The benefits of tokenisation in private markets are also well rehearsed. Improvements in price discovery and liquidity should be easy to make when applied to real estate transactions. The benefits of fractionalisation in real estate, in particular the further democratisation of the asset class, are also well rehearsed – not least by the various crowdfunding platforms that have gone before us with these business models.
Real estate transactions have a well-established workflow behind the scenes. The digitalisation of the real estate industry will remain reliant on this. However, unlike exchange traded securities, trading real estate requires due diligence by a transacting party. That means a transacting party will engage a professional team to do checks before entering into the transaction. I say transacting party, rather than a buyer, because this applies to more than just buyers. A lender, insurer, lessee, etc. will engage the same work. Anyone relying on recourse to the value of the underlying real estate or relying on the fact that they can continue to occupy it, needs to have these checks done.
Outside the industry this may raise the question of why this is needed. There are two main reasons for this: one – real estate assets exist in the real world as tangible assets susceptible to all the vicissitudes inherent in that status; and two – the legal principle of caveat emptor (buyer beware). There is no automatic recourse to a seller if what you buy is not what you expected. So, you need to know that you are buying what you expect. The next question is: what are these checks? In the UK they include checks on entries at the Land Registry, at Companies House, of copies of leases, of information held by local authorities, of construction contracts, of planning documents, of health and safety information - all among other things. All of these things have something in common. They are all analogue processes. The UK Land Registry runs a “Digital Street” programme, but it is not a digital registry. It is knowledgeable and sophisticated, but becoming digital would be a big, and expensive, IT project.