The real estate investment in India has traditionally been viewed as a safe and conservative investment that yields long-term returns.
Real estate investments have proven to be durable and continue to be a preferred choice for many individuals, even in the present day, over alternative investment strategies. In India, the real estate sector is projected to reach a market size of a trillion dollars by 2030[1]. It is the second-largest employer in India after the agriculture sector[2].
Despite the Real estate sector’s steady growth over an extended period, it is believed that technology-based corrective measures can unlock its unprecedented growth potential and mitigate the challenges subsisting in the said sector which include undisclosed defects in land titles, outdated land records, fraudulent land transactions, and language barriers when dealing with properties in different regions.
Mitigating these risks and challenges is crucial for the real estate sector to achieve sustained growth. For this, the use of technology or technology-based corrective measures are the most effective way to achieve this goal.
Blockchain technology: A Technological Solution to Challenges in the Real Estate Sector
The introduction of blockchain in the real estate industry is a technological advancement that can revolutionize how land records are saved and which can help prevent corruption and title fraud. Blockchain can be seen as one of the technological advancement and improvement which is a tamper-proof digital ledger of transactions, and can help create a robust and corruption-free, error free way of saving land-records, fighting corruption, creating secure digital records can help reduce title frauds[3].
The Andhra Pradesh government has implemented a blockchain-based land record management system to bring transparency and efficiency to land-related transactions in the state. The software, known as “Bhoomi”[4] has been developed by the state government in collaboration with the blockchain firm, ChromaWay[5]. Bhoomi stores land records and ownership information on a decentralized ledger, making them tamper-proof and reducing the risk of fraud. It is designed for online verification of property titles, reducing the need for physical inspections and documentation. The system also provides instant access to land records, eliminating the need for manual record-keeping and reducing the likelihood of errors[6]. This can be seen as a breakthrough in the real estate sector with the help of blockchain technology.
Democratisation of real estate
In recent times, the exponentially high values of real estate assets have discouraged the majority strata of the Indian population to invest in the real estate sector. This illiquidity of the majority of the strata to invest in the real estate sector persists due to several factors, including the unaffordable nature of properties and the inability of investors to purchase fractional or partial assets. Additionally, investors may be unaware of investment opportunities in high-capital inflow areas. To address these issues, there is a need to introduce a new investing concept that would allow inherently illiquid assets to be fragmented into smaller digital assets that can be sold using the available technology. This would enable these assets to generate revenue while expanding their reach to the masses. By dematerializing real estate ownership into small tokens, it is possible to democratize ownership, allowing everyone to co-own premium residential and commercial properties managed by professionals.
Tokenisation of real estate
Tokenisation can be seen as a rare and an untapped opportunity in most of the world. With the use of technology and data, any owner of an illiquid property can create digital tokens which would represent a fragment of a specific property. The market for tokenised assets has already picked up pace since in 2021, the global market had crossed a value of USD 2.1 billion and is expected to surpass the USD 5.5 Billion mark by 2026[7].
These tokens would now represent a shareholding of the property which, with the assistance of a blockchain system, would streamline the investment in high value real estate assets by bringing together the like-minded investors willing to invest in fractional ownership of the said asset. This would in turn create a market where real estate assets in India can be fractionalised digitally in the form of tokens and sold in exchange for liquidity for the asset owner. Such tokenisation would be capable of curbing the issue of soaring prices and lower investor knowledge that is majorly prevalent in the Indian markets.
| Advantages of tokenisation of real estate assets
Improves Affordability: The issue of the real estate investments being sky high shall be tackled by fragmenting the concerned asset into smaller, liquid chunks of investments.
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| Seamless Accessibility: Due to its online nature, all transactions such as transfer and payment of dividend would become extremely efficient and unbounded. By merely understanding the local laws of the concerned jurisdiction, a transaction can be conducted in the secondary markets with ease.
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| Liquidity: The primary advantage of tokenization is that it would provide liquidity to an illiquid real estate asset due to involvement of multiple stakeholders, significant capital contribution and substantial private players in comparison to public companies. This tokenisation in turn shall increase the flow of funds in the economy.
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| Increased Accountability and Transparency: An imminent problem in the field of real estate has always been with respect to rightful title of the property. By investing through tokenised real estate assets, an investor has the complete history of the property and a clear current title to the property with all details pertaining to transfers stores in digital form. Such ownership is also eased by clear and transparent ownership terms put forward by smart contracts.
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| Streamlines Transactional Efficiency: As the transaction shall be conducted in an online mode, the transaction speed shall be higher than the current procedure for owning a property.
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Challenges with respect to tokenisation
Despite being a really efficient process and concept as a whole, there are certain challenges that its implementation poses:
i. Legal uncertainty – There is no specific legislation when it comes to India with respect to smart contracts and mature real estate developers or group shall not venture into real estate tokenisation without sufficient legal backing from the Government and the courts in this space.
ii. Treatment of Tax – Another major problem when it comes to tokenisation is that how to regulate this space when it comes to taxation and the foreign money that may get invested in real estate of India.
iii. Cyber threat – With the ever-evolving technology, comes the risks which can lead to crimes. Custody of such tokens is still a concern.
iv. Energy consumption – Blockchain and the bitcoin networks are infamous for their heavy electricity usage which can lead to hefty electricity consumption.
Conclusion
The technological revolution of the real estate sector shall require a sea of changes in the current legislative framework. Currently, property or the revenues therefrom being a state subject, the states have accordingly brought about their own set of rules governing the sector. However, given the aspired technological advancement in the sector being collective and centrally-based, an anonymity in relation to governance of the sector persists. The blockchain ledger containing the details of all the real estate asset shall be a central depository and state-wise regulation of the assets of different states forming a part of the central based blockchain ledger shall trigger incoherency.
The current legislative framework in relation to revenue and stamp law shall have to undergo a complete overhaul and substantial changes shall be required to accommodate the proposed technological advancement concerning the transfer of fractional real estate assets. Further, there should be clear laid out rules and regulations which govern the transfer, trade and management of these real estate based blockchain tokens.
Another factor to consider should be the up-gradation of systems at the sub-registrar office to run this blockchain in an efficient manner, this is due to hefty energy costs related to running of the blockchain technology.
A blockchain like technology can also substantially reduce due diligence costs for devolution of title in our country and how will registered documents be made public if all real estate-based transactions are conducted with the help of a blockchain technology. Needless to say, there is an immediate need for all the stakeholders to be made aware of all the good and bad of this technology in the real estate space. Training, starting awareness campaigns, writing more about this space would raise the general knowledge of the public in this space.
By taking all these steps, we are sure that we can create a robust and efficient blockchain technology in the real estate sector.
Authored by:
Akshit Kapoor, Associate Partner
Naman Dubey, Associate
Kashish Khattar, Associate
| Disclaimer
This article is a copy right of Atlas Law Partners. It is intended for informational purposes only. The article does not get into detailed discussions on the issues raised nor does it seek to identify all issues concerned. Further, there may have been changes to the law after publication of this article. No reader should act on the basis of any statement contained herein without seeking specific professional advice. The Firm and the authors expressly disclaim all and any liability to any person who reads this article in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance upon the contents of this article. This article does not and is not intended to constitute solicitation, invitation, advertisement or inducement of any sort whatsoever from the Firm or its members to solicit any work, whether directly or indirectly. For any help or assistance, please email us on admin@atlaslawpartners.com or visit us at www.atlaslawpartners.com.
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Footnotes:
[1]Economic Times, Real estate sector to touch $1 trillion by 2030: Kant, Economic Times (last accessed on May 01, 2023).
[2] India Brand Equity Foundation. “Real Estate Industry in India“. IBEF, 2021.
[3] Nir Kshetri, Blockchain as a tool to facilitate property rights protection in the Global South: lessons from India’s Andhra Pradesh state, 43 Third World Quarterly 371-392 (2022), DOI: 10.1080/01436597.2021.2013116.
[4] http://meebhoomi.ap.gov.in/
[5]Coindesk. “Indian State Partners with Blockchain Startup for Land Registry Pilot.” Coindesk, 10 October 2017,https://www.coindesk.com/markets/2017/10/10/indian-state-partners-with-blockchain-startup-for-land-registry-pilot/.
[6] India’s Andhra state is using blockchain to build its new capital Amaravati. https://qz.com/india/1325423/indias-andhra-state-is-using-blockchain-to-build-capital-amaravati Accessed on May 01, 2023.
[7] BCG Platinion, On-chain Asset Tokenization: Understanding the Potential Benefits and Risks(URL: https://web-assets.bcg.com/1e/a2/5b5f2b7e42dfad2cb3113a291222/on-chain-asset-tokenization.pdf) last accessed at May 01, 2023.