Digitising real estate space and readying for fractional ownership: Trend ready to sweep Dubai this year
A Kingsley Insight Report
Dubai: The global real estate industry is estimated over $228tr in size and ever growing, making it, still, the most significant investable asset, without any doubt. However, it continues to be out of bounds for most because of high capital costs, complicated transaction processes and restricted deals. Dubai isn’t an exception but with technological innovations in digital assets, blockchain, and NFTs, it is now ready to show the world how to digitise the real estate asset class, making the investment experience more accessible than ever before, liquid and nearly cent per cent digital. All thanks to last month’s newly established Dubai Virtual Asset Regulatory Authority (VARA) that will now regulate, supervise, and control virtual asset services. The newly announced authority will set the rules and controls that will govern the conduct of virtual assets activities, including management, clearing, and settlement services, as well as classifying specifying types of virtual assets.
“With the liberation of regulatory policies in Dubai, expect more to follow suit in the MENA region and this only means more doors opening for the masses of the region, let alone Dubai,” says Pamul Sharma, VP – Business of Dubai-based Kinglsey Properties. “Look at how real estate crowdfunding has made it easier for the average person to participate in fractional ownership of residential properties for as little as Dh500,” he added referring to Deloitte’s latest 13-page Middle East Predictions 2022.
“Fractional ownership of real estate, powered by blockchain technology, can make properties liquid and tradable among a more diverse pool of investors. And it’s a no-brainer even for those who are not quite industry insiders here in Dubai,” explains Sharma, who recently took over the diversified real estate company operating primarily in Dubai since 1998.
Fractional ownership of real estate typically involves multiple coowners (usually four or more) who participate in the transaction either by each acquiring an undivided share in the property itself or through separate shares in a special purpose vehicle (SPV) that owns the title of the relevant property, explains the Deloitte report.
“The concept is yet to take off in the Middle East and that is solely because of the constraints surrounding regulations on foreign ownership in certain locations, as well as restrictions on registering multiple owners on the relevant title deed. But this is sure to gain traction and 2022 is when it will all happen,” adds Sharma explaining why another hurdle for a market-wide adoption of fractional ownership is the transfer fee that has a huge impact every time the shareholding is changed during the course of the investment period.
“Fractional title deed is a fairly common concept in the west, especially for holiday properties in the Europe, United States, and parts of the neighbouring Caribbean and it’s different to the ‘timeshare’ model that we all have heard so much about as it allows use of the property during certain times of the year only,” adds Sharma explaining how, in contrast and by contract, the fractional deed allows ownership of a portion of the property and the usage rights are typically part of the co-owners’ agreement.
Another key takeaway from the Deloitte report, he says, is tokenisation of real estate ownership. “Tokens are digital rights to assets and they can include ownership interests in real estate. Public records bearing timestamps, such as title deeds, property identification numbers and site surveys can be embedded into tokens in the future to ensure that the property title is secure and related records are readily and cheaply available,” he says, pointing to future trends ready to explode, pointing out how many countries like the United States and the UK, have already begun developing blockchain land and title records.
“Now after the new VARA law in place, tokens can even be programmed to automatically generate deeds upon title transfer, pay dividends or rental income, generate digital contracts and retain auditable records,” adds Sharma while talking about “endless future possibilities” in Dubai’s Real Estate market.
“And so all of this means that over time, the use of blockchain technology and digitisation of assets is surely going to lower transaction costs that typically restrict participation from a wider base of retail investors,” he sums up noting that transfer restrictions in future could be established through defining the maximum token transfer limits and Know Your Customer (KYC) or Anti-Money Laundering (AML) requirements, making processes simpler and better regulated.
The Dubai Land Department (DLD) launched the Fractional Title Deed initiative for hotel units in September 2019, paving the way for an investor to buy up to half or a quarter of the ready unit, rather than absorbing its costs in full, as part of a pilot phase for a one-off project. “The time has now come to take that model forward and make it the norm across the industry,” says Sharma.
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