How Real Estate is becoming a digital asset

digital asset

Yesterday, I had a call with one of my company’s larger customers. It has been five months since my company signed an agreement with this brokerage to process all of its $500 million in real estate sales using my company’s software. For an extended period of time, my team was heading nowhere with this client, who kept pushing the training period dates. However, to my team’s surprise, we received a follow-up call with a request to urgently execute the training and schedule the first property transaction for the upcoming week. The firm’s customers are primarily foreigners from countries in Asia, such as Japan, South Korea, and China; these foreign real estate investors are the very people who are afraid to travel these days due to the coronavirus pandemic but are still willing to close their property purchases in the United States.

In the future, an increasing number of real estate transactions will be taking place remotely online. Besides coronavirus and other publicly disturbing events that lead to mass hysteria, there are behavioral and technological evolutions that have been turning real estate from a purely physical asset to a digitally behaving one, which I will explain below. In addition, I have been reflecting on trends that may happen over the next decade. Below, I outline five trends that will shape a major transformation of the real estate industry in the years to come.

The world of digital assets is expanding, and we are starting to see each piece of daily life and business activity being converted into a computer-readable format. Money is already digital; in fact, only 8% of the world’s currency is materialized in the form of physical cash. The stock market is digital, as well (Charles Schwab was the first major financial services firm to sell stocks online, which ultimately led to an online real-time market for digital assets). As for tangible physical goods of generally low value, such as books and clothes, the majority of these items are traded online and around the clock, thanks to e-commerce platforms such as Amazon, eBay, and Alibaba. In contrast to low-value goods and services, there is a class of high-value assets that are behaving more and more digitally due to their digital ownership representations; this category includes real estate, cars, expensive collectibles, boats, and even venture investments.

When it comes to homes or cars, a digital record determines the ability of an individual to resell the asset in the future. It does not matter who actually uses the possession (i.e., lives in the house or drives the car); the legal owner of the high-value asset is the one who is recorded in a piece of code. Today, in the specific context of ownership, authorities store records in digital format (rarely on paper). In the United States, counties keep digital documents (scanned deeds) in databases that are managed by recorders’ offices. The previously government-controlled process of establishing car ownership is now controlled by private companies that take care of the records. Thanks to an increased trust in deals, not only has the process of online ownership transfer become possible, but the dependence on governments to store this data has decreased, unlocking further innovations.

The real estate asset is behaving like a digital asset because the ownership of the asset is already digitized; furthermore, the paperwork for the ownership transfer is also mostly digitized (thanks to the innovations of companies and organizations such as DocuSign and the National Association of REALTORS). In addition to these significant changes related to real estate and how it is traded, there will be further transformations and developments in the coming decade. Below, I outline five of the trends that I foresee for the real estate industry.

Trend 1: Real Estate Sales To Take Place Entirely Online In A Seamless Way

Imagine a future in which the real estate market is accessible and tradable in real time, similar to how one can access the stock market through a Bloomberg terminal. In this future, property ownership gets transferred instantly after the paperwork and payment are executed, and the process takes place entirely online. As predicted by proptech venture capitalist Vik Chawla from Fifth Wall:

“Future real estate transactions will take place in an entirely digital format where commercial and residential real estate purchases and sales are completed seamlessly. Through the utilization of these digitized platforms, major stakeholders will see an increased speed and lower cost of transaction, coupled with a rise in available data.”

Online sales are becoming possible because of easy data access and digital tools that are designed to make the property transfer process more convenient and transparent. The transparency of transactions, coupled along with privacy protection, is especially important when it comes to creating a healthy environment for buyers, sellers, and realtors. As stated in a World Economic Forum article, the growth of a particular real estate market is undeniably correlated with the level of transparency in that market. For this reason, many nations are expected to adopt proptech, which has already sparked a technological movement.

Oxford professor Andrew Baum defined “proptech” as a marriage of fintech and real estate. Fintech has to do with technological innovations in the context of money and payments (such as Apple Pay, Facebook’s cryptocurrency, and iWallet), as well as mortgage tech (such as Divvy, Better.com, and BoardRE) and secure wire payment gateways that are specific to real estate. Such financial innovations in real estate are leading to faster, more secure, and cheaper asset transfers that take place entirely online and that are expected to be seen more frequently in the coming decade.

The notarization procedure, a key part of the transaction process, is also starting to accelerate its presence online, thanks to companies such as Notarize.com and an evolution of the legal environment. Recently, agents and other market participants have become especially proactive at using technologies such as e-notarization and other tools for remote work during the unfortunate and deadly coronavirus crisis.

Software that is based on emerging tech (such as blockchain) allows participants to not only make paperwork and asset ownership secure but also complete work remotely. New tech comes with additional benefits, including the simple avoidance of establishing physical contact during periods of crisis. Such crises include the public spread of diseases (such as outbreaks and pandemics), dangerous weather conditions (such as snowstorms and hurricanes), and unstable political activities and rallies (such as protests and riots). The teleconferencing startup Zoom Video Communications reported that its stock has gone up by 38% in the past month, as the coronavirus panic is causing more people to switch to a remote work mode.

Agents who are always on the go are quickly learning how to deal with crises. The use of Zoom and other online real estate-related services is becoming especially relevant for people who need to take appropriate measures to meet their clients’ expectations and needs while staying safe and risk-free.

No matter the industry, when public stress builds up to a critical level, mob psychology and behavior change significantly. In the case of real estate, homebuyers and agents are forced to close deals remotely and entirely online to avoid physical contact in dangerous situations. Additionally, buying and selling on the go is becoming an expectation of current generations, including millennials and Generation Z, which will soon represent 50% of all homeowners in the United States.

Trend 2: More Capital to Be Invested In Proptech And Adoption By VCs And Startups

Corporations in real estate are heavily investing in VCs and proptech VCs; one such example is Fifth Wall, which has raised $503 million to invest in the proptech field. Enterprises have a clear understanding that they need to adopt new technologies. By adopting a startup’s technology, corporate investors also ensure the success of that startup; the support is mutually beneficial for the investors, their LPs, and the startup.

In 2019, the proptech market grew significantly; capital invested in proptech companies increased by 157% from the previous year, totaling an all-time high of $24.9 billion. The figure is predicted to be even higher this year. Companies and organizations like Lennar Corporation, Oxford Properties, JLL, CBRE, and NAR (the National Association of REALTORS) are investing in funds, accelerators (REach), and startups in the proptech field. Great examples of larger funds that are backed by real estate operators include Fifth Wall, OMERS Ventures, Second Century Ventures, JLL Spark, Camber Creek, and Round Hill Ventures.

Trend 3: iBuyer And Non-iBuyer Markets

Across 18 markets in the United States, the iBuyer market share out of total homes sold grew from 1.6% in 2018 to 3.1% in 2019; extended across the U.S., 3.1% out of roughly 673,000 houses equates to over 20,000 residential properties. While the iBuyer model is designed to target impatient or desperate sellers who are willing to accept higher fees (which can be in the range of 13% to 15% of the property value) in favor of saving themselves time and stress, the iBuyer concept is appearing to work and is growing in popularity. To some homeowners, the “three-day experience” and the 5% to 7% commission rates seem reasonable.

The iBuyer business model is becoming more accessible through a vast number of large brokerages and traditional real estate agents. Real estate professionals may have iBuyer programs of their own, as the capital required to operate this type of property buying and selling model is relatively easy to access. However, in some markets such as Silicon Valley, the traditional iBuyer model might not be as popular as it is in other parts of the United States. This conclusion comes from the fact that the San Francisco Bay Area and other parts of the U.S. are not homogeneous, and the high price tags make the model risky for iBuyers and their lenders.

Trend 4: New Era For Brokerages And Agents. Will They Be Disrupted?

In the new era, real estate professionals will no longer be middlemen (in the traditional sense). Brokerages will be extensively training their agents to use advanced technologies to work with customers. Over the past five years, brokerages invented new ways to generate leads and, as a result, no longer rely only on services such as Zillow (which turned into an iBuyer company in 2019). Instead, real estate professionals are pushing the industry to evolve even more. With novelties in the field, the brokerage industry will witness the replacement of top brands. Agents will be switching to new “cool” pioneers in the real estate space, quickly bypassing old “established” brands that have outdated technologies. Compass could be an example of a rising star, although it has the prerequisites to evolve into the next old and “established” brand to be outcompeted by newcomers.

Brokerages will be providing many additional services (such as iBuyer services, renovation loan services, lead generation services, marketing tools, and faster online closing tools). The business structures of many brokerages may change as well; changes may involve the inclusion of title and escrow services into the traditional business model. By focusing on their technology and service levels, brokerages will have higher chances of becoming the main drivers of new technology adoption; by doing so, the firms will offer higher value to real estate agents.

With the benefits of emerging technologies come potential risks for agents, as their commission rates may drop significantly due to the after-effects of new tech disruptions and growing competition. Despite these potential risks, the introduction of automation tools should improve the current dealmaking flow in the space and open up new opportunities for service providers to achieve higher numbers in their closing transactions. Those who know how to use new technologies effectively will be winning over customers. Phrases such as “my friend advised me to work with this agent” will be irrelevant. Instead, agents who are willing to negotiate on pricing levels will be receiving more exposure and demand. Trusted agents will be those who have the technical skills to close deals quickly and efficiently as well as those who have undeniable proof of high qualifications (such as high online ratings that reflect the agents’ abilities to negotiate on pricing).

In the U.S., where real estate professionals have liability and significant impact over real estate transactions due to the NAR, agents will not be disrupted anytime soon; all startups that aimed to disrupt brokers turned into brokerages themselves, or they started to partner with brokerages (such as Redfin and Opendoor). However, in many countries with no MLSs (where agents are not licensed and not trusted), real estate professionals could be disrupted and replaced with digital tools once the transaction process is fully automated and secure and once the consumer has direct access to listings.

Trend 5: Tokenization And Global Liquidity

Tokenization has become a popular and trendy word in the real estate and crypto spaces. In the context of tokenization, ownership is represented by a digital (or cryptographically-enabled) token that can easily be transferred between two digital wallets. There are two types of tokenization in real estate: Entire Asset Tokenization and Fractional Ownership Tokenization. The first, EA Tokenization, is very hard to implement; the second, FO Tokenization, is already having use cases. Both types are aiming to achieve unprecedented liquidity and accessibility in the real estate market on a global level. This trend will probably start showing its first mass-scale signs no earlier than at the end of the decade.

EA Tokenization is a P2P (peer-to-peer) entire asset transfer, where the title deed itself is tokenized. Entire Asset Tokenization is still hard to implement (not as much from the technical as from the regulatory and consumer risk management perspectives). To get there, first, the entire closing flow will have to be automated (this is already happening). The bottleneck will be the adoption of digital identity, its verification process, and the use of security token wallets.

Despite the obstacles, the future is bright. The ownership of assets could easily be transferred after the digital identity is verified and after the funds are simultaneously and instantly transferred. Additionally, agents and all other parties would be able to receive their payments automatically and immediately in their digital wallets. The elimination of most of the manual labor suggests that fees will most likely drop from a current charge of 10% of the property price (including recording fees, escrow fees, split fees, auditing fees, etc.).

The problem with current tokenization projects is that they do not work on the underlying protocol that would enable a new asset class, the tokenized deed, to emerge. Furthermore, no VCs would back such EA Tokenization innovation due to the very slow adoption of this technology and government involvement in the current real estate transaction process. The digitalization of the title deed and the liquidity associated with this new digital asset will lead to tremendous changes in the way that the real estate industry is financed and operated. One positive example is a San Francisco-based company, Figure, which has successfully tokenized home equity line of credit (HELOC); the firm does not work on EA or FO Tokenization, but it has received great traction in tokenizing a specific category of real estate.

Since 2017, many platforms and startups have announced that they were working in the space of Fractional Ownership Tokenization of assets. Some have failed, while others have received their first large-use cases and customers. However, while the aforementioned startups claimed to be focusing on fractional ownership of real estate, their business models were, in fact, representations of traditional crowdfunding, in which a legal entity owns a real estate asset that is being tokenized (similar to a classic ICO). The only difference is that the type of token is a security and thus should be registered with the SEC (similar to registrations of public and private Real Estate Investment Trusts). Many institutional homebuilders and asset holders have relied on this type of fundraising as a novel opportunity, seeking premium prices or faster sales. However, those who look for this type of fundraising should think of it as a way to participate in innovation and as an opportunity to shape the future of real estate trading.

Source: Forbes

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