Part 7 - Perspectives on Banking - Transformation of Property, to be fit for the 21st Century - Enter Blockchain stage left.

Blockchain Technology enables the fractionalisation of property through the creation of fungible and non-fungible tokens that have the potential to disrupt traditional banking and property systems. ?The two biggest problems with Property are:

- The inefficiency of the property buy, sell, invest, borrow customer journey.

- The inability to fractionalise property transactions (in the way that shares in companies can be bought and sold in small or large amounts).

Blockchain solves for the two problems above.

Blockchain/DLT eliminates the need for multiple systems, saves time and increases security. ?We must remember that Gen-Z, Gen-Alpha are used to real time functionality, instant service/gratification in every part of their life. ?Although developments are still in the embryonic stage, the RE industry is poised for a technology leap forward that will deliver immense value to key stakeholders, buyers, sellers, investors, borrowers, lenders and Government Registries. ?Using DLT there is huge scope for increased efficiencies, because the basic steps for executing a property transaction are repetitive, documentation is standardized, the closing process which runs on hard wet documents is antiquated and the number of parties involved can be vast.

Blockchain technology allows for the creation of decentralised platforms where participants can directly interact without the need of many of the intermediaries we utilise today. ?Smart Contracts, powered by Blockchain, can automate and enforce the terms of property transactions, reducing the need for traditional counterparties.

Let’s look at, and in part re-cap the ways Blockchain can be used to digitise the process of buying and selling property, making it more secure, efficient and transparent.

i)? Tokenization. ?The Tokenization of Assets through fungible tokens which are digital assets that represent ownership or value, can be used to tokenize Real World Assets (RWA) such as property. ?Property can be tokenized and the ownership represented by digital tokens that can be traded on Blockchain based platforms. This enables fractional ownership and new opportunities for investment.

ii)? Property registration. ?Blockchain can be used to create a digital land registry which enables property ownership to be tracked and transferred through linked tokens in a secure and transparent way. ?In the future, (digital) token title certificates will be created linked to the (digital) land registry which will eliminate the need for paper records and makes the process for transferring title more efficient and secure. Granted, this is not yet available, requires significant public/private partnerships, but is being advanced at various speeds in various efforts across the world, with, in my view U.A.E./Dubai looking like the country/city that will be first y-to market with this joined up ecosystem.

iii) Smart Contracts. ?Smart Contracts can be used to automate the process of transferring ownership of a property including the execution of payments and the legal transfer of title.

So, homeowners will be able to convert a portion of their home equity into Tokens, representing shares or ownership stakes in the property. ?This is the Fractionization of property, something we were not able to efficiently achieve pre Blockchain. ?These tokens can then be offered to investors, traded, bought/sold in the open market. Borrowers on the other side of transactions, can benefit through the creation of a new “token asset class”, which enables Retail and Institutional liquidity into third property transactions. ?This will result in a combination of significant enhancements to current banking/lending/investment/borrowing journeys and/or partial or complete disintermediation of current players, (e.g. direct person to person borrowing/lending for property transactions, utilising debt, hybrid, or equity tokens or any combination of the three). ?Property becomes divisible, fractional (think of the dematerialised Global equity markets and the opportunities to buy/sell small or large shareholdings of publicly quoted companies on Stock exchanges all over the world). ?Insurance companies hedging liabilities under Solvency 2 Directive will have the ability to micro hedge through tokens, property owners/investors can add a new capital slice to the transaction (for example a hybrid debt/equity token, as well as equity and bank debt, or other combinations of debt token, equity token etc).

Let’s dip into the future and have a look at some Use cases that I believe, will through time be examples of “how we do things around here” when it comes to engaging with Property.

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First Time Buyer Dublin.

Jack and Diane (J+D) are master’s graduates in Science specialisms, qualifying 5 years ago, both working for pharmaceutical companies. ?They are saving to buy their first house together. ?Their joint salary is EUR 140,000. They are currently paying EUR 2,100 a month in rent. ?The best Mortgage deal they can get is 4xLTI, and an LTV of 90%, equating to a mortgage of EUR 540,000, a monthly repayment of circa EUR 2,300, which they can afford. ?They have saved a deposit EUR60,000 over the past 4 years. ?However, the purchase price of the house of their dreams is EUR 700,000, and it will take them another 18 months/2 years of saving to get to the EUR 70,000 deposit required. ?It is depressing for them to conclude that as 2 well-qualified scientists their aspirations are limited in this way.?

However utilising the new Blockhouse platform, they are able to close the gap. ?The EUR700,000 house comes to the market in digitized form, represented by 100,000 tokens.

With their savings J+D acquire 8,571 tokens. They go through the full Bank Mortgage approval process and acquire 77,143 tokens with the EUR 540,000 mortgage proceeds. The Bank holds these tokens as security against their secured mortgage. ?The Bank is willing to lend against the token collateral, as the tokens are a digital representation of the title document, digitally connected to the digital land registry of the future. ?The remaining 14,285 are acquired by small retail property investors in a new Property token marketplace. ?This marketplace serves property token buyers and sellers with real time liquidity and pricing through a transparent automated pricing formula. ?The investors want some exposure to this type of property in this location, so it is a very specific bespoke investment opportunity. ?The 14k tokens are bought by 10 investors, each investing EUR10,000. ?The investors in the tokens are looking for capital appreciation over time, not a rental yield, (somewhat akin to investing in equity of a company that does not pay a dividend, the investor is looking for growth). ?Smart Contracts behind the tokens describe all the details of the property, the approach to property maintenance, (e.g., the responsibility of the owner of the 85k tokens, or a sinking fund is s set up with proportionate contribution etc.), any details of rights of first refusal in the secondary market, J+D’s rights to live in the property as long as they hold the majority of tokens and any other essential detail. ?Smart Contracts ensure the property is properly registered, and security is perfected. ?An immutable accurate record is created which ensures a pristine chain. ?The Bank has security of tokens that offer greater flexibility and liquidity in enforcement in circumstances where J+D cannot afford the full repayments, e.g., some of the Mortgage tokens are sold in the marketplace to investors, J+D’s monthly repayments are reduced to a level they can afford. ?In the future as their affordability improves again (one of them had lost their job but finds a new one 24 months later) they can buy tokens in the market to increase their ownership percentage of the house. ?This allows banks far more flexibility and tactical options in looking to help distressed borrowers stay in their home. ?No Bank wants to repossess a house or property of any kind, it is a last resort, and Banks currently go through a waterfall of clunky customer journey solutions when a customer is “in forbearance”, reducing capital and interest payments, possibly a capital and interest moratorium, extending the term of the mortgage, reducing the interest rate on the mortgage and other. ?The tokenization of the property allows fractional ownership, more specific investment and borrowing strategies, better customer journeys, better more accurate recording of ownership and property events, and crucially enables J+T to get on the property ladder with the house they really wanted to buy. ?Clearly there is a societal cultural shift required, whereby house purchasers accept that to live in their optimum house, they may not necessarily need to own all the house (100% of the tokens), but they are able to leverage to the optimum/maximum amount using conventional mortgage banking finance, understanding? that (say in this instance) ownership of 85% of the tokens enables them to live in the house of their preference. This is a cultural shift, but, if we pause for a moment, it’s not a huge leap, in that a first-time buyer, or any mortgagor, although “on the title deeds”, is effectively only the “owner” as long as they can make the mortgage repayments. ?What we have done here is basically introduce a new capital tranche, the small investors who buys some tokens, we have transformed the mortgage and house buying experience.

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A variant of the above, and executable today, is where the tokens represent ownership in an SPV, the SPV owning the property. ?The Bank lends against the c.70% of tokens the Bank has security over that back the mortgage. J+D own c.8.5% of the tokens in the SPV with investors owning the remaining c.14.3%. ?J+D repay the mortgage on a monthly basis effectively resulting in an increased ownership of the SPV/house. ?I am just touching on the outline of such structures in this article, not going into the diagrammatic detail, legal, regulatory, etc, we will start to mine through that in another article, but the principle net point being that J+ D are better off putting their savings/disposable income into buying tokens (equity) than saving for a first time deposit, given the relative costs and returns of money on deposit versus cost of secured credit. ?This accelerates their ownership of the property. ?The introduction of tokens that represent property title ownership, the introduction of investors into the property token market, and the overall acceptance and growth of fractional ownership changes the whole dynamic of J+ D’s property ownership journey, enabling them to enter the market earlier and into a more expensive property. ?Smart Contracts embedded in the tokens ensure everything happens automatically and consistent with required laws and regulations.

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Granted, there is a huge amount of “devil in the detail” I have not gone into above, but my intent with this LinkedIn article is about colouring in “the art of the possible” and likely future property/finance developments. ?The gradual acceptance of digital assets, RWA tokenization and the overall increase in use of Blockchain for multiple purposes from equities and securities issuance to trade finance and carbon credits will drag property use cases like the above more and more to the fore, and more and more people will ask “why not?”

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