PropTech, a term derived from “property” and “technology”, often finds itself associated with FinTech. In today’s world, properties are being purchased every single day which inevitably involves financial transactions. A predominant part of real estate transactions calls for some form of technology and with FinTech experiencing a 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 law perspective.

Peer-to-peer lending

Peer-to-peer (P2P) lending can be referred to as a financial business activity which enables a person to lend funds through an online portal or electronic platform which matches lenders and borrowers. Loans provided through P2P lending are usually unsecured. In Mauritius, P2P lending platforms use a segregated account model as prescribed in the Financial Services (Peer to Peer Lending) Rules 2020. This requires that the P2P operator shall, at all times, ensure that the funds of lenders and borrowers are maintained separately from its own funds, which shall be maintained through appropriately identified bank accounts in Mauritius. For context, the P2P operator is a body corporate issued with a P2P lending license by the Financial Services Commission (FSC) to operate a P2P lending platform. It is to be noted that the funds being requested from a P2P operator should be applied to finance a project. There is an obligation on the P2P operator to conduct due diligence on its lenders in accordance with AML/CFT laws prevailing 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 obligated to provide a cooling-off period of two business days to borrowers and lenders during which they may cancel their written agreements without any penalty.

An example of P2P lending in real estate is the provision of loans for real estate projects without having to go through the traditional lending process, reducing middlemen intervention and additional documentation. Although, there are licensed P2P operators in Mauritius providing consumer loans, flexi loans and business loans, there is currently a gap in the market for P2P operators providing real estate loans as there are certain hurdles which will need to be overcome before this can become a reality.

Crowdfunding

Crowdfunding is the solicitation of funds from investors for a specific investment purpose through an online portal or electronic platform. Any person operating a crowdfunding platform in Mauritius is required to be licensed by the FSC. Similar to the due diligence requirements imposed on P2P operators, crowdfunding operators shall conduct due diligence on each issuer, in addition to the due diligence conducted under the AML/CFT legislation, prior to 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 funding on the crowdfunding platform.

A hypothetical model of crowdfunding in the real estate sector is where investors can co-own property with other investors through crowdfunding platforms. The investors can subscribe to shares in companies which in turn own the property. The company can then lease the property to tenants thus enabling the investors to earn passive income from the monthly rental. There are working models of real estate crowdfunding, for example on certain US-based technology platforms, where members can use the platform to invest in properties advertised by real estate companies. To date, no such platform has been created for the Mauritian market. Perhaps a material part of its absence stems from control of the property market in Mauritius, especially where foreign investors are involved. In order to acquire shares in companies holding freehold or leasehold immoveable property, non-citizens require authorization from the Prime Minister’s Office. Therefore, using the aforementioned model, if a foreign investor were to purchase shares in the company holding the property through the crowdfunding platform, it would be obligated to request  authorization from the Prime Minister’s Office, a lengthy administrative process defeated by the quick and seamless nature of crowdfunding transactions.

Blockchain and real estate

Blockchain is a distributed digital ledger made up of “blocks” in which transactional data is stored and where the “blocks” link together to form a “chain”. Blockchain is immutable, meaning that the data which is stored therein is incapable of being changed. As such, this technology is considered as secure and reliable and has found its use in numerous applications over time.

Real estate transactions consist of several steps involving intermediaries, and it is currently a widely discussed topic as to whether blockchain can find an increasing presence amidst these transactions. Every intermediary in real estate has a specific function which in several jurisdictions is mandated by law. One such example in Mauritius, is the requirement for land purchase transactions to be carried out by a notary. Additionally, once a deed has been executed, it then needs to be registered at the Land Registry of the Registrar General’s department. Can blockchain therefore be integrated in these transactions? Currently, in Mauritius, this is not feasible as there would be a need for more than just an amendment of existing legislation. Sure, the opportunities do exist as some of the most remarkable features of blockchain are its security, immutability and efficiency, but there would be a considerable nationwide or even worldwide effort that would need to be implemented. Perhaps the most important consideration when carrying out a property purchase is ascertaining the identity of the parties involved to secure ownership. There have been significant concerns with regards to identification in blockchain technology which have given rise to robust AML/CFT measures. If real estate transactions were to become blockchain based, concerns over identification would first need to be resolved.

Another application of blockchain is the integration of smart contracts during property acquisition. At present, there is an involvement of legal professionals who draft, review and advise their clients regarding certain contracts such as the contract of preliminary reservation, any real estate agency agreement or lease agreements. Smart contracts rely on the fulfilment of predetermined conditions and are time and labor efficient. However, the shortcomings of these smart contracts are that they cannot replace a need for legal professionals in, inter alia, negotiations between the parties, advising them of any legal consequences or verifying the fulfilment of conditions precedent.

On the other hand, one of the beneficial uses of blockchain would potentially be the inscription of deeds at the Land Registry. Blockchain, being itself a secure database, would be able to maintain records of deeds. This will create transparency over ownership of property transactions being recorded by the blockchain.

Tokenization of real estate assets is another advantage of blockchain in real estate. Real estate rights are fractionalized and represented by digital tokens such that the tokens are respectively linked to an underlying fractionalized ownership. Transferring the token will also transmit the associated right. Benefits of tokenization include an increase in the investor pool, transparent records and the involvement of smart contracts reducing the need for intermediaries. This is currently not a practice in a country such as Mauritius, more so because of the reasons detailed earlier in this article relating to control of the property market.

Conclusion

With the world becoming more FinTech oriented, the real estate market is now a key player in FinTech. Blockchain, P2P lending and crowdfunding have certainly revolutionized property transactions and have already been integrated into the property market in certain jurisdictions. Embracing these advances would require regulation and amendments to existing laws, but since virtual assets found their way into several national legislation, there are definitely optimistic possibilities ahead.

References

• Financial Services Act 2007
• https://dha.govmu.org/Pages/Services/PRA.aspx
• Financial Services (Crowdfunding) Rules 2021
• Non-Citizens (Property Restriction) 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