Understanding Tokenised Property in the UAE: A Legal Insight

Investing in tokenised property is becoming an increasingly popular trend, especially in the UAE, where technological advancements and innovation in real estate are at the forefront. However, many potential investors are not fully grasping the legal implications involved. Vishal Tinani, a seasoned corporate lawyer and regulatory affairs specialist, sheds light on the essential considerations for anyone contemplating investments in tokenised real estate.

What is Tokenised Property?

Tokenised property refers to a system where ownership or shares of a property are represented by digital tokens that are recorded on a blockchain. Each token can entitle the holder to rights linked to the property, such as a portion of rent income, profit from sales, or even the value of the asset itself.

Here’s the critical point to note: for ownership to be legally recognized, the property needs to be registered with the Dubai Land Department (DLD). This registration is vital for ensuring that your investment has legal standing and protection under UAE law.

How Are Investors Protected?

For small investors, the UAE offers several layers of protection under its legal framework. These measures aim to safeguard investments, especially given the complexities of property transactions and tokenisation:

• Escrow Accounts: These are mandatory for off-plan projects to protect investors’ funds. They ensure that money is disbursed only when specific milestones in the project are met.
• Risk Warnings and Investor Profiling: Platforms must provide clear information about potential risks, allowing investors to make informed decisions.
• Restrictions on Marketing: Regulations are in place to limit the ways tokens can be marketed, preventing misleading claims about their risk or returns.

Tinani emphasizes the importance of transparency when it comes to tokenised offerings, stating, “Retail investors must be clearly informed about the risks, and platforms must not misrepresent tokenised offerings as low-risk or guaranteed returns.”

How Does Blockchain Help?

Blockchain technology enhances the security and transparency of property transactions. It ensures that all dealings are recorded in a tamper-proof way. Smart contracts—digital agreements that automatically execute transactions once predetermined conditions are met—play a key role in the tokenisation process. They can manage aspects like profit-sharing, resale limits, and ownership transfers seamlessly.

However, it’s important to note that while blockchain offers a robust technical framework, it does not replace traditional legal documentation. “Only DLD-registered title deeds or approved tokenised certificates confer enforceable ownership rights,” Tinani explains. “Smart contracts must support, not replace, formal title.”

What About Foreign Investors?

For those looking to invest in tokenised property from abroad, there are several critical legal aspects to consider:

1. UAE Rights May Not Apply Abroad: Many countries may not recognize the tokenised property rights established in Dubai. Therefore, if legal disputes arise, enforcement may be a challenge outside the UAE.

2. Final Say in UAE Courts: All property disputes must be settled within the UAE judicial system, emphasizing that foreign investors should be prepared for this legal framework, as it can differ significantly from their home countries.

3. Offshore Platforms = Extra Risk: If tokens are managed by platforms or held in wallets outside the UAE, legal protections may not be guaranteed under UAE laws, increasing the risk to investors.

Are There Legal Benefits?

Yes, several legal advantages exist for foreign investors interested in tokenised real estate:

• Full Ownership in Freehold Zones: Investors can enjoy complete ownership rights in designated freehold areas of Dubai, such as Downtown, Marina, and Business Bay, which adds to the appeal of property investment.

• Special Purpose Vehicles (SPVs): Utilizing SPVs and funds incorporated in the Dubai International Financial Centre (DIFC) or Abu Dhabi Global Market (ADGM) allows investors to navigate international common law while recognizing digital assets.

• Tax Advantages: Investors benefit from a 0% income tax rate and the ability to repatriate capital freely, making the investment landscape in Dubai particularly attractive.

“Dubai is currently at the global forefront of real estate tokenization,” remarks Tinani. “It offers a legally sound and tech-forward system for investors of all sizes.”

What Should You Do Before Investing in Tokenised Property?

If you’re contemplating a move into the tokenised property market in Dubai, there are three crucial steps to take:

1. Verify Licensing: Ensure that the platform facilitating the investment is licensed by the Virtual Assets Regulatory Authority (VARA) or the Dubai Land Department (DLD).

2. Confirm Legal Ownership: Check that the token corresponds to a legitimate DLD-registered title or legal ownership to avoid potential pitfalls down the line.

3. Understand Risks and Structure: Having a comprehensive understanding of the investment structure and the associated risks is vital for safeguarding your interests.

With Dubai’s legal framework rapidly adapting to the growing demand for digital property solutions, fractional ownership is becoming increasingly accessible. As with any investment, maintaining legal clarity should be viewed as an essential strategy for success.