Op Ed: A Roadmap For How the Blockchain Can Open Up Foreign Property Investment
For most individuals, investing in foreign property seems out of reach. The barriers, however, have far less to do with one’s income and more to do with issues around information, namely quality and verifiability. It is not just the cost of property but also the expense in hiring local advisers that makes foreign real estate a rich man’s game.
Blockchain technology has the potential to significantly lower these barriers, making property investment a viable option for a larger swathe of the population. In short, distributed ledgers can provide greater transparency into the availability, detail and oversight of properties in more inaccessible areas.
Tokenization makes real estate investments more liquid and divisible among a greater number of people — an attribute that greatly reduces transaction costs and increases economies of scale.
The various levels of complexity are the reason why foreign real estate investors often resort to hiring local advisers. The costs incurred in hiring local advisers or services can add up to more than the actual property.
As business lawyer, economist and Brickblock.io adviser Dr. Wolfgang Richter notes, “The various fees make it unfeasible for people to invest small amounts; thus, investing is only advantageous for those with a lot of capital.”
The decentralized, fluid and incorruptible nature of blockchain technology may present a solution to the barriers that aspiring property investors are confronted with.
Providing a Trusted, Verifiable Source of Data by Demystifying Information
As it stands, one of the greatest challenges for potential investors is understanding whether a property is appropriate for investment.
Investors may see a property they like — but how can they understand whether the financial, cultural and security prospects of the surrounding area fit their risk profile? And how can they trust that the information is even correct? Ensuring the accuracy of data and overcoming language barriers makes this process extremely difficult.
The same goes for valuations — how verifiable are they? How is a potential buyer who hasn’t set foot in the country meant to ensure that the current value is fair?
Companies and advisers interested in widening their client pool to international investors can collect, store and present critical information to individuals in a clear and transparent fashion. According to Richter, this information includes “a thorough description of the assets, including a valuation by an external expert, as well as documentation that demonstrates a credible management structure.”
In essence, the distributed ledger eliminates much of the complexity of compiling, verifying and ensuring the integrity of real estate data.
Eliminating the Need for Costly Trustee and Company Structures
Most trustee and company structures exist solely to hold and maintain records. Ensuring that the appropriate data is filed, maintained and accurate — especially as requirements differ across each country — requires extensive resources.
However, with blockchain technology, all data concerning the investment deal and ongoing valuation can be stored in a decentralized database where it can’t be altered or manipulated.
Between not having to pay high marketing fees for documentation and additional costs to store and verify information, investors have more cash to park in their investments.
Reducing the Need for Local Finances and Administration
Tokenization enables real estate investments to be divided and translated into digital tokens. Tokens can be distributed and traded between investors without any need to transfer into local currency.
The ability to buy and sell property via tokens eliminates the need for local bank accounts, which often require a high initial deposit from foreign individuals or are outright impossible to open due to residence requirements. Thanks to the nature of borderless cryptocurrencies, the size of local documentation is vastly reduced — further lowering administration costs. In addition, follow-up transactions for investors can be handled easily because of the liquid nature of the tokens and because of the transparency afforded by the distributed ledger.
Transforming Real Estate Into a More Liquid Asset
Tokenization also turns a somewhat illiquid asset into a highly liquid one. Tokens can be traded or liquidated much more easily and rapidly than an individual property or shares in a typical real estate fund.
Opening Up Accessibility to a Wider Variety of Foreign Real Estate
Dividing up a real estate investment into smaller-sized tokens not only makes it more cost-effective to invest in foreign property, but also enables investors to deploy their capital across more properties. As the amount required to invest can be low, individuals can spread out risk by investing in a variety of tokenized real estate offerings.
A blockchain-backed platform investing in foreign real estate is nascent, not exotic. As companies or advisers build up track records, grading systems aligned to the data in the distributed ledger can help individuals evaluate the risk associated with specific offerings. Investors will be able to gauge the aptitude of potential real estate investments as easily as they do stocks or bonds.
“Regulation will help this process along,” says Richter. Of course, regulators are still getting their heads around the necessary oversight for tokenization structures. There are also questions about tax issues. Yet, as Richter notes, “There are already structures available based on other types of existing offerings which can provide guidance.”
All in all, blockchain technology stands to open up a wider variety of foreign real estate assets to a larger proportion of the population. While some may feel that investing in property may not make sense for those with less capital than today’s investors, the reality is that real estate — like other real assets — can help offset volatile currencies or inflation. It’s a proposition that many individuals have found themselves excluded from. As with many other areas of finance, blockchain technology stands to make it more inclusive.
This is a guest post by Jakob Drzazga. Opinions expressed are his own and do not necessarily reflect those of BTC Media or Bitcoin Magazine.