PropTech, a term made up of “property” and “technology”, is often associated with FinTech. In today’s world, real estate is bought every day, which inevitably involves financial transactions. A vast majority of real estate transactions require some form of technology, and as FinTech sees massive growth in society it has undoubtedly merged with PropTech to produce FinTech Real Estate. In this article, we will discuss some aspects of FinTech Real Estate by focusing on peer-to-peer lending, crowdfunding, blockchain in real estate, smart contracts and tokenization from a Mauritian legal perspective.
Peer to peer (p2p), lending can be described as a financial business activity that enables a person to lend funds through an online portal or electronic platform that brings lenders and borrowers together. Loans made through P2P lending are usually unsecured. In Mauritius, P2P lending platforms use a segregated account model as mandated by the Financial Services (Peer-to-Peer Lending) Rules 2020. This requires the P2P operator to ensure at all times that lender and borrower funds are kept separate from its own funds, which are held through appropriately designated bank accounts in Mauritius. For context: The P2P operator is an entity regulated by the Financial Services Commission (FSC) to operate a P2P lending platform. It should be noted that funds applied for from a P2P operator should be used to fund a project. The P2P operator is required to conduct due diligence on its lenders according to the AML/CFT laws applicable in Mauritius and also on its borrowers and assess their creditworthiness prior to admission on the P2P lending platform. Interestingly, P2P operators in Mauritius are required to give borrowers and lenders a cooling-off period of two business days during which they can terminate their written agreements without penalty.
An example of real estate P2P lending is the provision of credit for real estate projects without having to go through the traditional lending process, reducing intermediary intervention and additional documentation. Although there are licensed P2P operators offering consumer loans, flexi loans and business loans in Mauritius, there is currently a gap in the market for P2P operators offering real estate lending as certain hurdles must be overcome before this can become a reality.
Crowdfunding is the raising of funds from investors for a specific investment purpose via an online portal or electronic platform. Any person operating a crowdfunding platform in Mauritius must be licensed by the FSC. Similar to the due diligence requirements imposed on P2P operators, in addition to due diligence under AML/CFT legislation, crowdfunding operators must conduct due diligence on each issuer before allowing the issuer to raise funds through the crowdfunding platform. The issuer is the entity seeking funding through the crowdfunding platform. The same due diligence mechanism applies to the investor providing funds on the crowdfunding platform.
A hypothetical crowdfunding model in the real estate sector is that investors can co-own real estate with other investors via crowdfunding platforms. Investors can subscribe for shares in companies that in turn own the property. The company can then rent out the property to tenants, allowing investors to generate passive income from the monthly rent. There are working models of real estate crowdfunding, for example on certain US technology platforms, where members can use the platform to invest in properties promoted by real estate companies. So far, no such platform has been created for the Mauritian market. Perhaps a significant part of his absence is due to the control of the property market in Mauritius, particularly when foreign investors are involved. To purchase shares in companies holding immovable property or leasehold property, non-citizens require Prime Minister’s approval. Thus, if a foreign investor were to purchase shares in the company holding the property through the crowdfunding platform using the above model, they would be required to apply for a permit from the Prime Minister’s Office, a lengthy administrative process made easier by the speed and smoothness of the process Nature is being nullified by crowdfunding transactions.
Blockchain and real estate
Blockchain is a distributed digital ledger made up of “blocks” that store transaction data and where the “blocks” are linked together to form a “chain.” Blockchain is immutable, which means the data stored in it cannot be changed. Therefore, this technology is considered safe and reliable and has found its use in numerous applications over time.
Real estate transactions consist of multiple steps involving intermediaries, and whether blockchain can find an increasing presence in these transactions is currently a much-discussed topic. Each real estate agent has a specific role that is required by law in several jurisdictions. One such example in Mauritius is the requirement for property purchases to be carried out by a notary. In addition, once a deed has been executed, it must be registered with the Land Registry of the General Registrar’s Department. So, can blockchain be integrated into these transactions? Currently this is not feasible in Mauritius as more than just changing the existing legislation would be required. Sure, the possibilities exist, as some of the most notable features of blockchain are its security, immutability, and efficiency, but there would need to be a significant nationwide or even global effort that would need to be implemented. Perhaps the most important consideration when going through a real estate purchase is establishing the identities of the parties involved in order to secure the property. There have been significant concerns about identification in blockchain technology that have led to robust AML/CFT measures. If real estate transactions were to become blockchain-based, identification concerns would need to be addressed first.
Another application of the blockchain is the integration of smart contracts when purchasing real estate. Lawyers are currently involved who draft, review and advise their clients on specific contracts such as the pre-reservation contract, any brokerage contracts or rental contracts. Smart contracts are based on the fulfillment of predetermined conditions and are time and labor efficient. However, the shortcomings of these smart contracts are that they cannot replace the need for legal experts, including when negotiating between the parties, advising on any legal ramifications, or verifying the fulfillment of conditions precedent.
On the other hand, one of the useful applications of the blockchain might be the registration of deeds in the land registry. Blockchain, being a secure database itself, would be able to keep records of deeds. This creates transparency about ownership of real estate transactions recorded by the blockchain.
The tokenization of real estate assets is another advantage of blockchain in real estate. Real estate rights are fractionated and represented by digital tokens, such that the tokens are each linked to an underlying fractional ownership. With the transfer of the token, the associated right is also transferred. The benefits of tokenization include an increase in the pool of investors, transparent records and the inclusion of smart contracts, reducing the need for intermediaries. This is not currently a practice in a country like Mauritius, mainly for the reasons described earlier in this article regarding property market control.
As the world becomes more and more FinTech oriented, the real estate market is now a major player in the FinTech space. Blockchain, P2P lending and crowdfunding have certainly revolutionized real estate transactions and have already been integrated into the real estate market in certain jurisdictions. Adopting these advances would require regulation and changes to existing laws, but with virtual assets making their way into multiple national laws, there are definitely optimistic possibilities.
- Financial Services Act 2007
- Financial Services (Crowdfunding) Rules 2021
- Non-Citizens (Property Restrictions) Act 1975
- Financial Services (Peer to Peer Lending) Rules 2020
- “Legal Challenges and Opportunities of Blockchain Technology in the Real Estate Sector”, Rosa M. Garcia Teruel, Department of Private, Procedural and Tax Law, UNESCO Housing Chair, Universitat Rovira i Virgili, Tarragona, Spain