Could smart contracts change the commercial property market?

Paper-based contracts could become a thing of the past in commercial real estate.
17 September 2019 | 8 Shares

Could smart contracts transform the commercial property market? Source: Shutterstock

One of the biggest developments underpinned by blockchain technology has been that of smart contracts— essentially a computer code that can self-execute as well as self-enforce the terms and conditions laid out in a legal agreement.

Due to the decentralized nature of blockchain— a smart contract can bypass expensive ‘middlemen’ such as financial institutions and solicitors. 

In the commercial real estate industry, smart contracts are already being used to conduct property transactions such as buying, selling, leasing, and financing.

Interested in ground-breaking ‘PropTech’, commercial estate agents SavoyStewart surveyed 544 commercial real estate (CRE) professionals to identify what they think are the biggest benefits of using smart contracts in CRE.

SavoyStewart found 71 percent of professionals view increased speed as the biggest benefit of utilizing smart contracts in CRE. 

Bypassing the middlemen

Since smart contracts run on software code, they don’t require documents to be processed manually. Consequently, smart contracts can significantly quicken home purchasing stages such as the processing of verification and ownership.

With CRE transactions typically involving multiple intermediaries such as brokers, banks, and solicitors – a smart contract has the capabilities to take over some or all these functions. 

Ultimate, two-thirds (66 percent) of those in the survey said they believed smart contracts would make the exchange between the buyer and seller more efficient while cutting out the ‘middlemen’ means intermediate fees could be cut, saving considerable amounts of money for both parties. 

Smart contracts could also provide a boon to security, owing to the fact they can’t be altered— this negates the risk of documents being forged, making property scams almost impossible. 

Treading too carefully?

But while CRE professionals see overriding benefits in using smart contracts, so far the uptake is limited and, for nearly three-quarters of respondents (74 percent) that comes down to lack of understanding and knowledge around the technology. 

A lack of best practice standards also factor in; 51 percent said this factor could negatively impact the wider use of the technology, while 58 percent said data privacy compliance would present a challenging issue— since details stored on a smart contract stays forever. 

“We now live in a digital era where almost everything our heart desires can be secured with a swipe on our smartphone,” wrote TechHQ’s Neil Hughes, on the subject of the use of blockchain in real estate.

“By contrast, real estate transactions stand out for being too slow. The slow speed is often responsible for abandoned transactions, which results in significant costs for everyone in the chain.”

New buying models

In regard to CRE, Hughes went on to explain how blockchain could open up new ways of buying property, helping to overcome the high cost of entry and liquidity problems. 

“A lack of affordability to buy a whole property shouldn’t lock people out of the real estate market,” said Hughes. 

“Crowd ownership and fractional sales of properties will also open up a new global market. As a result, there is now a long line of blockchain real estate startups lining up to fill the niche with new innovative solutions.”

“The future of real estate could see properties of all types being liquified, tokenized, and traded much like stocks as an alternative to searching for a single buyer,” Hughes continued.  

“Blockchain has the potential not only to transform real estate but to reinvent it. How we define property ownership is starting to change, and everyone will be able to enjoy a slice of the pie.”