Property
Blockchain getting attention of property players
Aliff Yusri 
Blockchain-enabled investment platforms have the advantage of liquidity over conventional property assets and real estate funds
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Blockchain technology has become increasingly popular following the spectacular rise of Bitcoin, with proposed applications in fields as diverse as e-commerce, healthcare, real estate and even the electoral process.

However, the technology itself remains misunderstood, with misconceptions arising due to its complexity and association with Bitcoin itself. Interestingly, blockchain applications have recently found their way into the property realm and there is much interest in tapping its potential.

Unfortunately, blockchain is too closely associated with digital currencies for its own good. Hence, some approach the technology with apprehension.

“Blockchain tends to be associated with Bitcoin, but they are not the same. Bitcoin is a cryptocurrency, while blockchain is the underlying technology which enables the Bitcoin ledger and other cryptocurrencies,” says FundPlaces Pte Ltd COO and co-founder Tan Kok Keong.

 

Verification by consensus

At its heart, a blockchain is a decentralised ledger of transactions stored across a peer-to-peer network, according to PricewaterhouseCoopers (PwC). Each transaction is recorded in a “block” of data with other transactions, which is then added to an existing “chain” in the ledger to derive the term “blockchain”.

As blockchain records are maintained in a large number of synchronised points in a network, this means that the technology is less vulnerable to single points of failure, such as tampering of the central computer.

“If the technology underlying a transaction is secure enough to largely preclude data hacking, then it can serve to duplicate the functions of a centralised agency, such as a land office,” says Tan.

“For this reason, land registries around the world are looking into blockchain deployments to track property ownership, particularly in Dubai, as well as Commonwealth nations where land titles are fairly straightforward.”

Other benefits of blockchain applications include increased transparency and accuracy of tracking, according to PwC, along with reduced “costs of trust,” or the financial cost of resorting to a trusted third party (such as a central bank) to verify transactions and contracts.

 

Emerging paradigms

As a result of these better security advantages, property players are increasingly looking into adopting blockchain in transactions. The first Malaysian land deal transacted using Bitcoin took place in Sabah on Jan 8, involving the sale of a 1.219ha plot in Libaran Island.

The deal, worth half a Bitcoin (about RM38,000), was done between two of Sabah’s tourism entrepreneurs, Alexander Yee and Polycarp Chin. A 10% deposit (RM3,883.25) was also paid via 0.05 of a Bitcoin. At the time, one unit of the cryptocurrency traded at RM77,665.

With this, there is growing interest in doing land and property deals using blockchain technology.

“The purchase and sale of real estate online is the second major growth area for blockchain applications in property. Bitcoin has become a medium of exchange for property transactions worldwide, with case studies in Tukwila, Washington in the US and Essex in the UK,” says Tan.

“Three trends are driving this global shift towards cryptocurrency: the move towards sharing economies such as Uber and Airbnb, a growing social emphasis on empowerment and disintermediation, particularly among millennials, and of course, the advance of technology towards mobile solutions.”

Essentially a decentralised ledger of transactions, blockchain records are less vulnerable to single points of failure, such as tampering of the central computer


Bitcoin’s volatility

Unfortunately, Bitcoin’s volatility makes more widespread adoption of the medium of exchange in property transactions problematic.

Last year, for example, the cryptocurrency lost 29.6% of its value over the course of a week, dropping from a high of US$19,498 (RM76,202) on Dec 18 to US$13,709 (RM53,578) on Dec 25.

In addition, regulations governing cryptocurrencies vary. In the US, for example, Bitcoin is recognised as property, not currency, and is subject to capital gains tax if held for more than a year.

“Blockchain technologies can also be used end-to-end in the development process, from the start of a project to completion and handover,” says Tan.

“Documentation can be securely stored online and shared, with access granted to parties according to need, doing away with paperwork entirely.”

However, blockchains have seen the most utility to date in what Tan dubs the investment marketplace, leveraging on crowdfunding trends to drive a new paradigm of property investment forward.

 

Bringing it all together

With the entry of blockchain into property transactions, a new method of raising capital has emerged. “The traditional model of raising capital blocks retail investors from a range of investment options due to regulatory concerns. However, the emergence of alternative investment platforms has opened up the playing field for individual players,” says Tan.

Such platforms, he explains, connect small-cap players as well as high-net-worth individuals directly to local, seed, mid-market and Series A to D investment opportunities, reducing the need for intermediaries such as venture capital groups, private equity funds and investment banks.

SPVs are created for each FundPlaces project, preventing a commingling of assets within a portfolio, says Tan

FundPlaces is one such example. Based in Singapore, the business is positioned as an alternative investment platform, using blockchain technology to promote financial inclusiveness and open real estate investment opportunities to a wider range of demographics.

“We create a special purpose vehicle (SPV) for every project, so there is no co-mingling of assets, unlike a real estate fund or real estate investment trust (REIT). Investments are paid to an escrow account, with tokens subsequently issued to investors,” says Tan.

“From the start of investment to the point of maturity, none of the funds is held by FundPlaces itself. Once the investment matures, participants can trade tokens back to the SPV, which is where the proportionate returns materialise.”

Digital tokens, called “tiles” in FundPlaces terminology, differ from conventional real estate investments in their liquidity. Property assets typically take significant time to mature, due to the time required for both capital appreciation and to find a purchaser.

Meanwhile, REITs suffer from liquidity issues due to their scale and the nature of the market, with dividends often outperforming short-term gains from the sale of units in a trust. As such, it can be difficult for investors to purchase stakes in or exit from a successful REIT.

In contrast, says Tan, FundPlaces tiles can be traded six months after purchase, with the option to sell back to the issuer once the underlying asset is realised.

To date, the platform has attracted more than 600 investors, with projects such as Berrinba Retail Park and Camberley Landed Homes in Australia and the UK delivering returns in excess of 10% per annum.



This article first appeared in Focus Malaysia Issue 278.