As blockchain and cryptocurrency regulations in the region begin to grow, numerous start-ups are showing interest, along with major financial institutions seeking to develop this innovation across the region. The concept of tokenisation of real estate assets involves creating a virtual token that represents ownership of a particular type of asset. Similar to the recent digital craze with non-fungible tokens (NFTs), but with a physical asset tying the token to its value instead.
Tokens can represent real estate related ownership in several ways due to their enhanced flexibility in use. A token becomes a record that has legal meaning and hence an economic value. In addition to representing ownership of an asset, tokens can also represent an equity interest in a legal entity that controls the asset, an interest in a debt secured by the asset, a right to share in the revenue or profits generated by the asset, or any other variation as determined by the issuer of the tokens.
Like traditional real estate investments, the types of real estate that can be tokenised also vary, including residential or commercial property, and industrial spaces or retail spaces. As tokens are secured by physical assets, their value will fluctuate in line with the performance of the asset, similar to real estate investments but with the added convenience the blockchain technology offers, specifically the safe and frictionless storage and transfer of the cryptographic tokens.
With traditional real estate investments, there are the challenges of a lack of liquidity, a lack of transparency, intermediaries, high processing fees, and an absence of fractional ownership. A solution to this problem has emerged through tokenisation.
Tokenisation of real estate assets is often overlooked because real estate registration records are stored in a database, under the control of a central authority. However, digitalisation spans far beyond that. Blockchains are distributed ledgers which rely on advanced cryptography to provide security to users, which means that no one person, group, or organisation controls them.
Moreover, a blockchain can verifiably keep track of the ownership status and changes through auditable records. There can be no contradictory records in this immutable record. This means that once a transaction has been recorded and confirmed on the blockchain, it essentially cannot be changed.
Furthermore, since a blockchain itself is a public registry, it is unnecessary to keep records elsewhere. Tokenisation requires initial interaction with the local land authorities, but once the title to the asset is recorded on the blockchain, no registration is necessary each time a transaction is processed as the blockchain provides a secure database. All transactions will be transparent to the public since each will be processed and approved by other users in the marketplace.
Regular updates to the blockchain keep investors informed of their rights and restrictions in relation to the tokenized digital asset, thereby increasing transparency and securing the real estate market as a whole.
Searching for a property in which to invest is another issue encountered when investing in real estate through traditional means. These assets can be purchased on a variety of marketplaces. However, as tokenised assets they could be sold in one centralised marketplace, and the investor will find it easier to find a potential investment. The advantage is that investors will be able to search for prospective investments from other regions, and sellers will be able to reach a larger community of prospective buyers.
Exchanging tokens on a blockchain platform will reduce the costs associated with the particular real estate investment. Through tokenisation, investors can purchase and sell the digitised asset without incurring closing costs, which reduces transaction costs substantially.
Tokenisation in real estate has also yielded the positive outcome of fractional and divisible ownership. The value of real estate has traditionally been indivisible as it is treated as a single asset. Tokenisation makes it possible to fractionalise the asset, leading to greater access thereto and better liquidity of the investment.
Globally tokenisation has the potential to completely transform the way people invest in real estate. Blockchain developers and their professional advisers will need to consider and plan well in order to move forward with that potential.
The tokenisation process is, however, complicated by a multitude of legal and practical issues, each of which could decide whether it succeeds or fails.
In the GCC region, real estate is one of the most popular areas for foreign direct investment (FDI). Therefore, real estate is undeniably one of the most significant asset classes, and the adoption of blockchain technology in the region, makes it an ideal sector for the integration of blockchain and tokenisation.
As blockchain and cryptocurrency regulations in the region begin to grow, numerous start-ups are showing interest, along with major financial institutions seeking to develop this innovation across the region. As an example, the UAE Central Bank is collaborating with the Saudi Arabian Monetary Authority to develop a digital currency for cross-border trade, resulting in an even more conducive environment for the tokenisation of real estate.
As a result, continuing developments in the tokenisation of real estate should prove to be highly promising.
This article was originally published for BSA in Arabian Business.
Senior Associate, Corporate