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ABN Amro launches pilot blockchain application for Commercial Real Estate

The Netherlands' third largest bank, ABN Amro, and its technology partner, IBM, recently launched a pilot to explore how blockchain technology can improve Commercial Real Estate (CRE) processes.

The Netherlands’ third largest bank, ABN Amro, and its technology partner, IBM, recently launched a pilot to explore how blockchain technology can improve Commercial Real Estate (CRE) processes.

The Dutch megabank defines CRE as, “land or property owned by project developers or investors with the purpose to develop, to trade or to rent the land or property.” This pilot is part of the bank’s strategy, “to offer innovative solutions for commercial real estate financing.”

“The potential of blockchain lies in the fact that trust is built into the technology’s design. In addition, it makes transactions programmable by means of so-called smart contracts. As such, blockchain can offer efficient, reliable and tailor-made support to multiparty processes, like commercial real estate transactions.”
— – ABN Amro

ABN Amro clarified in their announcement that real estate transactions involve many parties, including buyers, sellers, tenants, landlords, appraisers, notaries, banks, government agencies and regulators. For this pilot, clients have the ability to enter their lease contracts for properties financed by the bank in a blockchain-based app called Torch.

The app gives all parties involved, “a reliable and efficient way to record, consult and exchange information,” according to the Dutch bank. Using a blockchain, Torch allows client relationship managers to validate all information in the app.

Other state and local sources that Torch interfaces with include the Dutch Central Bank, the Land Registry Office, and Chamber of Commerce. The latter two add useful information into Torch, while the Central Bank is the regulator over CRE in the Netherlands, and is responsible for monitoring how banks value and finance commercial real estate.

“If the property needs to be valued, the bank employee uses Torch to send the necessary details directly to an appraiser. When the valuation report is finished, the appraiser shares it with the bank and the client.”
— – ABN Amro

According to a report from IBISWorld, the global commercial real estate market comprises of over 3.7 million businesses with revenue totaling $3 trillion. “In the next five years, industry revenue is forecast to increase as expanding business and retail operations drives revenue growth,” states the publisher of business intelligence.

CBRE Real Estate Revenue 18 Dec 2016In the Netherlands, loan sales have been rising in both CRE and residential real estate, according to a report by CBRE Capital Advisors. “In Northern Europe, the Netherlands is on many investment firms’ radar, particularly due to its favourable insolvency regime,” states the investment banking business of CBRE in the Americas.

In the US, the Federal Bureau of Investigation states that Real estate fraud is a major problem. Owners of distressed CRE can fraudulently obtain financing by manipulating the property’s appraised value.

“Bogus leases may be created to exaggerate the building’s profitability, thus inflating the value as determined using the ‘income method’ for property valuation,” the agency states. Since cash flows in these scams inevitably turn out to be lower than stated, the borrower often struggles to maintain the property and eventually default on the commercial loans. The lender is then left with dilapidated or difficult-to-rent commercial property.

However, Big four professional services firm Deloitte published the 2017 Commercial Real Estate Outlook earlier this month. The firm states that "the real estate industry is increasingly influenced by rapid technological advancements and significant demographic shifts." In addition, macroeconomic and regulatory developments continue to impact profitability. The report outlined disruptive trends that are shaking up the CRE marketplace, including the sharing economy and disintermediation of brokerage and leasing.

Technological advancements are making CRE data more ubiquitous and transparent, Deloitte noted. Online leasing in a cost-effective, real-time manner is threatening the traditional brokerage model. “Traditional brokers should consider diversifying their core business focus to include consultative opportunities, invest in data and technology, and collaborate with startups to get ahead in the game,” the firm advised. Specifically, companies such as Airbnb or WeWork are disrupting the way organizations lease and use CRE, the report claims.

“Companies face challenges from new competitors that are providing dynamically configurable spaces and flexible leases. Owners need to rethink their approach toward space design, lease administration, and lease duration.”
— – Deloitte

The real estate industry could benefit from blockchain technology in several ways, Deloitte claims. The firm outlined three key advantages of blockchains for real estate in March. They cited total transparency, removing fraud risk, and speeding up the buying and selling process all to be major benefits of the technology. Further, using smart contracts, much of the real estate transaction process can be automated, saving time and money.

Another area that will be disrupted by blockchain technology is the existence of middlemen. Deloitte states that the technology allows all relevant information to be available for everyone including the entire transaction history. “The need of a middlemen or due diligence will disappear when this technology is adopted within the marketplace,” the firm claims.

A month later, in April, Strategist at Newmark Grubb Knight Frank Global Corporate Services, Bernard Hoefsmit, also identified the same three ways blockchains will impact the CRE market. He echoed Deloitte, stating that the technology can effectively cut out middlemen in real estate transactions.

Having middlemen makes these transactions “cumbersome, complicated and expensive,” he noted. Third-party verifications such as by escrow companies or title companies add hefty costs and extra time to the process. However, they are needed because they hold information that cannot be accessed without specific skills or licenses.

“By using a blockchain distributed database to prove authenticity, property owners could legitimately transfer ownership immediately without paying for third-party verification.”
— – Bernard Hoefsmit, Newmark Grubb Knight Frank Global Corporate Services Strategist

Hoefsmit further suggested that escrows used in the process could have three private keys, where at least two are required for release. In the example of a security deposit, the tenant and landlord could each have one private key and a third one is given to a neutral third party such as an arbitrator. For the deposit to be spent, two out of the three people would need to use their private key. Meanwhile, the funds are locked in crypto-escrow for the duration of the lease.

Citing the infancy of blockchain technology, Hoefsmit believes that the CRE transformation is not going to happen overnight. “It will take innovative and forward-thinking real estate firms to lead the way and convince the masses that blockchain is the correct path to take,” he wrote. Nonetheless, the strategist pointed out that there are many benefits in doing so. “Regardless of the road ahead, this new failsafe technology could make the transaction process streamlined, safe and transparent.”

The potential benefits of blockchain technology are also recognized throughout the real estate industry. A collaboration of organizations and individuals focused on the development and implementation of real estate standards, OSCRE International, announced in August that it was "looking into the long-term potential for Blockchain, given our stake in information flows across the industry."

“Disintermediation, fraud prevention, increased use of digital currency, and smart contracts are some of the top impacts of Blockchain. Transparency is a significant benefit along with faster transactions and lower costs.”
— – OSCRE International

ABN Amro is also looking much further afield than CRE. In April, ABN Amro Head of Innovation Centre, Arjan van Os, wrote on the bank’s corporate blog that the bank “is investing time, energy and resources into as many facets of the Blockchain phenomenon as possible.” In addition to studying blockchain’s infrastructure and developing applications, “We’re assessing the impact it may have on our core bank processes.”

Van Os mentions a range of businesses, from mortgages to risk modeling and cross-border payments. “By spreading our resources across a vast range of experiments, we are preparing for any number of possible scenarios. One might say that we’re hedging our bets.”

The bank partnered with Dutch university TU Delft in October, and is developing what it calls "more complex blockchain applications,” meant to deal with larger amounts of data. The university’s Blockchain Lab and the megabank are creating an open source set of blockchain products that they describe as next-generation blockchain technology, “that can deal reliably and appropriately with large amounts of data and large numbers of users."

"This offers us an excellent opportunity to expand our knowledge and gain a deeper understanding of the ways in which blockchain applications can be used. The fact that it is being approached from a scientific perspective makes it especially interesting."
— – Arjan van Os, ABN Amro, head of innovation centre


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