In commercial leasing, one set of processes which creates headaches for all involved is the current paper based system of arranging bank guarantees for landlords in the event that tenants default.
These include the need to issue, handle, store, exchange and manage a whole heap of physical documents as well as ongoing difficulties associated with tracking and reporting of the status of guarantees through their life cycle.
In July 2017, ANX and Westpac teamed up with IBM and Shopping Centre operator Scentre Group to conduct a successful trial under which a paper based system was done away with and distributed ledger technology, or blockchain, was used. The trial formed part of a broader plans to build a shared solution with the remainder of the industry and to invite other organisations to participate in a larger trial.
This raises questions about how blockchain will revolutionise Australia’s property sector.
Essentially, blockchain is a technology which uses math and cryptography to provide a decentralised database of various forms of transaction such as money, goods, property, work or even votes. A blockchain is a growing list of records, called blocks, which are linked using cryptology.
Arguably the best way to explain how this works is to illustrate through an example. In a discussion with Sourceable earlier this year, Rogier Roelvink, associate director, Turner and Townsend, used the simple illustration of a cleaning contact. For this, he says you might have seven blocks of information.
Block one would verify that the cleaner had completed a Certificate III in cleaning operations. This would be verified by the registered training provider who produces a certificate which verifies that the person in question has passed the relevant tests. That in itself could be verified by a mini-blockchain involving different teachers and lecturers.
Block 2 shows that the cleaner was in fact offered a job. This is verified by the cleaner (via the employment contract), the cleaning company’s HR records (which show the person is on the books as an employee), the tax office (though the person being registered for PAYE) and records of the client organisation which verify that the person has access to the premises.
Block 3 might verify that you have passed the relevant security checks. Under this block, you could have evidence that (a) you have made an application for a valid criminal record check, and (b) the police ran your name through their databases and found that you do not have a criminal record. Following that, the client’s records would verify that they have accepted the evidence that you pass security checks and have building access. There is now a digital record set which proves that the cleaner is duly employed (block 2), has passed security checks (block 3) and is now considered to be acceptable to be allowed to work.
Block four would recognise that the cleaner attended work during the time in question. This could be verified by either by security records (CCTV/security passes), which might show that a person holding the cleaner’s security pass duly swiped in and out for their shift. This might be further supported by the shift supervisor signing off on attendance records.
Block five would verify that cleanliness standards were met. This could be verified by an absence of complaints as well as inspections performed by either the supervisor at shift end and/or the facilities manager the following morning.
With verification from blocks four and five that the person attended and performed to standard, the cleaning company could now pay the cleaner (block 6) for the work. This creates an exchange of money from one bank account to another.
Using information from blocks four, five and six, the contractor could secure payment from the client (block 7). This would be authorised on the basis that various records show that the cleaners were present (block 4), the standard of cleanliness was met (block 5), and that the employee cleaner has been duly and properly paid (block 6).
In short, a growing body of evidence would show that individual cleaners were duly qualified, employed, passed security checks, duly attended the workplace and that the cleaning was performed to a suitable standard.
How Might This Work in Property?
First, there is the ownership of real estate itself. In this area, associate professor Ellie Rennie, a research fellow in the Digital Ethnography Research Centre at RMIT, says a keen area of interest among developers is the potential for greater options in fractional ownership whereby ownership of individual properties or dwellings is shared among multiple parties.
In the US, for example, a company called Merino has created a blockchain platform which enables the division of property into small shares. The software enables blockchains to be created to keep track not just of who holds what portion ownership of the property but also enables potential investors to view past sales, rental income and maintenance records.
For now, Rennie says this will mostly impact the larger investor end of the market. This is because of legal restrictions in respect of certain types of securities and financial products to what are known in the US as accredited investors (those with a net worth of more than $1 million excluding the value of their primary residents or those who meet certain income benchmarks). In Australia, the Corporations Law limits the offering of certain securities and financial products for which a regulated disclosure statement is not provided to ‘sophisticated investors’ who have had an income of at least $250,000 for two consecutive years or who have $2.5 billion in assets.
Longer term, however, she says this could enable those excluded from property ownership to have at least a stake in a unit or apartment. As well, the technology could create avenues through which tenants are able to obtain an ownership stake in properties which they lease. This could help to incentivise tenants in respect of the property’s upkeep.
Another area in which blockchain could have an impact is to promote greater transparency within the development and construction process. Blockchain, Rennie says, could be used to create a transparent record of events which range from the initial lodgement of the plans to amendments to the plans, the hiring of subcontractors and the purchase and/or delivery of materials and the issuing of occupancy certificates.
Anissa Farrell, chief executive officer of project bank account management firm Fair and Square, talks of several more areas.
One is land registries. Were land registries to be placed on a public blockchain, those owning the information would have free access and be able to manage their land holdings without being slugged with hefty fees. This would prove especially valuable in developing countries, Farrell said. In countries such as Haiti, where natural disasters wiped out all records and even landmarks, she says people are still arguing over ownership status years on.
Rennie agrees that blockchain has applications in land registries, but says these may not be as significant in Australia compared with overseas, as our land titles system is already considered to be one of the most robust internationally.
Next, there is security of payments. Here blockchain could enable principals or owners to verify statutory declarations on head contractors, whereby head contractors declare that all of their subcontractors, suppliers and employees have been paid their amounts owing as a condition of the head contractor themselves receiving payment. These are supposed to guarantee that money flows freely down the construction chain and that head contractors do not hold up money which is effectively owed to subcontractors and suppliers.
A significant challenge here has been the widely reported prevalence of false declarations. In NSW, the Collins Inquiry into construction industry payments found the phenomenon of false statutory declarations to be widespread.
Potentially, Farrell said blockchain could help to overcome this problem. Using blockchain technology, principals would be able to look through the chain of construction events and verify whether or not subcontractors, staff and suppliers have indeed been paid. Taking this further, Rennie said this could be automated so that that head contractor payments are automatically triggered only after all subcontractor payments have been made.
On a related note, Farrell says payment processes for simple tasks could be automated and made to run on an ‘if and then’ contractual basis. Under such arrangements, electricians contracted to install lighting, for example, could be automatically paid once all lights have been installed and the contractor has approved the installation.
Next, there is product compliance and the proper specification, selection and installation of products used in construction – a topical issue within building and construction following the Grenfell fire. Digital ledgers could be used, Farrell said, to store information relating to specifications, installation and certificates of compliance. This would not overcome issues such as false certification, but it would at least create an undeniable record for the building owner as to who said and did what and what happened as products went through the construction chain.
Farrell says there are several examples of blockchain initiatives which are happening. In energy, Power Ledger is creating a decentralised energy marketplace which enables consumers to sell their private surplus renewable energy to other consumers. Fair and Square itself is creating a decentralised application with Lachlan Fenney at Labrys to manage construction progress claims and Security of Payment confirmations. Once blockchain technology matures, the firm hopes to move toward what it calls ‘smart contracts’ management for the building sector. This will entail the kind of automation of events which follow other events (such as payments which automatically follow certification of work).
Farrell says it is important to remember that blockchain does not represent any form of holy grail and will not prevent people from acting in a manner which is criminal or untrustworthy. In addition, the technology’s reliability has yet to be proven on a mass scale.
Rather, blockchain should be approached as a potential vehicle for progress and an opportunity to derive greater efficiency.
Rennie says organisations face a choice with regard to being the first mover or observing early adopters and learning lessons.
Where the latter is chosen, she says there are risks about being caught behind as others surge ahead. It was imperative, she said, to at least keep abreast of what is going on so as not to be caught out by any fundamental market shifts which may occur.
For those who embrace the technology, Rennie advises constantly evaluating progress to see what is and is not working.
Blockchain is impacting many industries in many ways.
The construction sector is Australia is no different and is not immune from this.