PROPERTY JOURNAL

Considering smart contracts in commercial real estate

Recent research has explored what commercial real-estate professionals think about the use of smart contracts in the sector

Author: Khilen Shah

21 January 2020

A smart contract is a computer code that can automatically execute and enforce the terms and conditions of a legal agreement. Thanks to the decentralised character of the blockchain on which they depend such contracts can bypass expensive intermediaries, such as financial institutions and legal professionals. These benefits mean that although the technology is in its infancy, smart contracts are already being used to conduct commercial property transactions such as buying selling leasing and financing.

Given this potential commercial agent and surveyor SavoyStewart asked 544 professionals in the sector to identify what they think are the biggest benefits of using smart contacts, as well as what they feel are the main barriers to wider use in future. These findings are summarised in Tables 1 and 2 respectively.

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Table 1. Perceived benefits of using smart contracts

Barrier identified Response rate
Increased speed 71%
More efficient 66%
Cost effective 63%
Highly secure 59%
Better back-up, as all transactions automatically duplicated 54%
Greater accuracy 48%
Clearer communication 45%
Paper-free 40%
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Table 1. Perceived benefits of using smart contracts

Barrier identified Response rate
Increased speed 71%
More efficient 66%
Cost effective 63%
Highly secure 59%
Better back-up, as all transactions automatically duplicated 54%
Greater accuracy 48%
Clearer communication 45%
Paper-free 40%

Our research found that 71 per cent of the surveyed professionals consider increased speed as the biggest advantage of using smart contracts. Since these contracts run on software they dont require documents to be processed manually, thus freeing up time and resources for companies.

Transactions in commercial real estate typically involve not just the buyer and seller, but also lender, appraiser, insurer, auditor and surveyor though a smart contract can take over some of these other functions. As a consequence, 66 per cent of the experts surveyed believe that this will make the exchange between the buyer and seller more efficient.

Similarly, as there are fewer intermediaries to deal with in smart contracts, 63 per cent of professionals state that buyer and seller will each save considerable expenditure on fees, hence making transactions more cost-effective.

Since records on blockchain are unalterable and documents cannot be forged, opportunistic commercial property scams become almost impossible and 59 per cent of respondents rate smart contracts as highly secure. Contracts are also paper-free, so 40 per cent appreciate the positive impact this could have on the environment. Furthermore, smart contracts require all of a transactions terms and conditions to be recorded in explicit detail; with that 45 per cent identify clearer communication between parties as a vital benefit.

As Table 2 shows, 74 per cent of experts cite a lack of understanding or knowledge about smart contracts as the primary reason why commercial real estate may not use them on a greater scale in the future. This could be addressed, to some extent, by senior figures in commercial real-estate firms arranging for an employee or external expert to run workshops on blockchain and the fundamentals of using smart contracts in transactions. The onus will be on firms to provide adequate time and training for staff to familiarise themselves with all the details, as well as the intricacies of smart contracts. Those firms that do could realise the power of smart contracts and enable their employees to provide a better service to their clients.

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Table 2. Perceived barriers to use of smart contracts

Barrier identified Response rate
Lack of understanding/knowledge 74%
Uncertainty about government approach to regulation and taxation 69%
Complexity of integrating contracts into business processes and practice 62%
Data privacy compliance issues 58%
Lack of best practice-standards 51%
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Table 2. Perceived barriers to use of smart contracts

Barrier identified Response rate
Lack of understanding/knowledge 74%
Uncertainty about government approach to regulation and taxation 69%
Complexity of integrating contracts into business processes and practice 62%
Data privacy compliance issues 58%
Lack of best practice-standards 51%

Meanwhile, 69 per cent of respondents feel that until the government clearly stipulates how it intends to regulate and tax smart contract transactions their use will remain limited. Furthermore, 58 per cent think that data privacy compliance might be a challenging issue: because details stored on a smart contract remain there forever there is a perception that it may breach certain data privacy regulations. This could create a significant dilemma if one party wants to withdraw particular information from a contract and legislation, such as the General Data Protection Regulation, grants them the right to do so. More than half of the professionals surveyed, 51 per cent, also suggest that the lack of best-practice standards could have a negative impact on the wider use of smart contracts.

Overall this research indicates definite interest in smart contracts, but barriers relating to knowledge and compliance must be overcome before the potential benefits can be brought to the real-estate market.

Khilen Shah is a commercial property researcher at SavoyStewart khilen@journalistic.org info@savoystewart.co.uk

Related competencies include: Legal/regulatory compliance

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