Podcast—What’s
blocking blockchain?

James Cook: [00:00:00] You remember blockchain? That's the technology that makes cryptocurrencies work like Bitcoin. So not too long ago, blockchain was also held out as a revolutionary technology for real estate. So where is that revolution? This is building places where we look at the world of commercial real estate through the eyes of the experts that study it every day.

[00:00:25] My name is James Cook and I research real estate for J L L. Today, we're making a transatlantic call this time to Matthew McCauley.

[00:00:35] Matthew Mcauley: [00:00:35] Matthew McCauley. I'm a director within JLLs global cities and markets research team.

[00:00:43] James Cook: [00:00:43] So today we're talking about blockchain and it, it seems like not that long ago, you couldn't escape blockchain.

[00:00:50] It was everywhere. Then that stopped. I kind of want to delve into. What happened there, but before we get into it, remind our listeners what blockchain is.

[00:01:02] Matthew Mcauley: [00:01:02] Blockchain is essentially a distributed ledger system. So what that means is you create either an item or a transaction, which has the details built into what you call a hash.

[00:01:17] Well, a block in the chain and because it's distributed one, these are created, it needs agreement from the other various nodes in the network. It doesn't require any third party oversight or verification because it all happens within the network itself. It's theoretically a quick and simple way of automating and keeping track of it.

[00:01:39] Having an open ledger system. Without any independent oversight.

[00:01:43] James Cook: [00:01:43] So the promise is that there's a single ledger that records all real estate transactions. It's unhackable so bad guys can't get in and change it.

[00:01:54] Matthew Mcauley: [00:01:54] That's right. And that's, that's really the promise that's been held out. And what got people excited about it in the first place?

[00:02:02] There have subsequently been some concerns raised about the actual, um, hackability of the blockchain, but it's essential promise is that you can have a speedy, streamlined transaction with a high level of security, because it involves all of these separate nodes needing to sign off on it and more transparency because.

[00:02:25] All elements of the transaction are held on the chain and can be viewable to anyone with access

[00:02:31] James Cook: [00:02:31] blockchain held all of this promise for commercial real estate, but then flash forward to today and not too much has happened so

[00:02:42] Matthew Mcauley: [00:02:42] well. We have seen some incremental progress in how people are working with this.

[00:02:47] There are around 30 different governments around the world that have. Looked at engaged with the technology in some way, relating to real estate. For example, in Sweden or the UK, they've carried it out end to end trials in the UK. Okay. For example, they've sold a residential unit with fully automated smart contracts, all done on the blockchain.

[00:03:08] Dubai is probably furthest advanced. They've actually got a system where they're putting leases and other real estate contracts on a blockchain system. And that's tied into other databases like utilities and so on. And they've got some real ambition behind their effort, but by and large, it's not made a lot of it progress.

[00:03:27] There's a couple of key factors holding it back. One is the logistical difficulties. Involved in moving an entire land registry system, both to be completely digitized and to have the requisite training for the personnel and the computing power to run all of this on the blockchain. And that's a particular concern for emerging markets, many of which have difficulty maintaining an UpToDate digitize system in the first place.

[00:03:56] Probably the more complex. Issue is around the regulatory aspect of blockchain, precisely because it is distributed and the aim is to do away with third party oversight of transit. Then you very quickly run into the issues of, of how do you. Maintain the quality and consistency of the data that's on there.

[00:04:19] If you have a record for a house that's on the system, and then someone comes to sell that on the blockchain, it has to then be assumed that all of the details that are associated with that transaction are correct in perpetuity. And so there's never any, some leasing, there's never any issues with court-mandated.

[00:04:39] Hold on, selling the property. No other complications arising around the ownership of that transaction, because there is effectively no way to stop that person from selling it on regardless. So you have real issues around the integrity of the system. Once you get to a fully distributed land registry with no government oversight.

[00:05:02] James Cook: [00:05:02] I mean, that sounds like a huge drawback. A system with no oversight means that a mistake could go forward into perpetuity. It's kind of like cryptocurrency where no government has any control over it, of it. And it's good in some ways, but it's also not good in some ways. Is there a workaround at all for that immutability?

[00:05:23] Matthew Mcauley: [00:05:23] Yeah. That's something that people are working on. There's two separate elements to it. One is on the transaction side and making sure that the transaction is, is correct. And whether you can stop someone from carrying out a transaction, if you want to. And the other is about that immutability in that the record can really not be changed.

[00:05:41] And so if you want to backtrack and you need to change some elements that went before. That then becomes exceptionally difficult. So you kind of have some workarounds in terms of, of what the administrators of the blockchain system to do, but that very good quickly runs into the technical allowance of.

[00:06:01] How much you can interfere with a distributed ledger system before it ceases being a distributed ledger system and offering the initial benefits that it was meant to provide.

[00:06:11] James Cook: [00:06:11] Right. If certain people have the power to edit it, it's just like any other database.

[00:06:16] Matthew Mcauley: [00:06:16] Then you lose all those benefits of a streamlined process with less manual intervention and the speed of the transaction.

[00:06:24] Some of that will still be there if you can work in smart contracts and so on. But even those come with issues around, you know, any bespoke elements that need to be added to them. And, and so on. I don't think anyone's yet found a good, effective regulatory workaround for how you can maintain the integrity of the system.

[00:06:41] Well, having a fully non third party oversight, blockchain registry,

[00:06:47] James Cook: [00:06:47] it's almost like you're asking a government to say, let's get rid of your currency and let's start using a cryptocurrency. Like that's a huge leap for them to take.

[00:06:56] Matthew Mcauley: [00:06:56] It is. Yes. And for very similar reasons, none of the governments we looked at have gone further than Dubai and even in Dubai backups and other procedures in place.

[00:07:09] If you think about moving, what is the world's largest asset class onto a system with no effective governance oversight or ability to implement court decisions? For example, It really shows the scale of the difficulty.

[00:07:24] James Cook: [00:07:24] We all know how often real estate transactions end up in court. So that's, that's a nonstarter right there.

[00:07:30] So what is the outlook for blockchain in real estate? Is there, is there a future there

[00:07:36] Matthew Mcauley: [00:07:36] continue to see investments and research. Around the topic. The pandemic over the last few months has highlighted the benefits that are there to be had for more remote, more digitized ways of transacting and some form of distributed ledger technology could be an important way of implementing smart contracts.

[00:07:59] Some of these technologies that could really speed up transaction processes. But in terms of radically overhauling, the structure of the market as was first hoped, I don't see that happening anytime soon, if ever simply because of the scale of the risk, that would be inherent in that.

[00:08:16] James Cook: [00:08:16] This is all a bigger part of a bigger conversation around transparency.

[00:08:21] Why is transparency so important?

[00:08:23] Matthew Mcauley: [00:08:23] Our team has been tracking it for 22 years now, and we cover 99 countries around the world and over 160 individual cities within that, it came out of a need to understand where we were operating, but then building up from that transparency is a fundamental component to any real estate market, to any transaction.

[00:08:45] If you go to some of the less transparent markets the last time I was in Uganda, for example, I saw a spray painted on the side of our house. This house belongs to so-and-so. It's not for sale because they don't have a fully functional and fully complete land registry system. So people in some instances have been known to go and try and sell someone else's house while they were out.

[00:09:08] That just illustrates the scale of the problem. If you don't have transparency, you can't have a functioning market. We measure everything from what data is out there around stock levels, rental levels, vacancy. Through to the legal and regulatory environment, how accurate and comprehensive the land registry system is how effective contract.

[00:09:31] Sure. All systems are to the listed market and even the sustainability of the market in terms of green building certifications, green leases, and so on. We tried to take a holistic look across the market and say, how easy is it to operate in this real estate market

[00:09:47] James Cook: [00:09:47] in the transparency index? What's the what country ranks.

[00:09:52] Number one, what's the most transparent country. I'm so curious.

[00:09:55] Matthew Mcauley: [00:09:55] UK is ranked number one and London is the top ranked city. And a good part of this is to do with history. You have really long series of really in depth. Market information, the countries that are advancing fastest, a number of those are Asia Pacific.

[00:10:13] Yeah. The countries, China, India, for example. And they are, they have real estate markets of scale and are now building out more advanced regulatory systems to deal with those and the market information that all the market participants required to be able to transact with confidence.

[00:10:29] James Cook: [00:10:29] So folks want to dig into this.

[00:10:30] There's a very in depth report, the global real estate transparency index. They can find that for download, right? If, if, if you go to jll.com that's available.

[00:10:40] Matthew Mcauley: [00:10:40] Yes. There was a microsite for the report itself where you can find interactive data visuals showing all over the various markets and included.

[00:10:49] And then there is an in depth report.

[00:10:51] James Cook: [00:10:51] Matt, thank you so much for joining me today.

[00:10:53] Matthew Mcauley: [00:10:53] Thank you.

[00:10:54] James Cook: [00:10:54] So I've got a question for you. Is there a technology that you think will revolutionize real estate? Well, you should tell us about it. You can leave a message on the podcast hotline, and we might even use your voice in an upcoming show.

[00:11:08] Give us a call at (602) 633-4061. If you enjoyed today's interview, you should probably just go ahead and subscribe to building places we're on the iPhone podcast app on Spotify or wherever you listen to podcasts, or you can stream us@buildingplaces.show. If you've got a particular interest in retail real estate, you should check out our sister show.

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