A number of industries are being negatively impacted by the COVID-19 pandemic, including the United States housing market, which is valued at $33.6 trillion. Recent findings from Zillow, an American online real-estate database company, show that despite low mortgage rates, the coronavirus has slowed down the U.S. housing market considerably.
In addition, the number of seriously delinquent mortgages — those which are 90 days past due — has doubled from May to June, hitting its highest level in more than five years. In an attempt to revitalize the housing market, some real estate companies are turning toward blockchain concepts, such as tokenization and smart contracts, to replace traditional processes.
Tokenizing real estate
Matthieu Bouchaud, a senior product manager at Codefi Assets ConsenSys — a blockchain application suite that works with companies to digitize financial assets — told Cointelegraph that COVID-19 has considerably slowed down the issuance of real estate mortgages. As a result, Bouchaud mentioned that real estate companies are exploring new techniques like tokenization to distribute smaller properties or fractions of properties at lower costs:
“Tokenization streamlines registry maintenance and the distribution of shares of companies owning real estate or real estate asset managers. Due to COVID-19, the loan-to-value ratios have become more strict, and companies relying on the lending capacity of their customers to distribute real estate are in trouble. Therefore, they are exploring new distribution techniques like tokenization.”
Codefi Assets is currently working with the French real estate fund management company Mata Capital on tokenizing real estate assets to ensure greater participation in investments. The Codefi–Mata Capital case study states that the long-term vision is to reduce minimum investor subscription amounts from 100,000 euros to 1 euro to attract more users.
Mata Capital has partnered with Codefi Assets to issue security tokens for three separate funds worth a total of 350 million euros. The first of these tokenization projects would allow a number of investors to own part of an 11-story hotel currently being built in Paris.
In regards to the U.S. housing market, RealT is a blockchain company that offers a tokenization platform for investors interested in real estate across the United States. The company allows global investors to buy into the U.S. real estate market by offering fractional and tokenized ownership. The ownership of the real estate properties listed by RealT is denominated by digital tokens called RealTokens, which are based on the Ethereum blockchain.
Through tokenization, real estate investments should ultimately become more affordable and accessible to a wide range of individuals, making this particularly appealing during a financial crisis spurred by a pandemic. For example, a single token for RealT properties costs anywhere between $50 and $150, considerably less than traditional real estate investments.
Tokenization further allows separation between a renter and property owner. Venture capitalist and noted Bitcoin investor Tim Draper recently revealed in an interview that he finds tokenization exciting because of this:
“Tokenization is exciting because it means that someone could buy just a piece of my house without buying the whole thing. And it separates the renter from the owner nicely. I would sell a piece of my real estate that that individual would pay rent to use it.”
Real estate goes paperless
Bouchaud also pointed out that tokenization allows companies to move away from paper-based, manual processes, which have become a risk for the global economy due to COVID-19.
Asset managers like Mata Capital typically rely on paper to manage their investor registry. Digitizing this process by having virtual investor accounts with uploaded Know Your Customer documents would enable Mata Capital to go paperless entirely. RealT also replaces traditional paper deeds with digital tokens that represent asset ownership based on the Ethereum blockchain.
Blockchain solutions also allow for smart contracts to be used for ownership settlement. In turn, this creates a secure transaction automation process. Natalia Karayaneva, the CEO of Propy — a blockchain-based real estate startup — told Cointelegraph that there are currently three things needed in order for a real-estate transaction settlement to occur:
“An individual must complete the required paperwork, then send a payment. If the payment is sent and the property ownership clears, the request is transferred, and the payment is released to the seller. The ‘if’ and ‘then’ rules are all programmable and can be put in a code. The best solution for this type of self-executing code today is within a smart contract.”
According to Karayaneva, smart contracts used for real-estate transactions aren’t necessarily needed because of the COVID19 pandemic, however, most transactions are happening online nowadays, and real estate companies have been showing interest in these digital solutions.
Karayaneva shared that the American real estate agency Re/Max Plus uses Propy’s technology to tackle transaction speeds and fraud prevention while having an overall transparent process for both home buyers and sellers. She explained that Propy works with brokerages like Re/Max Plus by providing a blockchain-based transaction system for agents and transaction coordinators. Agents, buyers, sellers and lenders all sign and complete paperwork within a single secure online environment.
Pete Zizzi, team leader of the Zizzi Team with Re/Max Plus, told Cointelegraph that Propy’s technology has helped eliminate the need to install multiple systems to manage transactions, allowing agents the ability to close deals in a transparent and efficient way.
COVID-19 can drive real estate digitalization
While revolutionary, Bouchaud is well aware that the real estate sector requires more education on blockchain technology in order for improvements to be made. Adding to this, Karayaneva explained that blockchain isn’t always part of the conversation Propy has with its real estate clients. “Many broker-owners realize that blockchain is the future of real estate, but they can’t understand its practicality. This is why when we offer our product to customers we only discuss the benefits that are visible to their daily work,” she said.
However, regulatory challenges continue to loom, especially around tokenization. Outdated regulations around digitalization are also hampering adoption. Max Simkoff, founder and CEO of States Title — a San Francisco-based title insurance company — stated in a recent American Express blog post that while the technology to conduct real estate closings without paper has been available for years, “outdated regulations and industry reluctance to abandon traditional practices held up the transition.”