The media is saturated with news stories about Bitcoin and its ability to cut out the middle men. For a while the ABC News had nightly reports on the daily gyrations of Bitcoin.
The underlying technology behind Bitcoin is Blockchain. Entrepreneurial start-ups are very enthusiastic about the wider application of Blockchain technology, especially for smart contracts in our own domain of Commercial Real Estate.
Commercial Property Search Costs – Just Waiting for Blockchain Disruption!
In the recent past, bestselling books such as Freakonomics have incorrectly predicted the internet would disrupt the real estate industry. Apart from newspaper ads, it just hasn’t happened.
A large part of real estate property switching costs are the transactional costs of finding, acquiring and closing real estate transactions. Information is mainly communicated in workflows based on hard copy, phone calls and PDF format documents. Transaction times are measured in months. A typical commercial property transaction includes substantial legal fees to specialist lawyers who negotiate contract points one by one, turn around hard copies, and close contracts in ink.
So it’s no wonder Blockchain enthusiasts think they’ve struck gold. There are at least three issues currently getting Blockchainers attention.
- Many commercial real estate listing details are inaccessible without contacting the agent. Key information is kept from consumers at a cost of time and money.
- The financial evaluation necessary to assess rates and prices are currently very difficult and time consuming.
- No structure for seamless sub-leasing currently exists, especially for the short-term.
Relationships are the Roadblock for Blockchain
Many industries have been disrupted by technology. Travel agencies and the music industry are two examples that were completely disrupted by the arrival of new technology. Why has Commercial Real Estate been slow to take up disruption?
The answer why disruption in this market-place has yet to occur is simple. Highly localised agencies maintain their existence and value through relationships. The uniquely Australian model of only one real estate agent, representing the landlord and dealing directly with the leasee/buyer reduces agency commission costs.
Commercial Real Estate agents are seen by Blockchainers as an easy smart contract target because of their high sales commissions. However this is just the marketplace price placed on their valuable selling skills and extensive personal relationships. It would be unwise to disregard the power of an agent’s relationships.
Blockchain’s Clever Tech Structure
Blockchain’s specific data structure is a linear transaction log, typically replicated on many computers whose owners (called miners) are rewarded for logging new transactions.
There are two key elements that are very clever in Blockchain’s data structure. One is that a change in any block invalidates every block after it, which means there is no tampering with historical transactions. The second is that the data miners only get rewarded if they’re working on the same chain as everyone else, so each participant has an incentive to go with the flow. The Blockchain rules are enforced by maths —no government authority is needed. Blockchain enabled commercial real estate smart contracts is a powerful idea that is going to continue to attract attention.
Deciding between a Trusting or a Trustless World
Michael Finney at law firm Colin Biggers & Paisley Pty Ltd is a subject matter expert when it comes to Blockchain and the law. Michael explains that, ”lawyers will rapidly need to get up to speed in understanding how to integrate these new technologies, such as Blockchain, into their clients business models.”
Michael expands how he sees a way forward, “Although smart contracts are expected to have a disruptive impact in which contractual trust processes are replaced by irrefutable cryptographic code. Contract solutions lie on a spectrum.”
“At one extreme, natural language contracts may continue to exist for some time with only the payment mechanisms encoded by smart contracting means. In such cases, the traditional role for a real estate agent will change little.”
“At the other extreme, we may one day see the buyer-vendor contract entirely existing in cyber code. However, with the current state of smart contract development and the complexities of many contracts, this day may be some way off yet!"
A distributed, tamper-proof repository of smart contracts sounds like a great way to manage commercial property transactions. Commercial Real Estate is about the difficult task of building trust not creating an environment where trust is not needed. Blockchain solutions will need to take account of the power of the local commercial real estate agents’ relationships before they can succeed.