Tokenisation of UAE Real Estate

The real estate market in the UAE has recently also been experiencing a period of rapid growth, which has attracted a great deal of investor attention.

However, real estate in general is a market that requires high capital for entry, lengthy transaction requirements and timeframes and is typically an illiquid asset class. The introduction of real estate investment trusts (REITs) and real estate crowdfunding platforms in the UAE have been welcomed but do not currently have a large presence in the market for several reasons, including high regulatory establishment costs and, particularly in the context of crowdfunding platforms, significant operational limitations.

Tokenisation has therefore been identified as an alternative pathway to increase exposure to the UAE real estate market and, as a result, we are seeing an increased number of real estate tokenisation projects in the UAE.

What is tokenisation?

Tokenisation is essentially a process that converts traditional assets into a digital token that can be stored, transferred and traded on a blockchain or distributed ledger technology (DLT) network.

Tokens can take various forms such as currency tokens (i.e., cryptocurrencies), security tokens (i.e., tokens which have characteristics, or substantially similar characteristics, to a traditional security like a share or a debenture), non-fungible tokens (NFTs) and utility tokens (i.e., tokens that grant the holder access to a particular product or service).

With respect to real estate, tokenisation can be used in a number of ways to either (1) tokenise the legal ownership of the property; or (2) tokenise the economic benefits of exposure to the property; or (3) a combination of these.

What are the benefits of tokenising UAE real estate?

There are a number of potential benefits for tokenising UAE real estate which include:

1. Reduced initial capital for each investor (through fractionalisation)
2. Broader investor base
3. Increased efficiency and shorter settlement times
4. Improved diversification of an investor’s portfolio
5. Automated compliance
6. Data transparency on the DLT network
7. Potential for secondary trading (which is currently restricted for real estate crowdfunding platforms in the UAE)

What should be considered in a real estate tokenisation project?

Tokenisation of UAE real estate outside of REITs and crowdfunding platforms is still a nascent area in the UAE. As a result, there are a number of key considerations when determining how to structure a real estate tokenisation project here.

The characteristics of the token are particularly important as, in instances where the token is determined to be a security token (which is highly likely for the economic exposure they are intended to provide investors), the jurisdiction of the target investors and the issuer are relevant in order to determine the prevailing regulatory framework (i.e., onshore UAE, the Dubai International Financial Centre or the Abu Dhabi Global Market).

Consideration will also need to be given as to:

• whether the issuer also wants to list the tokens for trade on an exchange or alternative trading facility and the resulting steps required to either establish their own platform for this or to list on an existing platform;
• the method to implement post-issuance mechanisms (i.e., voting rights, distribution of payments to investors or other corporate actions) which are often embedded into the tokens using smart contracts; and
• whether there are other service providers required to ensure the tokenisation project is managed post-issuance (i.e., payment service providers for distribution of payments to investors, physical property management).
  It is also important to consider the prevailing Emirate level laws for ownership and the transfer of ownership of the target property / properties or sometimes even a change of control in the entity holding the assets. These laws may add increased complexity, administrative costs and timing to register changes of ownership or control in the property.

How can we assist you in tokenising UAE real estate?

We can provide as much or as little support to evaluate and execute real estate tokenisation projects in the UAE. This could include an initial structuring / feasibility advice that considers your business model and the relevant UAE regulatory jurisdiction, assistance to obtain authorisations and drafting client facing documentation and internal policies.

If you are looking to tokenise real estate in the UAE, please reach out to our local experts Gregory Man and Jessica White.