Technology innovation in blockchain, tokenisation, NFTs, and the resultant decentralised finance (DeFi) services have the prospect of disrupting real estate and other private asset investing by creating efficient and deep public markets. Such innovation promises to solve several limitations in the current real estate investing models such as REITs, public and private open/closed-ended funds and even crowdfunding models.
Real estate is the most lucrative investable asset class, with a global market size of over $228 trillion. However, it remains inaccessible to most people.
Direct property indexes indicate an institutional real estate portfolio is relatively low risk compared to other asset classes, offering good diversification and attractive risk-adjusted returns on investment. Despite the strong case for significant real estate allocation, where it should be at least between 30-60%, the actual percentage was nearer to 10% for institutional investors in 2019. It is worth noting that:
- Less than 1% of all real estate assets are traded on a national exchange
- Only 7% of all commercial real estate is available to investors
- Over 80% of individuals seek to have some investment in real estate
Various studies and experts within the industry suggest this under-allocation is due to execution inefficiencies and property transaction speed. This leads to poor liquidity and high trading costs. The real estate asset unit structure is not uniform like other asset classes. Each unit typically has a significant investment size, making diversification challenging to achieve, thus even at scale, leading real estate investors to suffer from concentration risk.
A primary market for real estate asset fractions, or tokens, built on the public blockchain could drive greater demand, efficiency, and the creation of new innovative products. A secondary market for these tokens and fractions can be created using blockchain-based tradeable tokens. The digital tokens representing real estate can make the transaction process more efficient and cost-effective. It can also make it easy for cross-border transactions by incorporating existing digital currencies for payment. The really exciting prospect is the potential for various Defi services that can be built on top of the tradeable real estate tokens, potentially unlocking further value for investors from the underlying real estate assets.
SmartCrowd was conceived in 2018, revolutionising real estate investing by being the first financially regulated (DFSA) real estate crowdfunding platform in the Middle East. As a result of the platform's use of intermediary SPV (special purpose vehicle) structures and beneficial ownership, the barrier to entry has been reduced, with capital requirements for each investment starting from a minimum of AED 500. It has made real estate ownership universally available through a digital marketplace application.
We are at the precipice of another revolutionary period, driven by a new wave of regulations in digital assets. To this effect, Dubai has set up an independent body, known as VARA (Virtual Asset Regulatory Authority), while ADGM (Abu Dhabi Global Market) had launched the world's first virtual asset regulatory framework in 2018. Both of these efforts are driving immense activity in this space to reimagine the regulated digital asset business models.
Related: Programmes and organisations supporting Web3 companies in the UAE
There are challenges with asset-backed digital assets/tokens that need to be overcome, such as:
- Price volatility of crypto and digital assets
- Investor protection from scams, cyber hacks, and investing risks
- Market integrity of the real estate industry and constant appropriate supply
- Fraud-related AML and KYC risks
The technological, regulatory, legal and economic concerns related to real estate-backed digital assets can be overcome with the appropriate design of various components such as integration of automatic market makers for liquidity, the use of NFTs for title deeds and economic rights, stablecoin for low volatility payments and regulatory opt-in for investor protection on wallet custody.
According to surveys conducted by SmartCrowd, average investors who are relatively digital savvy are keen on real estate-backed digital assets as long as they have regulatory and legal protection from the authorities. The survey respondents see a lot of value in a public market built on blockchain, especially higher returns through a safe and secure staking mechanism.
In a recent Chainalysis NFT report, it has been noted that collectors have sent over $37 billion to NFT marketplaces as of May 1, 2022, putting them on pace to beat the total of $40 billion sent in 2021. The UAE is the Middle East’s third-largest crypto market, trailing Turkey and Lebanon, with a transaction volume of about $26 billion, according to data compiled by Chainalysis from July 2020 to June 2021.
Furthermore, according to TechInsight360’s Q2 2022 NFT Survey, the NFT industry in the UAE is expected to grow by 45.5% on an annual basis to reach $982.1 million in 2022.
The NFT industry is expected to grow steadily over the forecast period, recording a CAGR of 32.1% during 2022-2028. The NFT Spend Value in the country will increase from $982.1 million in 2022 to reach $4746.3 million by 2028. On the other hand, the real estate market in Dubai alone is worth approximately $40 billion. Despite the Covid-19 pandemic, the DLD (Dubai Land Department) recorded 37,762 total units sold from January through June this year, which is 60% higher than the same period in 2021.
Investors are excited by the various digital asset-enabled real estate products that can be created in future, such as collateralised borrowing, tokenising funds for sophisticated investors, security tokens for single assets and utility and hybrid tokens for fractionalised private residential transactions and debt securitisation. Collateralised borrowing can also be possible by integrating the broader financial ecosystem, like banks and financial institutions.
The UAE’s attractive real estate market, a dynamic financial services industry, and a forward-looking regulatory ecosystem can enable digital asset-enabled business models to flourish and catapult the MENA region to become a global hub for alternative investing.
About the author
Musfique Ahmed is an international technology professional and ex-equity partner for EY technology consulting with more than 18 years of experience. His leadership has influenced multinational organisations across London, Singapore, Berlin, Boston amongst others. His tireless efforts as an entrepreneur, technologist and digital business model innovation expert have been instrumental to the success of his partners, clients, and ventures. His current expertise and focus are on building modern digital businesses and platforms that are transitioning to Web 3.0, such as asset fractionalisation and next-generation investment platforms.