Bitcoin for Commercial Real Estate: A Question
Dubbed as the ‘Switzerland of North America’ for global commercial real estate according to a report on the Financial Post, Canada’s commercial real estate market has been on track to beat its previous investment and sales records both domestically and globally. No longer just an alternative asset class, real estate is in the upswing, and commercial asset management companies continue to welcome increasing demand for commercial assets among investors looking to get a piece of the country’s lucrative real estate investment market.
Just like any other type of investment, the real estate market is also highly dependent on financial viability. With the advent of cryptocurrency used in many digital transactions, its potential uses in the real estate market require investigation to mitigate its effects, if ever.
So how does Bitcoin change the real estate investment market? It’s time for commercial real estate asset management companies and their investors to find out:
The Bitcoin Effect
Financial institutions worldwide have seen the value explosion caused by digital currencies powered by blockchain ledgers. The once climbing, but now still highly fluctuating exchange rates dictate ongoing buying and liquidating activities among those who own and trade these currencies. Bitcoin and its close relatives are popular mostly due to the anonymity they provide to owners, allowing a common, digital type of money to permeate borders with little to no regulation. Digital currencies are commonly used in various digital transactions, such as Internet-based services, art and crowdsource funding, and recently, far more valuable uses, including reported lower-priced real estate closings in North America.
Bitcoin for Commercial Real Estate Transactions: No Longer Anonymous
Being of typically larger value due to size and location, commercial properties have yet to be fully invaded by the bitcoin phenomenon. But even so, with the growing appetite for real estate assets in Canada among foreign investors, their foreign-sourced money could present an ideal testing ground for Bitcoin exchanges to fund real estate investments.
After acquisition and years of management, the final test of how well a commercial investment asset can thrive is its sale, bolstered by generous returns, but the use of cryptocurrency can impede this. Legal regulations concerning title insurance bar companies or agents from disbursing cryptocurrency funds. While this can be resolved by liquidating the funds to cash prior to its disbursement, this would change the nature of the transaction from crypo to cash, which removes the element of anonymity.
Commercial real estate deals require a significant escrow deposit, but even if a digital wallet could be created, a title company is likely unwilling to bear the risks associated with this transaction due to the volatility of the value of cryptocurrency and persisting issues regarding the source of funds and their possibly illegal nature. Currently, professional regulations concerning real estate professionals require them to have deposits placed into a bank or a similar account, which seems unsuitable for the anonymous and digital nature of cryptocurrency.
Undeniable Volatility of Cryptocurrency
While cryptocurrency owners enjoyed its upswing, its more recent dips have had some investors worried. Even if a financial institution regulated by the Canadian government can include cryptocurrency account information on their balance sheets, the use of bitcoin in sales and investments remains highly questionable. This is not only because of title insurance obligations and legality of the fuds, but also due to the fluctuating value of cryptocurrency. How much bitcoin was worth last year may have been sufficient to buy into a commercial real estate investment, or close a sale, but as its value continues to dip, that may no longer be the case.
A close relative of Bitcoin, Ethereum uses smart contract, a type of peer-to-peer blockchain technology. Their value can be pre-programmed according to certain contingencies and price adjustments, and as a result can be viable in smaller real estate deals; however, the use of this cryptocurrency is still doubtful in commercial settings, since these involve multiple contingencies and price adjustments.
Despite the issues associated with the use of cryptocurrency particularly in commercial real estate investment and sales, investors and asset management companies alike are looking forward to improvements in how Bitcoin can be used and regulated. Should fiscal regulations advance to accommodate the digital economy, and prompt the value of these digital currencies to stabilize, investors may be able to see their Bitcoin and other cryptocurrencies be used in more valuable transactions, such as real estate closings and to represent returns on their investment.
Thinking of using cryptocurrency to invest in a commercial property? Our real estate asset management company can help you explore your options for generating the most favourable returns in the face of the digital economy.