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  • Technology

    Blockchain solution to the lending process

    Here's part two of my exploration into how blockchain technology might solve inefficiencies in my property journey. Imagine receiving lending approval, valuation and cost reports plus the legal pack instantly. I live in hope.

    I'm not an expert by any means but this is just how I see the industry trending once the technology is available. The full article is here:

    http://www.linkedin.com/pulse/commercial...ublished=t

    Imagine if you could apply for a £2m bridge in the morning and be in funds by the afternoon. Combine that with the super-fast planning I theorised about in yesterday’s article and you’ve just solved all my job-related problems. (Nearly, I’ll discuss conveyancing tomorrow.)

    Raising commercial debt from banks and lenders is, in my opinion, a drawn-out and archaic system. Let’s not even start on the mortgage industry... I must highlight immediately that I have great relationship with our lenders and brokers. It’s not their fault that there are issues, it’s just the system.

    When I first researched blockchain technology it was the simplification of the lending process which really excited me. Allow yourself to imagine how it would be if you could submit your commercial lending application and have approval, a professional valuation report and finalised legal documents instantly? Final checks would be carried out by a human before funds are released.

    As a small housebuilder we have tens of millions in commercial debt. The largest share is with one high street bank, some is with two larger lenders and then we have a few projects boutique lenders. So while I’m not an industry insider, I know a bit about the debt raising process. The more I pay in interest the faster the process. High Street banks tend to take about 12-16 weeks, smaller lenders about 4-8 weeks.

    Let’s look at the current system in a very simplified way for a bridge of say £500,000.

    1.     The borrower, or her broker, submits an application to the lender, often on paper, with personal information and details of the project. This is sent along with an appraisal of the project and development CV.

    2.     The lender undertakes a quick analysis of the deal to ensure it meets internals metrics. If so a valuation report is ordered. The lender might also, depending on the size, need to send the project before a credit team. A formal offer letter is sent to the borrower.

    3.     The valuation report costs £5-10k and takes up to a month to produce. Apologies if this sounds demeaning but the information is readily available if you have a Rightmove Plus account – it’s simply the latest asking and sales for equivalent properties in the locality. The surveyor does look at micro and macroeconomic data but this will be a “house” view and the same for all properties in any given area. The important thing for the lender is that the valuer provides an insurance policy if things go wrong.

    4.     Monitoring surveys might be called upon depending on the size of the development. Again, if the developer is experienced all this data is available from their internal accounting systems. Yes there are exceptions but with material inputs roughly the same it’s just the skill and efficiency of the developer’s team that differs. This report costs another £5-10k for the borrower.

    5.     Once the loan is approved the solicitors prepare the legal packs. The borrower must foot the bill of both the lender’s solicitor as well as their own – another £5-10k a piece.

    6.     Once through the final scrutiny the borrower must visit his or her solicitor and sign the personal guarantees.

    7.     A bank transfer is arranged for full or part of the funds depending on the loan type. I’m not going to touch on monitoring and partial payments of development lending.

    Let’s allow ourselves to fanaticise (perhaps it's just me?) for a moment that we can use blockchain technology to streamline this process. How would it look? Let’s assume the developer is known to the lender and the development is fairly straight forward.

    1.     The borrower completes a full application online including a full appraisal in the format required by the lender. Much of the site information is pre-populated from land registry data, the planning database and various financial databases. The development CV information is completed if the application is a new developer otherwise the information is pre-populated.

    2.     Upon submission the system immediately notifies the prospective borrower that the loan has been approved in principle based on the lender’s criteria.

    3.     A valuation report is automatically created from the land registry data which is updated live following each property transaction. Asking prices are live and updated by estate agents on a single, open source database.

    4.     A monitoring survey report is automatically generated based on the costs associated with thousands of other similar builds in the same area. The borrower’s own data is also factored in to the figures.

    5.     Legal packs are produced immediately from the blockchain systems now available for conveyancing (more tomorrow). A restriction is placed on a proportion of a developer’s assets held within a digital currency wallet which can be seized by the lender should the deal go wrong.

    6.     A credit committee reviews the project perhaps deciding to visit the site or meet with the developer.

    7.     Upon human approval of the loan funds are immediately released.

    The exciting thing about the hypothetical scenario above is that steps 1 through 5 happen instantly. Yes, instantly. As soon as the application is submitted into the system all information is matched against various lender policies and the outcome is instant.

    From discussions with those in the know we’re still at least two years away from this technology. But it’s clear that the first lender who grabs the opportunity and rolls it out across the market, at a reasonable cost, will benefit greatly. As developers we’ll benefit too not just on the cost savings but the speed in access to finance will allow us to focus on what we do best, build homes.

    Tomorrow I'll discuss access how the conveyancing model and land registry database might look.

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    East London based property developer, investor and speaker

    East-Eight.com

    Follow Me: Facebook Twitter Snapchat

    Block chain is obviously a brilliant concept

    Gonna put millions out of work though!!

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    None of the "to be" process that you describe would, in any way, be improved by, or even require, blockchain

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    Even better then. Why isn't it being done? And I don't see how it doesn't required blockchain. From my understanding, limited as it is, it's about live access to big data which trigger transactions based on the matching of a variable.

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    East London based property developer, investor and speaker

    East-Eight.com

    Follow Me: Facebook Twitter Snapchat

    You already know why it isn't being done

    1. The data required lives in different systems / formats that aren't immediately compatible without some sort of intervention / translation and automatically shared

    2. Fees

    3. Resistance to change & cost of change

    The steps that the institutions involved would need to take to speed up the process (standardising and automatically sharing data primarily) would create the faster and more efficient process that you outline

    The main purposes of blockchain - decentralisation and cheaper verification / audit of transactions - are of little value in the process you describe.  That isn't the rate limiting factor, nor is there any inherent lack of trust between the institutions involved

    Once the process has been optimised, so that it can (and should) happen in moments rather than months, then a situation arises where blockchains could be used as the ledger of the transactions involved, but that wouldn't be necessary and would have a very small impact on the speed / cost of the overall process compared to the standardisation and automatic sharing of the data between the institutions involved.

    Maybe blockchain will be one of the factors that drives those involved in the process towards doing the work required to standardise and automatically share the data.

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    A very interesting post Nicole. However I might be very short sighted here but I cannot see it happening any time soon.

    To try and explain my misgivings the one thing that came to mind was visiting the doctors due to an un-diagnosed illness. I feel unwell so I go to the doctor, he asks me lots of questions and carries out tests over days and weeks to ultimately provide a robust and accurate diagnosis and treatment plan.

    Property purchase along with the necessary financing solutions, I see is very much like the analogy above and to stretch it further if it is possible to use blockchain to carry out the financial transaction in this way it is equally possible to diagnose and treat my medical condition. But is it?

    The answer is no, by virtue of the fact that it so heavily relies on past data to support all the elements of the transaction it is missing the one most important thing and that is the present, what is happening right now. Information in the present is what so many people use to try and predict outcomes, with varying degrees of success when making any investment decision. To rely on past data, however recent it may be, will only lead to a crash at some point in the future which will ultimately shatter the confidence in the whole Blockchain solution. When making lending decisions lenders ask all the intrusive questions to get a feel of where the business or property is now and go someway to predicting where they will be in the short and long term. The solution above whilst undoubtedly valuable in the overall process cannot really replace what has been a tried and tested way of gathering the fundamentals necessary to measure risk.

    Notwithstanding all this there is also the elephant in the room of outside intervention and manipulation. I know that Blockchain is designed to remove that risk but that is only at the Blockchain level if someone was to manipulate the data going in which is entirely possible then there would be an undue level of confidence in the result which is potentially flawed.

    IMHO

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    Landlord with 25 years’ experience in the property market and a specialist in tenant referencing, ID and credit screening. Creator of identity, credit and anti-money laundering system ValidID.co.uk


    It's fascinating and I'm watching the progress with much interest. But to say it's not happening is very short sighted. It is currently happening. These things are not built in a day and technological changes are the same. In fact I had dinner with a partner of one of the top UK law firms last night and he was outlining what they're doing to use blockchain technology within his firm.

    There's a whole new area called Regtech - regulation technology - that is looking at using technology to simplify the regulation around many processes in the Fintech space. Another friend is on a board of a company in Australia where they are using the blockchain in the conveyancing process. This is happening. Small steps, yes, but steps are being made in this direction.

    Just take a look at Warren Buffet's address at his AGM yesterday. He spoke about the impact AI is going to have. Millions of jobs are going to be lost. But he sees it as a good thing because it assists with social mobility. Very interesting to read his views. Here's a link. 

    And to address your doctor analogy I also think that's a flawed one. There are many parts of rural Australia as one example where there are no doctors for thousands of kilometers. How do people seek treatment? Online. There are a series of checklists - are you experiencing pain? Where is it? etc done by a system without a doctor. There are even apps here in the UK where you can plug in your issues using the app, not to a person, then if it warrants it a GP reviews your situation, issues you with a prescription and the app guides you to the nearest pharmacy to have it filled. This all happens in minutes. I had the unfortunate experience of taking one of my children to hospital last month. They have a series of checklists they go through to come up with the treatment plan. But surely our experience could have been sped up by pre-completing these questionnaires prior to the visit? Even his identification and medical history? That's blockchain.

    So we can all bury our heads and believe a major change isn't upon us but I know it's coming and want to ensure I'm at the forefront and can benefit from the efficiencies it brings.

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    East London based property developer, investor and speaker

    East-Eight.com

    Follow Me: Facebook Twitter Snapchat


    There is immense work being done on blockchain and associated technologies in the financial space

    Take a look at

    https://www.r3cev.com

    for an example of the scale of collaboration and scope of interest

    I am not sure that means that things like local council planning is anywhere close to grasping blockchain, but the financial side of property transactions is

    If something like blockchain is what it takes to start to drive data standardisation and sharing to the next levels - resulting in less admin / nonsense for more people, then bring it on


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    I couldn't agree more with your last sentence.

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    East London based property developer, investor and speaker

    East-Eight.com

    Follow Me: Facebook Twitter Snapchat

    Love the article Nicole, as a trader in a former life (on bet fair) I have been drawn to the new age of Bitcoin etc... it is effectively new money, they are creating something which will speed up so many processes it's easy to see the impact it could have on our lives.

    It could truly become technology which cannot be bettered.

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