The race to streamline due diligence on property deals

In the past few months, Mishcon de Reya has been involved in the completion of the UK’s first digital transfer of residential property using blockchain technology and smart contracts, with the aim of increasing transparency, speed and trust in property transactions. It is clear that real estate transactions are slow. Our ultimate vision is that technological advances will make it commonplace for real estate to be traded in a day. As part of our drive to make that happen, our legal tech incubator, MDR LAB, is interested in proptech start-ups that will dramatically change the pace of real estate transactions. Other elements of the process also need to be transformed for this vision to be realised – one of the key areas will be due diligence. There is a huge amount of work needed to digitise and analyse all the data required to sign off on due diligence and there are many people trying to solve this problem. The Land Registry is undertaking a huge digitisation project, Digital Street, and Geovation has provided much-needed support to launch and grow start-ups that want to use location or property data. A greater understanding of risk and more transparency will lead to much faster and more streamlined transactions That much-needed support and structure has helped start-ups focusing on speeding up the due diligence process to flourish. Mapping out the risk associated with a property involves aggregating specific property-related data with geospatial data in order to get a broad understanding of the risks associated with that property. There are lots of companies doing great work in this area, including Orbital Witness, Datscha, Search Acumen and Urban Intelligence, to name a few. If we want to significantly change the pace of real estate transactions, we need to be able to automatically analyse the vast amounts of data required and to get human input only when it is actually needed and is able to add real value. Innovate UK is funding projects which aim to build next-generation services (including legal and insurance) which will be needed to dramatically change the way we do due diligence. Companies are using this funding to access cutting-edge natural language processing and machine learning techniques to digitise, identify and analyse risk or to investigate new insurance models. New insurance models are likely to drive down average transaction times.  Innovate UK recently awarded grant funding to MDR LAB’s first proptech start-up, Orbital Witness. With this funding it plans to develop cutting-edge AI techniques to extract and analyse rights and obligations relating to property. Using our expertise in utilising machine learning to identify and extract legal terms from title documents and leases, Mishcon de Reya has been helping Orbital Witness identify the key legal issues that need to be extracted and analysed. Orbital Witness plans to use this data and analytics to support the creation of risk scores for properties; this will enable issues to be dealt with much earlier, avoiding delays. Whether Orbital Witness succeeds in its aim to digitise and analyse rights and obligations or the Land Registry can provide a complete and structured digital data set, we will see some significant changes to business models as a result. A register of legal risk for property could enable new business models for transacting real estate. It may be possible to transact or finance real estate without the counterparties having to carry out due diligence. Instead risks could be covered by new insurance products. Where issues are more complex, it will enable greater transparency between the parties and a greater focus on the issues that matter from the outset, which will shorten average transaction times. If there is a direct correlation between a property with a low risk rating and the time it takes to transact, it may be possible to employ third parties to reduce the risk rating of a property and make them more liquid. We know from our involvement with the Land Registry’s Digital Street project that it is keen to provide the industry with a complete and structured digital dataset. This is a huge undertaking (there are 26 miles of boxes not yet scanned) but it will have clear value to the industry. A complete digital record would enable digital transactions to be faster, more transparent and accurate. We are at an early stage in the journey of revolutionising the way in which property due diligence is undertaken. It is not yet clear which players will be successful in their endeavours to digitise and aggregate all property risks with geospatial data in a meaningful and useful way, but it is obvious that a greater understanding of risk and more transparency will lead to much faster and more streamlined transactions, which would be beneficial to everyone in real estate. Nicholas Kirby is managing associate at Mishcon de Reya