Tokenized Millionaires: Real Estate Tokenization in the UAE
Millionaire Country
A report by UBS states that the world will have 86 million millionaires and 372,000 UHNW individuals by 2027, who contribute to both luxury real estate value and sales. Dubai has emerged as a sought-after destination for high-profile investors, with more than 67,000 high-net-worth (HNW) individuals securing permanent residency in 2022 alone.
According to a report by H&P, the majority of millionaires and HNW individuals are from India, followed by the UK and Russia. The primary reasons for this influx are due to the UAE having zero income tax for individuals and low rates of tax for businesses. The business-friendly environment, in general, has been a key driver of its success as a wealth hub in general. Additionally, Dubai offers businesses relaxed regulation, a robust legal framework, a transparent and effective bureaucratic system, strong government support for entrepreneurship and special economic zones.
Additionally, the 10-year golden visa, which was introduced in 2019, is considered to be a game changer. The golden visa programme is intended to attract highly skilled foreign workers from various fields to the country. This long-term residence visa will allow people to live, study and work in the UAE.
Impact on Real Estate
The UAE has become the embodiment of wealth, luxury, prosperity, and economic development. Recent data from the DSC indicates robust growth in Dubai’s real estate and construction sectors, contributing to nearly 14.4 percent of the emirate’s total gross domestic product (GDP). In 2023, sales transactions reached AED411.74 billion, a remarkable 56 percent rise compared to 2022. Moreover, it recorded around 133,000 registered real estate sales transactions, marking an impressive 38 percent growth.
Meanwhile, DMT reported record-high real estate transactions in Abu Dhabi, reaching 13,298. This reflects a 75 percent increase compared to 2022. Moreover, residential real estate transactions accounted for 97 percent of the entire volume, totaling AED44 billion. This marks a notable 120 percent rise compared to the previous year.
Off-plan sales in Dubai set a record, surging to 68,783 transactions, a 59.4 percent increase from 2022. Moreover, 70 percent of real estate transactions concentrated in the top 10 areas, with the leading area contributing 14.4 percent. On the other hand, Abu Dhabi recorded 10,151 off-plan sales transactions, a 99 percent year-on-year surge in volume, and a 174 percent increase in value, reaching AED 35,570 billion.
UAE real estate market surges amid global uncertainties: Report
Tokenization of Real Estate in the UAE
Real estate assets are, by their very nature, illiquid. Sale and purchase transactions take time to complete and there are a number of set processes that need to be carried out in order to complete the transaction by various third parties and intermediaries with associated transaction costs. Asset-backed tokenization has the potential to reduce these liquidity obstacles.
As tokenization continues to gain traction, it is expected to revolutionise the real estate industry globally, offering a more accessible and secure form of investment for individuals and institutions alike. The UAE, known for its futuristic developments and booming real estate market, has embraced tokenization as a means to attract more investors and revolutionise property transactions. Through tokenization, investors can buy and trade fractions of high-value properties, making real estate investments more accessible and liquid.
There are a number of potential benefits to tokenizing UAE real estate, which include:
- Reduced initial capital for each investor (through fractionalization).
- Broader investor base.
- Increased efficiency and shorter settlement times.
- Improved diversification of an investor’s portfolio.
- Automated compliance.
- Data transparency on the blockchain and smart contracts.
- Potential for secondary trading (apart from real estate crowdfunding platforms in the UAE)
Tokenization provides a financing alternative with properties being assigned their own tokens, which constitute fractions of the whole or part of the asset’s ownership or debt. The different types of tokens, most notably,
- Utility tokens: These tokens provide users with future access to a product or service. When issued, they support companies in raising funds for project development.
- Securities tokens: Securities tokens are derived from external assets; these tokens resemble traditional securities. They also provide rights like ownership, dividends, and interest.
- Equity tokens: These tokens denote equity in an underlying asset, giving token holders a fractional ownership interest. This can boost the accessibility and liquidity of traditionally illiquid assets.
- Stablecoins: These are tied to assets like traditional fiat currencies, which helps mitigate the extreme volatility common in other cryptocurrencies.
- Non-Fungible Tokens (NFTs): Unique and irreplaceable, these tokens are used to establish verifiable digital scarcity.
What should be considered in a real estate tokenization project?
Tokenization of UAE real estate occurs through Real Estate Investment Trusts (REITs). The characteristics of the token are particularly important; whether the token is determined to be a security token, the jurisdiction of the target investors, and the issuer are relevant in order to determine the prevailing regulatory framework (i.e., Mainland UAE, DIFC, or ADGM).
Some considerations, most notably:
- 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 tokenization 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 UAE 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 complexity, administrative costs, and timing to register changes of ownership or control in the property.
Challenges of Tokenization
Tokenization has vast potential, but it also has several challenges. The Middle East has a comprehensive regulatory framework for cryptocurrencies, digital securities, and tokenization; educational initiatives are vital to increasing its awareness and acceptance.
Tokenization needs to adhere to Islamic finance principles to ensure they are permissible for a significant portion of the region’s population.
The increased use of digital assets and tokenization likewise opens the door for potential cyber threats. Thus, ensuring a secure environment for tokenized assets is critical to preventing fraud and loss of funds and stepping up cybersecurity.
Desert Pearl is Dubai’s first real estate asset tokenization initiative
Regulatory Framework for Tokenized Assets in the UAE
The SCA has issued several regulatory guidance documents for tokenized assets, including guidance on the classification of tokenized assets as securities, the issuance of security tokens, and the regulation of security token exchanges.
Under the current regulatory framework, security tokens are classified as securities, and the issuance and trading of security tokens are subject to the same regulations as other securities. This includes licencing requirements, anti-money laundering and counter-terrorism financing (AML/CTF) measures, and investor protection measures.
Know Your Customer (KYC) and Anti-Money Laundering Requirements
KYC and AML requirements have been put in place to prevent illegal activities, such as money laundering and terrorist financing, and to protect investors. Businesses issuing or trading in tokenized assets must comply with these requirements by verifying the identity of their customers and monitoring their transactions for suspicious activity.
Data Privacy and Protection
Data privacy and protection are becoming increasingly important in the digital age. Businesses issuing or trading in tokenized assets must comply with data protection laws, such as the General Data Protection Regulation (GDPR), to ensure the privacy and security of personal data.
This may include implementing appropriate technical and organisational measures to protect data, such as encryption and secure storage, and ensuring that data is only processed for specific and lawful purposes.
— — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — —
For information on the comprehensive list of UAE Regulatory authorities, visit: https://lnkd.in/dqiXMtVv
For information on the DIFC Digital Assets Law №2, visit: https://lnkd.in/dY7bSkaF
For information on the UAE digital assets strategy and events, visit: https://lnkd.in/dwG7XdBj
For information on digital inheritance management,visit:
https://justiceaccelerator.ai/digital-inheritance-management/
For information on identity-verified digital signatures and document witnessing, visit:
For information on Web3, blockchain, and RWA tokenization,visit:
