The Argument for the Use of NFT's in Real Estate in 2021


Ethereum as a token
The Argument for the Use of NFT's in Real Estate in 2021

We have had a love-hate relationship with the idea of cryptocurrency for the last four years when we were young college students looking to make a quick buck somehow. In 2017 Bitcoin was hitting new all time highs every other day and celebrities were suggesting that everyone "has to buy Bitcoin" or "has to buy Ethereum" or "has to buy Litecoin" and then we started to become somewhat sceptical about the idea of cryptocurrency in general. Celebrities became cryptocurrency shills (a person who has a financial interest in a particular asset class and advises you to buy it and receives a financial kickback from their advocation) on all forms of media, including social media, print media, and even mainstream news networks.


In mid December 2017, we decided to cash out our crypto trades as we believed there was an irrational exuberance in the marketplace and disposed of our bitcoin at the target of $17,200. Our other cryptos were immediately cashed out once that target was hit. Bitcoin then reached a new all time high just short of $20,000 the following few days and sub-sequentially the market price fell off a cliff.


In the months to follow, there was no good news about bitcoin or any other cryptocurrency the behemoth took down with it. Until 2020, the idea of cryptocurrency was never spoken of again. But what happened in 2020 except for the worst year in modern history and the effects will be felt for decades to come which included fires in Australia, floods in South East Asia, revolution in the United States and pestilence that carried itself across all corners of the earth?


To prevent unrest and to encourage workplaces that could not work from home, western governments decided to print money to give it to the civilian population who were out of work or lost their jobs as a result of their closure orders. This helicopter money which appeared out of nowhere was not just being spent on the necessities like food and shelter, but also on more frivolous items such as a new iPhone and the corresponding AirPods. Some of the more savvy of us took whatever the government was willing to give us and invested it into high risk assets (we are going to be paying this money back after all so the risk is warranted (the person with nothing to lose is a great threat)).


As the pandemic continued and there was no end appeared in sight, people began to lose hope, distrust the government and its monetary policy and this caused a bull run in the cryptocurrency market lasting to this present day. but this is not what this blog post is about. Lately on the social media, instead of Bitcoins and alternatives making all time highs, there is a new development in the development of Blockchain Technology and Decentralised Finance. This post is about the use of NFT's (or Non-Fungible-Tokens) for the use of real estate transactions, and revolutionising how the ownership of real estate can take place.


What is an NFT?


An NFT is a (Non-Fungible Token) by the definition that it is not fungible, you cannot use it to purchase goods or services. Money according to Mike Maloney is "Portable, Durable, Finite, Divisible, Fungible and a store of value." Fiat currency is an abstract unit of account and medium of exchange to represent apparent value the currency represents.


An NFT is designed this way because it represents a limited amount of something and is designed to represent uniqueness. the nature of money, currency, or even digital tokens is that it is fungible and no matter where you go in the world, an ounce of gold will always be worth an ounce of gold, €100 will always be worth a €100, and a bitcoin will always be worth a bitcoin.


The current use of an asset that is not fungible is classical art. While it represents a store of value, and that it is finite in nature, one piece of art is not equal to another and therefore using it as a medium of exchange is rather limited. However the fact that a classical piece of art is a one of a kind, means that it cannot be reproduced as the original has been "minted" as the original and any reproductions, no matter how perfect will not make it the original.


High net worth individuals often invest in pieces of classical art for the purpose of writing off profits as a loss towards "investment activities" and therefore reducing what they must pay as tax to governments. This is not the case for all people who invest in art as some people of high net worth may in fact like to own the piece at their residence and have it as a nice talking point over their fireplace and simply enjoy owning it.


As of late there are multiple artists who are producing digital art which is then minted on the Ethereum blockchain. There are also multiple chancers minting abstract things such as a 1080x1080px white square that was bought for auction for $650 for absolutely no reason other than to take advantage of the bubble that currently exists. One day not too far away from now, the NFT bubble will burst and the lucky few will get away from the fallout while the unfortunate many will be left holding things they don't fully understand and likely at a substantial loss. After all something will only have value when somebody is willing to buy it otherwise the value becomes nil.


But where do NFTs have a place in the built environment?


Since an NFT is Non-Fungible and one-of-a-kind it means that the NFT is incapable of being divided (unlike other Cryptocurrencies which can be divided fractionally and represented by a number of decimals. The NFT is a standalone asset and not like other tokens on offer in the marketplace unless the individual "mints" a number of copies of the same NFT for a collection.


Buildings are a one-of-a-kind asset which, while they can be financially designated as a store of value and even leveraged to take on additional debt to fund other assets, they are not fungible, portable, or divisible. You cannot take a building away with you and immediately turn it into money and while you can assign portions of the building to a tenant or sell parts of it under direct ownership, you cannot divide the building and sell it monetarily.


A real estate NFT can remove the issues associated with buildings in being portable and divisible and if the owner (or part owner) wishes to sell their NFT of the building, they are in a position to put it up for a decentralised global auction or a Peer-to-Peer transaction and have it verified on the Ethereum (or similar) Blockchain as a ERC721 Smart Contract.


Building Meta Information


NFT's also have Meta information attached to them. In an age of smart construction, green building, and Building Information Modelling, many new large scale constructions have this meta information as part of the building file. Both hard and soft copies of the building file are issued to the owner of the building which account for information such as when it was built, who the architect is, who the developer is, the chartered engineers and other parties involved, who owns the title to the property, building energy rating certificates, health, safety and fire protection certifications, structural element origins, maintenance schedules, usable floor space information, vehicle parking spaces, standard occupancy rate, and much much more information.


Since this meta information is attached to the building file it can also be registered on the NFT to provide insight into the building. Additional meta information could include estimated annual yield, void rates, estimated third party liability insurance, estimated usable building life, etc. This will make it easier for the investor to determine whether it will be a good investment property relative to the surrounding area.


Democratisation of Investment Property (with less legal issues)


Since multiple NFT's can be made it will also democratise ownership of a building. As opposed to dividing ownership floor by floor (where some floors will have a higher yield than others) democratised ownership will allow for the less messy legality of owning property where the whole building is to be taken as a tenancy-in-common contract with multiple parties while each tenant having relative equity to the proportion of ownership.


In this case, the ownership of the NFT will also be used as a way to designate rights to of ownership to the deed or title. If the paper deeds and land ownership contracts go missing this causes a messy situation where you must search through public record to identify who the previous owner was, and in the event that the previous owner has been declared dead or incompetent, you must search for a next of kin who might not even be aware that they are the heir to the deed contracts or if they are aware they might not return communication as the land has been deemed abandoned and all the associated tax, levies, and duties have been unpaid and cannot be sold until they are.


We are not lawyers for land/deed ownership and this is not legal advice, however NFT's do have the potential to change the way that property is owned, verified and transacted through the minting of NFT's of the property itself as it represents the concept of ownership.


For example, If a building that cost €10,000,000 to develop also came with 10 NFT's that each represented a 10% stake of ownership of that building, the total intrinsic value of each NFT is worth €1,000,000 (or about 587.13ETH at the time of writing). And anybody who wanted to buy the NFT representing a portion of the €10,000,000 building can make an offer to buy it from the owner in real time and if the owner chooses they can sell a portion of the building and can do so by auction or by Peer-to-Peer sales. In theory, rent could be paid to the NFT holder(s) in Ethereum to the NFT holders wallet address (equivalent to the rental amount in Euros or Dollars) or fiat currency directly to their IBAN.


An NFT can also be "sharded" whereby proportional ownership of an NFT can take place and be added to a Real Estate Investment Trust (or a REIT) which will allow real estate become a digital asset that everyday people can invest in. In the same stroke, since banks rarely offer collateral against crypto-assets due to their volatility, you can avail of Decentralised Finance (DeFi) to support a building development project by leveraging your NFT's against Ethereum, and leveraging Ethereum against USDC or Euro's.


As we have said, NFT's are currently in a bubble of irrational exuberance and media hype, and we do not provide financial advice in this field. We only wish to highlight the possibility of changing current industry frameworks to a more decentralised a more open and honest system that reduces the friction in real estate transactions and real estate portfolio management.


In an age where common people are becoming more distrustful and critical of government policy, centralised banks becoming more stringent and less innovative, and the miles of red tape that any constructor, architect, property investor must limbo under together, we believe that the application of NFT's will see legitimate and purposeful use within the next couple of years.


How to "Mint" an NFT


According to ethereum.org there are a few different protocols which you can engage to create an NFT "Most NFTs are built using a consistent standard known as ERC-721. However there are other standards that you might want to look into. The ERC-1155 standard allows for semi-fungible tokens which is particularly useful in the realm of gaming. And more recently, EIP-2309 has been proposed to make minting NFTs a lot more efficient. This standard lets you mint as many as you like in one transaction!"


The ERC-721 standard is the most used standard to mint NFT's you can read more information on that here by clicking the link below. https://ethereum.org/en/developers/docs/standards/tokens/erc-721/


Once the NFT is minted you can sell it on NFT marketplaces such as Opensea.io where dome NFTs are sold for thousands of dollars on a daily basis.


We currently do not know all of the facts surrounding NFT's at the moment other than the fact we believe that a lot of them are over-valued and offer little utility to the contract holder. NFT's are in an early stage of development for real application and if somebody would like to connect with us to to inform us of additional ways he NFT ecosystem can be applied we would love to hear from you by either dropping a comment below, or emailing us on info@sjpconsultancy.com

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