Parties

• Represent a person or another legal entity

• A party can play a role of Signatory, Observer, Controller or Maintainer

Participant Nodes

• The party doesn’t talk directly to an underlying distribute ledger or the database. It goes through an intermediary and that intermediary is called the participant node

• The participant node exposes public API for the parties to access the ledger

• Multiple parties can be connected one participant node and one party can be hosted by more than one node. In the later case a single party hosted by multiple nodes will be recognized in Canton by unique party ID

• The participant node also exposes an admin API which helps manage connections, add/remove parties, upload archives and run diagnostics

• The participant node talks to the drivers through the Canton protocol and the protocol talks to the ledger

Domains

• Participant nodes, domain nodes, the services and the APIs constitute a Domain also called a synchronization domain

• One or more participant nodes can join a domain

• A participant node can join more than one domain

• This ability for participant nodes to join across domains makes it possible to create a virtual global ledger

• With sub-transaction privacy canton enables a high level of composability while allowing any domain to freely scale without dependency on any other domain because each domain is private and segregated

Sub-transaction Privacy

• Suppose a there are three parties

• Party A sends a transaction containing data for Party B and Party C

• Without sub transaction privacy the entire data will be seen by both B and C

• Canton’s sub-transaction privacy ensures a participant sees only the data it is meant to see

• This data transmission is fully encrypted

Canton Identities

• All parties are represented by a unique identifier

• The format consists of an alias::fingerprint

Recently securities and exchange board of India issued a consultation paper is to seek comments/views/ suggestions from the public on the proposals for regulating platforms offering fractional ownership of real estate assets. This reminded me of a 2-week stint coming up with requirements ourselves and designing an MVP for a real estate tokenization platform with ability to create fractional ownership.

Back then Siddhesh and I came out empty handed in our search for government regulations around fractional ownership. Hence we reduced the scope that consisted of

• Creating ERC-721 tokens

• Locking such a non-fungible token to create user defined fractions using ERC-1155 tokens

• We added a twist to bridge ERC-721 tokens from another EVM chain on to the Polygon edge chain for fractionalization and trade

More on our learnings with that MVP in a later blog. SEBI's consultation paper prompted this blog which will deal with fractional ownership of real estate and their advantages.

Globally and in India Fractional ownership platforms started showing up around 2015. The union government now proposes to bring about regulatory oversight, common uniform standard disclosure practices, ensuring liquidity, investor redressal mechanism, etc. to safeguard the interest of investors.

What's an REIT?

• REIT (Real Estate Investment Trust) are set up as a trust and registered with SEBI

• They consist of parties such as Trustee, Sponsors and Manager. REIT can invest in real estate assets, directly or through Hold companies and/or Special Purpose Vehicles

• REIT must hold controlling interest and at least 50% of the equity share capital or interest in Hold companies/Special Purpose Vehicles.

• They must invest at least 80% of its value of assets in completed and revenue generating properties and maximum 20% can be invested in under development properties

• The minimum value of the assets owned/proposed to be owned by REIT should be INR 500 crore and the minimum issue size for initial offer should be INR 250 crore

• It is required to distribute at least 90% of its net distributable cash flows, to its investors

• REITs can invest in sheds, garages, fences, fittings etc.

Though the potential in real estate investment in office spaces is immense there are only 3 REITs across India as of May 2023. The possible reason could be the requirement of minimum asset size of INR 500 crores and minimum offer size of INR 250 crores.

REITs let big and small investors own a share of property and earn dividend income. It lets small investors pool money to invest into large commercial real estate.

How does fractional ownership of real estate work?

Investment in real estate is capital intensive which makes it difficult for the non-institutional investors to invest. In addition to the investment barrier the non-institutional investors may face following difficulties

• Lack of knowledge about real estate and investment opportunities

• No adequate expertise to manage the real estate

• Problem finding tenants and negotiating terms with such tenants on an on-going basis

Fractional ownership is an investment strategy in which the cost of real estate is split among several investors, who invest in securities issued by a Special Purpose Vehicle (SPV) established by the Fractional Ownership Platform. The SPV purchases the real estate asset. The costs of upkeep and acquisition are divided among the shareholders in SPV. The benefits and returns of the assets are shared among the shareholders. The SPV earns through management and maintenance fees charged to the shareholders. Thus, FOPs allow investors to own a certain fractional share in the real estate asset through the securities issued by the SPVs. This enables a group of people can pool in money and jointly purchase real estate.

Fractional ownership reduces the financial burden on a single investor while allowing them to generate a steady stream of cash flows and long-term returns.  Also increases liquidity allowing for fractional sale

The process

• The property is first identified by the FOP

• The FOP seeks expression of interest by prospective investors with token amount ranging from INR 10,000 to INR 1 lakh

• On 100% booking the SVP issues securities and sends out a subscription memorandum to the investors

It is the SPV that which will purchase the real estate asset or already owns the real estate asset

• The investor transfers the amount to the escrow account

• The securities allotted  to the investors

The benefits of a regulatory framework

• The standard KYC requirements applied when registering clients

• The Net worth and deposit requirements will ensure that FOPs have a sound and stable financial health

• Code of conduct for Managers will ensure fairness in their dealings with clients

• FOPs will be subjected to regulatory inspection and oversight

Listing of units and trading through stock exchanges

The framework will mandate the FOPs to list units and trade through the stock exchanges. This will provide

• Risk Management framework and Surveillance mechanism

• Fair and transparent pricing

• Guaranteed settlement

• Liquidity and Exit opportunity to the investors

• Framework for redress of Investor grievances

FOP vs REIT

With both REITs and fractional ownership, an average citizen can purchase a share in Commercial Real Estate and gain monetary benefits from monthly rental or the interest generated on the security deposit amount. The what is the difference?

• REITs pool investors' money to invest in real estate on the behalf of the investors. But REITs do not allow the investors to choose the property to invest in

• FOPs on the other hand allow investors to choose the property to invest in. FOP has no investment barrier like REIT who must invest 80% in developed properties

• With REITs the returns are more or less consistent but they can fluctuate in case of fractional ownership