfolio/#61b531074e61
4. "The Destruction of Economic Facts", by Hernando de Soto. April 28, 2010. Bloomberg BusinessWeek. Accessed online May 2, 2011
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