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Blockchain technology threatens the middleman in real estate transactions

‘In theory, you’re not involving a lot of paper work and you’re reducing the number of people involved in the process,’ says an expert in real estate-related blockchain technology.

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In Canada's commercial real estate market, there are countless extra fees and processes involved in purchases that go beyond the price of the property. But blockchain technology could hold the key to cutting down some of those costs by reducing the intermediaries.

Blockchain is essentially an online ledger that manages recorded transactions. What makes it innovative is that the ledger is distributed, meaning anyone connected to the network has a copy of it. The implications of this in commercial real estate are numerous, from purchasing to leasing to management.

"If we have a blockchain approach … then it cleans that whole process and streamlines it," says Sheila Botting, national real estate and construction leader at Deloitte Canada.

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At its root, blockchain technology compiles records of transactions into systems called blocks, which are secured cryptographically and contain a digital fingerprint of past and present records.

Technology and real estate experts alike say blockchain technology has an important place in the commercial real estate market with its ability to streamline processes, reduce fraud and cut costs (and middlemen), but it remains unclear how and at what rate it will be adopted.

According to a recent Deloitte report, Blockchain in Commercial Real Estate: The Future is Here, landlords, sellers and intermediaries (such as brokers and lawyers) all have access to the historical data for both the specific property alongside the commercial real estate market as a whole. No more entering data in multiple places, multiple times.

"Today we can do all of those things with both websites and e-mails … but in a blockchain world, assuming that confidentiality is cleared, that property would have a property identity, so the previous people who owned the property, any of the inspections or records, landlord information, would be fully disclosed," explains Ms. Botting.

"In theory, you're not involving a lot of paperwork and you're reducing the number of people involved in the process."

Transaction fees and services in both Canada's residential and commercial real estate spaces – such as legal costs, land-transfer taxes and real estate commissions – make up about 2 per cent of Canada's economy, according to Statistics Canada's latest GDP survey.

High-cost processing fees are also a challenge in Canada's global commercial real estate transactions, which could be reduced through the adoption of blockchain, says Amy Erixon, principal and managing director of investments at Avison Young.

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In particular, this system could reduce registry costs in countries that rely on the notary system, which is "staggeringly expensive and cumbersome," explains Ms. Erixon.

"We do a lot of business in Germany and when we close, say, a $50-million deal in Germany, we'll spend half a million dollars or more on the notary charges," she says, adding that similar transactions in Canada "would be a $25 charge."

"In Germany … there is a regulatory apparatus around how you record transactions that involves the notary conducting procedures, in terms of checking for liens, doing a lot of things that in North America, governments take care of through the title registries."

By having all of the encrypted information needed for the acquisition secured on a blockchain, it can be easily authenticated – a process that usually requires several parties, including banks and notaries, which are unnecessary in a blockchain scenario.

But advocates of blockchain say there are a lot of factors at play – including fear of the unknown by potential users – that have to be satisfied before its adoption into the commercial real estate market.

"The challenge is not around if the technology is good for A, B and C. The challenge is in the execution of it, in getting the various parties to agree to the system," says Jay Milroy, head of product management at BTL Group Ltd., a blockchain technology developer in Vancouver.

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Indeed, privacy is the main concern for potential blockchain adopters as many are worried about their data being shared with users in the network, even if it is encrypted.

"Everyone is interested in a system that's more trustable, but at the same time you have to get parties to agree that the shared, cryptographically-secure system is better than having their data squirrelled away behind a firewall in their own system," explains Mr. Milroy.

But a fundamental aspect of blockchain's security is actually tied to its distributed and open nature. It means that no single person has control over the information and having the data stored over multiple computers cuts the risk of losing that information.

"Once that light bulb goes on and people get over that fear of the unknown, they say, 'This is great, this solves a lot of my problems' and maybe most importantly, 'How do I get more people to join?'" says Mr. Milroy. "We're in the midst of this kind of shift."

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