Blockchain has been around for more than a decade and it undoubtedly comes with tremendous potential to change the way we conduct businesses.
One of those changes is the ongoing transformation in the commercial real estate market, which creates both opportunities and challenges for retail investors — nonprofessional individuals with smaller available funds to invest.
So, what is the impact of blockchain technology on the commercial real estate market? And ultimately, how can retail investors benefit from such rapid changes?
In a nutshell, blockchain is another method to record data. As the term indicates, blockchain stores information in blocks that are tied together in chronological order.
By design, these recorded data are immutable and/or irreversible.
In many cases, blockchains are intended to be decentralized, which means all users can retain control over such databases. Thus, among other benefits, decentralized blockchains, when utilized, offer greater security, efficiency and transparency than other existing databases.
Traditionally, retail investors have limited access to commercial properties due to their significantly high minimum capital requirements as well as lack of information. With the introduction of blockchain technology and its accompanied benefits, these barriers to entry can be lowered effectively for retail investors.
First, the implementation of decentralized blockchains can allow potential buyers and sellers to access the recorded financial information freely with ease and security. At the same time, this unique characteristic also helps reduce the related transactions costs that are known to be unnecessarily expensive.
For instance, recurring title searches on the same property may no longer be needed in the future since all related historical transactions are already available and accessible in the blockchains. With the addition of smart contracts, blockchain technology can potentially remove the role of middlemen as well as the related costly commissions and fees.
Second, decentralized blockchains can help leverage fractionalized ownership in commercial real estate and take it to the next level. Fractionalization — the notion of dividing an asset into smaller parts (for example, a corporation issues shares and sells them to equity investors) — is not new in commercial real estate markets. However, it has been a challenge to implement the concept effectively and efficiently in this sector before, and the invented blockchains now delivers the solution.
Given the increased security, efficiency and transparency provided by the technology, groups of retail investors will have more confidence and interest in acquiring/selling expensive commercial properties jointly, knowing that the entire trading process is simple, safe, transparent and affordable.
In other words, with blockchains it is now digitally possible to divide a commercial asset into millions of shares that are worth only $1 each and still successfully sell them to retail investors.
In the mind of retail investors, the scenario of owning just tiny bits of shares of a commercial real estate in downtown New York City has become more realistic than ever. In fact, such a trend has been created already and is picking up the pace.
In sum, if you are a retail investor with some monetary funds to invest, you may not want to miss this bus that can take you to an exciting destination with lots of profitable opportunities. With that said, regulations have lagged behind in this fast-growing niche market as in many other sectors that involve blockchains. Thus, some unexpected hiccups should be expected along the way.
Trung Nguyen teaches in the Department of Finance and Insurance in the College of Business at East Carolina University.