A new way of owning property awaits Dubai
Real estate tokens can bring in fresh liquidity and a wider investor base for the local property market
We saw in the first part of this series how the uniqueness of Dubai turned vision into reality and created a successful real estate market. And how tokenisation can be the next innovation needed by Dubai post Covid-19 to revive its real estate sector.
Tokenisation is the answer as it represents the intersection between real estate and digital economy. So how would it work?
Real estate security tokens, unlike utility tokens such as Bitcoin, would have many advantages. Real estate tokenisation will open the door for the acceptance of all forms of digital payments, from fiat (cash) currencies to cryptocurrencies like Bitcoin and stable coins like Gemini or Coinbase, or, possibly, even open the door for the issuance of a Dubai stable coin, the DXB in dirhams pegged to the dollar. Once the security tokens are listed on a digital assets exchange — like crypto exchanges or national exchanges that accept digital assets — the traditional illiquidity of real estate will be resolved, making real estate investments a tradable security. Switzerland is at the forefront of such exchanges and is preparing to launch SDX which is owned by a consortium of Swiss banks.
I can hear some sceptics saying this is just putting Real Estate Investment Trusts (REITs) on the blockchain, but it’s not even close. REITs to security tokens is like cheque books to Noonpay or e-wallets.
The main differences between real estate tokens and REITs are:
■ REITs are traditionally costly to assemble and launch, and they usually tackle one heavy project and do not support off-plan.
■ Most REITs require a high minimum investment.
What is especially important is that in developed real estate markets, the REITs trade at approximately a 20 per cent premium to the assets simply because of liquidity. Security tokenisation will drive higher liquidity and bring prices closer to fair value.
A step-by-step guide
Is adopting the format of assembling a collection of real estate assets and putting them in a special purpose vehicle (SPV) and then starting the tokenisation process, similar to an IPO? Well, yes and no.
Yes, in that the format that we are introducing is an investment product available to the public. And no, because in the scope of real estate products in an area like Dubai, the data across many of these assets is similar and easily available in the market.
Moreover, there is no need to go through a lengthy valuation process. There is just a need to launch the product at a specific price set by the owner/developer and let the market decide the price. As far as legal due diligence is concerned, Dubai Land Department has all the records. This structure can be moved to the blockchain and picked up automatically by any asset to be tokenised. Hence it becomes like a “select and drop” process. At the same time, the Dubai Land Department acts as the custodian.
The initial price is determined by the seller. The property management contracts for the cost of maintaining those units is already approved by Dubai Lands Department, and it will be integrated as a part of the “smart” contract. The issuer should also be required to upload a property management contract with a set rate for the management fees. The Dubai Lands Department can set a cap, say at approximately 5 per cent. Once the tokens are issued, then the Real Estate Regulatory Authority (RERA) will inspect the offering and approve release for trading on the exchange. This becomes an IEO, or an initial exchange offering. Open your app and start trading real estate on your phone.
The Dubai Land Department can set a minimum size per offering, say Dh10 million.
A digital assets exchange only needs time to become a reality in a financial hub like Dubai, with its exchanges seeking to remain at the forefront of the future financial markets. Like the Swiss Digital Exchange (SDX), which is set up by a consortium representing market infrastructures and financial institutions. The capital market regulator can swiftly set up a digital assets exchange for real estate tokenisation and manage a global contract with a reliable KYC/AML vendor.
Affiliate contracts with existing crypto exchanges like Binance can be secured to onboard their existing clients and split the trading commissions. Existing investors on local stock exchanges can also be onboarded.
The above process is straight forward for completed projects. But how about off-plan projects launched by developers?
It’s fairly the same process except that funds will flow to an escrow account. In this case, the developer might decide to tokenise the whole project or a part of the project.
So, what are we waiting for? Let’s assume it is May 2002, and let’s start dazzling the world once again.