Will the Blockchain Revolution Accelerate Real Estate Transactions?

How can we develop a market environment where anyone can make quick investments with peace of mind? The key to solving this question is the use of technology—in particular, a new technology that has the high potential to improve the transparency of the real estate market and then exponentially increase the liquidity of property transactions: Blockchain.

August 01, 2018

Technologies make real estate more transparent and liquid

New technologies—blockchain (distributed ledger technology) in particular—will dramatically increase real estate value. The keys are transparency and liquidity. Both words are often heard in stock and foreign exchange transactions, and a transparent and liquid market means a market where there are multiple market players and transactions can be made immediately. If we use blockchain, we can substantially cut the time-taking processes of real estate transactions.

Data on a blockchain practically cannot be manipulated. By recording any and all information on a blockchain concerning real estate properties in chronological order—registered records of land/buildings, transaction prices, construction/renovation history, financial data, and such—that serves as a reference in making decisions on investments, we can make highly accurate information widely public, and also establish a common database with high security. The mountains of printed contract documents will be digitalized, and transactions will be accelerated ever more. When the time taken for making a deal is shortened, foreign exchange risks that always come with making overseas investments will be mitigated, too.

Buyers will have wider options for investments, and the time taken for due diligence and loan screening will be substantially shortened. Meanwhile, sellers can work on their sales activities with confidence, using trustworthy information on a blockchain as proof which supports the fact that they are selling attractive real estate properties. In short, by making use of a blockchain, we can create an environment where both the buyer and seller can make a real estate transaction with peace of mind. One of the issues the Japanese real estate market has is information asymmetry. If the market evolves into something that is sound and fair, it will be able to absorb more investment money than ever before, and be highly spoken of internationally as a global market. This, furthermore, will contribute to economic development.

Experiments abroad to test a blockchain system are going on in full swing

A property transaction involves many parties other than the buyer and seller. Having multiple stakeholders makes the steps more complicated, and the process towards signing on the deal longer. On the other hand, smart contracts self-execute transaction processes. They use a blockchain as their core technology, and can therefore shorten the settlement period and prevent injustice such as unauthorized data manipulation and alternation.

Some countries including the U.S. have come to realize the usability of blockchain technology, and embarked on experiments to test if the technology can be used in managing real estate information. Some have made it to actually put it into use. For example, South Barrington, Virginia, in the U.S. is conducting an experiment to replace the city’s system for recording real estate transactions with a blockchain, while Sweden, which has been conducting an experiment to manage the country’s land register with blockchain technology since 2016, has announced in March 2018 that it officially adopts the technology. Viewing printed information such as public documents takes up a lot of space and involves the trouble of sending documents by post. Introducing a blockchain can also achieve substantial cutbacks on costs.

Real estate tech made the investment environment more transparent

JLL has published biennial Global Real Estate Transparency Index since 1999, which researches and ranks the transparency of real estate markets around the world. This research is closely related to the amount of direct investments made by overseas investors, and in other words, is a metric to measure the ease of making an investment in a real estate market. The latest 2018 edition published on July 25 expanded its scope of research to include 158 cities in 100 countries worldwide. Japan was ranked 26th place in the 2014 edition in the total rankings, 19th in 2016, and jumped to 14th in 2018. The country now sits on the doorstep of the “Highly Transparent” group—the highest tier. Japan came in 3rd in the “Sustainability” subindex that was newly added to this research from the 2018 edition, and this result pushed up its total rankings. When only traditional indexes are applied, however, the country’s rankings drop to 21st. This is because other countries are improving their market transparency faster than Japan, though the Japanese market is also becoming more transparent. Out of the 100 countries that were surveyed for the 2018 Index, market transparency increased in 85% of them. More than that, the sub index that saw the biggest improvement is “Market Fundamentals.” Many countries are working on making more data available and improving its quality. The Netherlands, which is actively making use of real estate tech, leaped to 6th place, and Dubai, which promotes an open data policy as a part of its national strategy, and others have also made big climbs on the chart. Of course, in most of the markets that were at the top in transparency rankings, information disclosure is thoroughly implemented, for example by making it obligatory to disclose transaction prices on real estate registration. It is evident that the attractiveness of a real estate investment market to investors is closely related to transparency, drawing from the fact that countries that are ranked high in transparency rankings attract 75% of the total amount of investments in the world.

Blockchain transforms the Japanese investment market

This transparency research revealed that many countries are successfully making their real estate market more transparent using technology. Making data open boosts accessibility to data, and this strategy is put to practice in new emerging markets, as well as English-speaking countries which have the top-ranking markets in the transparency index to themselves, encouraging a revolution in market transparency. On the other hand, in Japan, information is not disclosed enough, and opaque business customs such as common service charges are still deeply rooted in the market. Will Japan be able to catch up and overtake other real estate markets around the world which are becoming more transparent? The blockchain technology holds the key to opening doors to the country’s potential.