A world of tokens awaits Dubai real estate

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Aden - Yasmin Abdel Azim - Dubai turned vision into reality and created a successful real estate market. Tokenisation can be the next innovation needed to revive its real estate sector. Image Credit:

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 tokens represent ownership in the underlying assets.

* Real estate owners and investors can offer smaller investment tickets, expanding distribution to a broader group.

* Tokens would help individuals build diversified portfolios with limited funds. Except for Real Estate Investment Trusts (REITs), diversification in real estate has always been limited to the wealthy and institutions.

* Make online purchase accessible from anywhere, on a 24-hour basis.

* All transactions would be instant and recorded on immutable smart contracts. All rights and legal responsibilities are embedded directly onto the token along with an immutable record of ownership.

* Automated compliance and governance.

* Reduction of insurance, administrative and distribution costs, thanks to the high level of automation. * Rights and restrictions would be programmed in the assets and easier to valuate.

* Price discovery in the secondary market will become real-time, transparent, easily and cheaply available to all.

* Investors will benefit from automated, market driven future price appreciation and dividends (mostly in the form of rents).

* Any additional special offers or promotions can be programmed into the smart contracts to make it transparent and irrefutable.

* Tokenisation does not require a middleman, making it easier, cheaper and more transparent.

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 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:

* 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, if all checks out, will 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.

Invest the time

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 on-board 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.

Obviously from an investor’s point of view, investing in off-plan tokens should generate a higher capital appreciation.

So, what are we waiting for? Let’s assume it is May 2002, and let’s start dazzling the world once again. — Ziad El Chaar is CEO — Family office of Dar Al Arkan and had previously held CEO positions in Emaar, Dar Al Arkan and Damac Properties.

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