Smart contracts for real estate investment

For all the technological advances seen in many parts of the real estate business, transactions – both for assets and for funds – are still a costly and time-consuming process. One solution to this problem could be creating automated transaction systems, where human involvement is replaced by digital ledger-based technology (DLT). Smart contracts are at the heart of these systems.

DLT not only has the potential to streamline the legwork involved in transactions, leading to substantial time and cost savings for all involved, but also supports the tokenisation of real estate. As explained in an earlier INREV technology paper on the Digitisation and Tokenisation of Real Estate, this could in turn lead to a broader investor base for the asset class as the possibility of holding lower denomination holdings makes it more attractive to smaller scale investors.

But how do smart contracts fit in? Well, a smart contract is a way of automating and recording particular contractual processes – essentially pieces of self-executing computer code by which instructions, conditions and outcomes can be issued, met and achieved through blockchain (or DLT) technology. It has been suggested that the automatic vending machine was an early incarnation of the smart contract.

A smart contract is a way of automating and recording particular contractual processes – essentially pieces of self-executing computer code by which instructions, conditions and outcomes can be issued, met and achieved

For real estate, smart contracts have so far been most common in the area of facilities management, where agreements are often for standard services that are repeated many times – say maintenance contracts. But now investment applications are also starting to be explored. A high profile first mover has been the UK Land Registry, which began to test smart contract and DLT technology for registering transactions on its platform. In one simulation, it claimed to have gone through all the steps needed for the transfer of a small residential property that took 22 weeks in the real world in about 10 minutes.

Meanwhile, a number of firms, most of which are backed by venture capital, are developing private tokenisation and smart contract platforms for real estate. These include Propy, a cross-border market platform that allows owners and brokers to list properties and buyers to search and negotiate a sale, and Plotify, which describes itself as a ‘real estate investment platform for global investors’.  And in the US, the 2020 start-up Red Swan tokenised over US$2bn of commercial real estate using smart contracts and DLT/blockchain.

[ad:content]

Given these clear practical use cases, an obvious question is why smart contracts are yet to be widely taken up for European real estate investment. The most important reason is probably regulation: today each country has its own rules for using digitised securities, which need to be harmonised if such instruments are to be adopted internationally. Other hurdles are the cost of developing this kind of technology in a form that will be widely accessible, and sentiment – essentially a fear of the unknown among existing investment market players.

But still, the potential advantages of DLT systems and tokenisation for both investors – faster transactions at lower cost – and managers – a bigger market pie – look clear-cut. So, with smart contracts making visible inroads in the wider real estate industry, their use in investment transactions, including in the non-listed real estate sector, will surely follow.