Real estate transactions and technology
The term “Proptech” has become a buzz-word. It has been used a lot recently and its definition in terms of scope is currently unclear. Market participants have their own special idea about it and technology progress will almost certainly change the understanding of it over time. Currently, in its simplest form, it can be understood as the use of technology for advancement in the real estate sector. Especially in real estate transactions, the market participants use technology for the preparation and implementation of their sales and acquisitions.
1. Electronic data room solutions
The real estate industry is often considered as being a late mover when it comes to the use of technology. From our point of view, this does not hold true for real estate transactions. On the contrary, due to the increasing complexity of real estate transactions, greater regulatory and compliance requirements and broader volumes and types of documents involved, one of the biggest uses for Proptech is in real estate due diligence.
Particularly in the field of real estate transactions and the technology used for it, market participants use various data room solutions. Such solutions are constantly evolving regarding their functionalities, starting from the mere storage and accessibility of documents, traceability of users and their time spent on review, organisation of bidding processes and Q&A up to intelligent systems, as for example so-called finding managers or automated review and summary of documents.
The real estate industry is particularly prone to using these types of solutions as at least parts of the extensive deal documentation have characteristics that tend to repeat, for instance with regard to standard documents like land registers or simple lease agreements. Repeating elements or stipulations offer a high potential for automatic review, which can allow professionals to focus their efforts on more qualified and detailed tasks.
These automatic review solutions are already being used today, and they are further improved when it comes to sensitive data management. Under the applicable GDPR, market participants are now seeking data sovereignty software solutions. Consequently, the German Society for Research in the Real Estate Industry (Gesellschaft für Immobilienwirtschaftliche Forschung e.V., “gif”) developed standards for electronic data rooms. The gif “guideline for the establishment of a real estate data space and document management system” was drafted with the involvement of the European partner associations “Format d’Inter-échanges de Données Juridiques et Immobilières – FIDJI” (France), “Royal Institute of Chartered Surveyors – RICS” (UK) and “Zentraler Immobilien Ausschuss – ZIA” (Germany). It provides users and data room providers with a common set of rules for document management. At the same time, the guideline applies to all developers and operators of appropriate software products as well as to consultants, who are entrusted with the mechanism and advancement of appropriate document management systems. The goal of the version 2.0 is to take the exchange of documents to another level of standardization, in particular by regulating how documents can be uniformly classified and structured in the future through the use of modern technologies, such as artificial intelligence. This level of standardization is a prerequisite for the future development of software-based review solutions.
2. Electronic sales and acquisition process
Most of the market participants agree that the traditional process of acquiring real estate can be inefficient due to the low level of standardization. Hence, Proptech solutions for the sales and acquisitions process are currently being developed and presented in the market. They include virtual tours of the property being marketed, intelligent software solutions for agents and assistance with investment memoranda or other essential information provided to potential clients. Virtual tours allow a potential buyer to fully see a property from even thousands of miles away or properties that have not been constructed yet. Augmented reality could also allow an agent to describe more closely parts of a home or technical functions to the probable buyer.
Nowadays, properties are searchable on the internet which is already a huge improvement from the old days. Tech solutions can consist of using a web crawler which is a bot (software application) designed to systematically browse the web. These web crawlers can copy all the pages they visit for later processing by a search engine. Further, analysing the deal for the buyer requires comparables from other deals. These information can also be compiled by technical solutions which are easier and cheaper to use than the traditional research tools.
However, the traditional model still prevails regarding the transaction itself, i.e. the negotiation of heads of terms, letter of intents or even more important transactional documents, like a power of attorney, purchase agreements, annexes or securities. Proptech’s future development will from our point of view include helpful solutions and tools in this regard. Tailor-made commercial real estate deals will continue to require expert legal and real estate advice. However, the future tools can be expected to facilitate the process of selling and acquiring real property.
3. Outlook: Electronic archive for notarial deeds from 1 January 2022
In Germany, the notarial deed reflects the parties’ agreement on the sale and transfer of the real property. Regarding these notarial deeds, the electronic archive for notarial deeds (Electronic Deed Archive, EDA) will be introduced in 2022. The starting date specified by the legislator for the register of documents and the depositary register is currently still the 1 January 2020. The EDA is to be kept from 1 January 2022. However, the technical prerequisites for electronic archive are still work in progress.
A draft bill has been submitted by the Federal Ministry of Justice and Consumer Protection, which provides for a change in the dates for the entry into force of the regulations on the EDA to the effect that the EDA will be put into operation uniformly on 1 January 2022. Currently, the legislator would have had to keep the register of documents and the depositary register in the electronic archive of documents from 1 January 2020, the electronic collection of documents as the centerpiece of the electronic archive of documents two years later. These dates are now to be set uniformly for the later date, i.e. 1 January 2022.
In order to guarantee the confidentiality of the documents, each notary will be connected to the EDA via a specially secured network. All documents are stored there in content encrypted form. Only the notary and his staff can decrypt the documents again, there will be no general key and hence the information kept at the EDA will not be available for the real estate market.