The most important benefits of blockchain technology are its full transparency over all transactions, immutability and being tamper-proof. While not all businesses and industries require such benefits, one industry that is embracing it is the real estate industry in Malaysia.
At the recent World Blockchain Summit KL 2019, Elizabeth Siew, an established Malaysian real estate lawyer and co-founder of LePro Systems Bhd., addressed the pain points the real estate industry faced in Malaysia and outlined how blockchain solves these. Set up as an end-to-end full-service legal technology company, LePro Systems serves the property industry and property lawyers in Malaysia and other parts of ASEAN.
Transforming from Within
Blockchain enables us to identify properties in four dimensions as opposed to two-dimensional tracking through coordinates (longitudes and latitudes). We can now add altitude and time, the latter allowing us to move to any point in the history of a property and retrieve information like occupancy, ownership, type of use or any other relevant recorded information.
Tokenized ownership has also enabled high liquidity for real estate and land, previously considered non-liquid assets. Fractionalization of real estate has lowered the barrier to entry considerably for investors while, for property owners, this has proved to be the perfect way to unlock some of the equity of the properties and overcome obstacles facing en-bloc sales. Even establishments like the St. Regis have taken note and decided to use the tokenization model on blockchain to sell their property.
In the last couple of years in Malaysia, according to Siew, it has proved incredibly difficult to get a bank loan approved for property purchases and "this is a reason homeownership is a major problem in the country." With blockchain tokenization, the pressure of traditional bank financing can be removed, which is much healthier for the project and all of the stakeholders involved. Also, the good news is since tokenized real estate is not categorized as property in Malaysia, investors are also able to bypass paying the RPG (Real Property Gains) Tax.
Using smart contracts to execute the transactions, a transparent and trustless ecosystem can start to alleviate concerns like information asymmetry and property fraud while easing processes like accounting and cash flow management.
Governments worldwide are starting to take notice. They are closely examining recording title-deed ownerships and property dealings like tenancy leasing, power-of-attorney and letter authorizations on the blockchain so that all transactions can be traced and tracked. The Dubai Land Department is one of the first government entities in Dubai to launch a comprehensive blockchain solution.
Is It Fool Proof?
While tokenization is indeed paving the way for a new frontier in real estate development, is it foolproof? Siew contended that blockchain was “still not at a mature stage ... probably at the 30 or 40 percent mark” in terms of its progress.
For real estate, Siew emphasized the need to recognize that tokenization does not create value to the asset - the asset itself needs to be bullish. She added that the property market is all about the valuation of the assets.
Another area of concern is the certification and authentication of the information added at the creation of the blockchain. If a fake title and information were added, even if all the following transactions were genuine, land fraud could still be committed.
As a real estate lawyer of nineteen years, Siew warned that land fraud, where title deeds are replicated, and mortgage fraud, where multiple land titles are used to borrow from different banks, are prevalent cases in Malaysia.
Hence, at the moment, doing due diligence on a title-deed before it is registered on the blockchain is of crucial importance. Malaysia is currently digitizing land titles in three states and taking a painfully long period because of the need for physical verification.
Lastly, it is important to note that the current blockchain is not like an internet which is an open system. Instead, it is like the intranet (closed system). Hence, we are unable to verify information the moment we cross to another chain automatically.
Even though there are many good tokenization platforms in the world, Siew stressed that “if their blockchains cannot link up with the blockchain of the local government land office, verifications will not be able to take place.” These are technical problems we will need to address before tokenization of property can be foolproof.
Making Housing Affordable
In Malaysia, the three most pressing problems in real estate are property fraud, property tax leakages and the distribution of housing.
Like in India, many instances of land fraud occur in Malaysia. As mentioned, tokenization has the potential to solve this issue if properties are correctly implemented on the blockchain at its genesis.
Many property owners commit property tax fraud when they do not declare their rental incomes to the government. If blockchain can be used to link up all the different governmental departments like the Inland Revenue and Land Registry Department, together with AI input, tracking these tax leakages will be automatic.
Currently, the Malaysian government is making a lot of effort to encourage home ownership and is supplying a lot of affordable homes to Malaysians. Unfortunately, the Malaysian systems are not centralized - every state government has its system and data is not shared across states. This has led to people taking advantage of the system and buying multiple homes at affordable rates in various states.
If all the information is centralized and put on the blockchain, situations like this can be circumvented. These kinds of properties will then only be allocated and distributed to real first-time homeowners and people who need affordable homes.