Blockchain technology has recently gained popularity for its use in the modern world, bringing new disruptions across industries. Real estate has not escaped blockchain either which will make real estate ownership, management, and transactions faster and safer. This could be translated as making investments in real estate more readily accessible.
The Cambodian all-in-one payment app, Bakong, has also used blockchain technology to build its platform. It allows users to transfer and receive funds. The Bakong app and platform are on their way to solving Cambodia’s money transferring hurdles by offering a fast and convenient solution.
On top of that, Z1 FINANCIAL, a subsidiary of Zillennium Co., Ltd (Z1 Group) – one of the leading real estate marketplaces in Cambodia – also made use of the same technology to operate a blockchain-backed platform that allows all investors, both local and international to invest in real estate globally. (More details on Z1 FINANCIAL will be elaborated in the next article)
So, what’s blockchain and how can it be adopted in real estate?
Blockchain has been defined as a distributed and decentralized public ledger database that records all transactions and creates data for every transaction. Multiple new and unique data elements are created for each transaction. This data is bundled as a block and such blocks are chained sequentially using algorithms generated during each transaction. No block can be added to the chain if the hashes are not replicated by all the key users in the network.
Thus, the integrity of the transactions is maintained. Data and transactions on the Blockchain cannot be manipulated or tampered with as they are spread across the network of users who store and verify each block of information.
Blockchain boosts its strong potential in real estate investing because it mitigates many of the assets class’ hurdles. Here is what real estate investment platform-backed blockchain technology can take advantage of over traditional real estate financing.
Removing investor barrier by fractionalization
Because properties are expensive, large amounts of capital are required which poses a barrier to entry for retail investors who wish to participate in the sector. Blockchain tokenization is becoming a solution to this challenge by dividing an asset into a digital token that acts as an ownership share. Therefore, it considerably lowers the cost of entry, while further opening up the investor pool for funding.
For example, you can invest in a commercial building that is worth $10 million. With tokenization, the ownership of this physical property could be split into 100,000 digital tokens amounting to $100 each.
Traditionally, the documentation needed for the purchase of a real estate asset, such as finance agreements, searches, title deeds surveys, property valuations, etc., are in the possession of different stakeholders, and sharing information can be a time-consuming exercise. Blockchain has opened up ways to solve this issue. The introduction of smart contracts in blockchain platforms now allows assets like real estate to be tokenized and traded.
Safer, Faster, and More Transparent
Blockchain – a digital ledger known for its security – is decentralized. Tampering with a blockchain’s data is nearly impossible because the ledger is shared and verified by all of its users. This provides investors with full transparency into the past transactions of a property, as well as undeniable proof of ownership.
Transactions in tokenized products can be settled almost instantly, unlike traditional finance transactions that can take up to days or even weeks.
If a property were to be tokenized, it would essentially cut out the middleman and allow buyers and sellers to transfer ownership directly. Thus, tokenization generates liquidity by enabling secure transfers between investors.
A report from the World Bank shows that the construction and real estate sector has been the largest engine of growth in recent years, contributing more than a third of Cambodia’s GDP growth in 2019. The sector is mostly represented by foreign direct investment (FDI). FDI volumes in Cambodia were worth $3.4 billion in 2019 and hit $3.6 billion in 2020.
Having said that, the arrival of blockchain technology has allowed for the creation of exciting real estate investment platforms like Z1 Financial. This will enable more foreign investors from around the globe to inject their funds and properties into the market.