When in May 2002 Dubai pioneered the opening up of the real estate market for foreign investments in the GCC, this turned out to be a step towards transforming the real estate market in the Emirate to the bold, diverse, and creative sector that it has become today, enjoying a global appeal and diverse footprint. The vision, leadership, and innovation made Dubai one of the premier property investment destinations globally.
The top-down approach meant that all real estate initiatives were synchronized and that relevant entities worked seamlessly together to turn vision into reality and ensure the success of the future blueprint. As a result, more than 200 nationalities from around the world embraced the market and invested in it.
It is high time to aim high and innovate once more.
Though it might seem complicated, the formula was simple: trusting the market as a highly secure environment where all completed projects are managed by developers; ensuring straightforward transactions; and applying minimal fees with zero income and corporate tax, as well as zero value-added tax on residential real estate.
The current unique structure of the Dubai real estate sector presents a huge opportunity to reshape the market with a new recipe for success.
The uniqueness of Dubai as a place where all entities, public and private, work together in an imperceptible partnership to the greater benefit of the city, cannot be easily replicated in other markets. The synchronization between the various sectors of the economy, the government, and the investment community across the public and private sectors offers an exceptional opportunity.
The real innovation that would help Dubai’s real estate market recover its unstoppable appeal and regain its glamour is: asset tokenization.
This unique Dubai composition, as well as current and potential investors, are ready for the next phase of innovation. Combined with a post-COVID-19 new world that will open wider doors to the digital economy- in a manner not seen before, real estate and innovation can revitalize the market in an unprecedented way.
The Dubai Government is undertaking to move all its services to the blockchain and could take this decision to the next level by applying it innovatively to real estate investing, thus pioneering another new initiative in the region.
The real innovation that would help Dubai’s real estate market recover its unstoppable appeal and regain its glamour is: asset tokenization.
To tokenize an asset is to divide it into shares or tokens that represent a clearly defined share of the asset in consideration. This is what we call a security token.
The real estate industry is resilient and always delivers valuable and more stable returns. Although it is future-proofed, it has always been restricted to high-ticket investments and is illiquid, complicated, and opaque.
Tokenization will resolve these problems and will introduce real estate investments into the digital economy. We should remember that innovation is in Dubai’s DNA.
In Feb 2020, the University of Oxford published a paper advocating digital assets entitled, Tokenisation: the future of real estate investment.
To tokenize an asset is to divide it into shares or tokens that represent a clearly defined share of the asset in consideration. This is what we call a security token. The tokens are secured through the immutability of blockchain technology. Every transaction of tokens is completed with automated smart contracts (software algorithms integrated into a blockchain with trigger actions based on pre-defined parameters).
When tokens are mentioned, the first thing that springs to mind is Bitcoin, and it is important to differentiate between real estate tokens and other types of tokens that exist today in the market.
Bitcoin, as with other tokens launched over the last 3 to 4 years, are utility token. They don’t represent ownership in the underlying asset. They have value only on the platform, and investors in these utility tokens hope that, with time, the platform and the utility will grow and so will their investment.
Advantages Of Asset Tokenization
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Real estate tokens represent ownership in the underlying assets |
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Real estate owners and investors can offer smaller investment tickets, expanding distribution to a broader group |
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Tokens would help individuals build diversified portfolios with limited funds. Except for the Real Estate Investment Trusts (REITs), diversification in real estate has always been limited to the wealthy and institutions |
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Make online purchases accessible from anywhere, on a 24-hour basis |
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All transactions would be instant and recorded on the immutable smart contracts, all rights and legal responsibilities are embedded directly onto the token along with an immutable record of ownership |
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Automated compliance and governance |
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Reduction of insurance, administrative and distribution costs, thanks to the high level of automation |
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Rights and restrictions would be programmed in the assets and easier to evaluate |
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Price discovery in the secondary market will become real-time, transparent, easily and cheaply available to all |
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Investors will benefit from automated, market-driven future price appreciation and dividends (mostly in the form of rents) |
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Any additional special offers or promotions can be programmed into the smart contracts to make them transparent and irrefutable |
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Tokenisation does not require a middleman, making it easier, cheaper, and more transparent |
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Real estate tokenization 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 stable dollar or USD Coinbase stable dollar or, possibly, even open the door for the issuance of a Dubai stablecoin, the DXB in Dirhams, pegged to the USD |
Once the security tokens are listed on a digital assets exchange like crypto exchanges or the evolution of national exchanges to 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 preparing to launch SDX which is owned by a consortium of Swiss banks.
I can hear some of the skeptics saying this is just putting REITs on the blockchain, but it’s not even close. REITs to security tokens are like checkbooks to Noonpay or e-wallets.
The main differences between real estate tokens and REITs are:
1. REITs are traditionally lengthy and costly to assemble and launch, and they usually tackle one heavy project and do not support off-plan projects
2. Most REITs require a high minimum investment
3. What is especially important to learn from REITs is that in developed REIT markets the REITs trade at approximately a 20% premium to the assets simply because of liquidity. Security tokenization will drive higher liquidity bringing prices closer to real fair value
How To Proceed? A Step-By-Step Guide
Adopting the format of assembling a collection of real estate assets and putting them in a special purpose vehicle (SPV) and then starting the tokenization process, similar to the format of an IPO.
Well, yes and no.
Yes, in that the format that we are introducing is an investment product available to the public to buy. And no, because in the scope of real estate products in an area like Dubai, the data across many of these assets are similar and easily available in the market.
Moreover, there is no need to go through a lengthy and costly 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 and in the presence of the transparent and diligent Dubai Lands Department where all records exist for all units, there is no need for legal due diligence either.
So, in the case of the Dubai structure the Dubai Lands Department holds all legal due diligence in its system. This structure can be moved to the blockchain and picked up automatically by any asset to be tokenized, hence it becomes like a “select and drop” process.
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.
At the same time, the Dubai Lands Department acts as the custodian. The initial price is determined by the seller. The property management contracts for the cost of maintaining those units are already approved by the Dubai Lands Department, and they 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 which Dubai Lands Department can set a cap for, say at approximately 5%.
Once the tokens are issued, then the Real Estate regulatory authority will inspect the offering and, if all checks out, will approve the 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.
Surely Dubai Lands Department will set a minimum size per offering, say AED10 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 markets authority can swiftly set up a digital assets exchange for real estate tokenization 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 straightforward 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 of the project. In this case, the developer might decide to tokenize the whole project or a part of the project. Obviously from an investor’s point of view, investing in off-plan tokens should generate a higher capital appreciation.
By far, real estate investing requires high face-to-face interaction as it’s usually a sizeable investment and requires many meetings with developers, brokers, property managers, etc. It also requires a physical visit to the property to check the location, design, and specifications.
The new digital process of tokenization will eliminate the face-to-face interaction to zero, by adopting the below processes:
1. The tokenization process starts online at the Dubai Lands Department by assembling the assets/units from the registry and moving these units to the tokenization module
2. The system will attach the specifications, property management agreement, and applicable annual costs for maintaining the units (approved by Dubai Lands Department)
3. We add a VR 360 (virtual) tour of the project, unit, location and its surroundings will be embedded
4. Then the property/unit is tokenized and transferred to the digital assets exchange that trades online
5. Open the trading for the public
In this way, face-to-face interaction is eliminated. All offerings should provide hotlines, video chat, and 24-hour support.
The introduction of security tokenization will also open up the real estate market to the capital markets’ brokers to work with their existing and new clients, trading the security tokens.
Another online element that will provide more transparency to the market is that all security tokens now belong to a regulated market, and all advertising is deeply scrutinized by the regulator.
In the food business, three-star Michelin restaurants are expected to innovate in order to stay in the game and retain their stars. Real Estate leadership the same.
