Tokenisation of Real Estate in Hong Kong: Legal Framework and Regulatory Considerations

Introduction

Real estate tokenisation — the process of representing ownership interests in real property as digital tokens on a blockchain — has attracted significant interest from developers, investors, and financial institutions in Hong Kong. By converting illiquid real estate assets into tradeable digital tokens, tokenisation has the potential to democratise access to property investment, increase liquidity in the real estate market, and streamline the processes of property ownership transfer and fractional investment.

Hong Kong's status as a leading real estate market and virtual asset hub makes it a natural testing ground for real estate tokenisation initiatives. This article examines the legal framework for real estate tokenisation in Hong Kong, how different token structures are regulated, and the key legal considerations for issuers and investors.

How Real Estate Tokenisation Works

Real estate tokenisation can be implemented in various ways, depending on the desired legal relationship between the token and the underlying property:

• Direct ownership tokens: Tokens representing a direct fractional legal or equitable ownership interest in the property itself. This structure faces significant practical challenges in Hong Kong, as the Land Registry and property law do not readily accommodate fragmented blockchain-based ownership records
• SPV-backed tokens: A special purpose vehicle ("SPV") holds legal title to the property, and tokens represent ownership interests (shares or partnership interests) in the SPV. Token holders gain economic exposure to the property through the SPV, without direct registration on the land title
• Debt-backed tokens: Tokens represent debt instruments (such as bonds or notes) secured by a mortgage or charge over the property, entitling token holders to interest payments and repayment of principal
• Revenue-sharing tokens: Tokens entitle holders to a share of the property's rental income or other revenue streams, without conferring ownership

Regulatory Framework for Real Estate Tokens

Securities Classification

The SFC's regulatory treatment of real estate tokens depends on their legal characteristics. Real estate tokens that represent interests in a collective investment scheme ("CIS") — broadly, arrangements where investors contribute assets that are managed as a whole, with investors sharing in profits from the scheme — are regulated as securities under the Securities and Futures Ordinance (Cap. 571) ("SFO").

SPV-backed property tokens, where investors contribute to an SPV that acquires and manages the property, are likely to constitute interests in a CIS where:

• The investors' contributions are managed as a whole or in a pool
• The investors do not have day-to-day control over the management of the property
• The investors share in the income or gains from the property

If a CIS characterisation applies, the token issuance and any ongoing market in the tokens would require SFC authorisation or applicable exemptions, and the managing entity would require SFC licensing for Type 9 (asset management) or other relevant regulated activities.

VASP Licensing and Secondary Market Trading

If real estate tokens are traded on a secondary market platform in Hong Kong, the platform operator may require a VASP (virtual asset service provider) licence from the SFC if the tokens qualify as virtual assets. Where tokens are securities (as discussed above), trading on a secondary platform would trigger the regulated activity of providing an automated trading service (Type 7) or operating a securities exchange.

The SFC has indicated that tokenised securities (securities represented as digital tokens on a blockchain) are subject to the same regulatory framework as traditional securities — being securities does not reduce regulatory requirements merely because the instrument is tokenised.

Land Registry and Title Considerations

A fundamental constraint on real estate tokenisation in Hong Kong is the Land Registry system. Legal ownership of land in Hong Kong is recorded in the Land Registry (or, for new territories land, through other systems). The Land Titles Ordinance (Cap. 585) governs the registration of indefeasible title to land. Blockchain token records are not recognised as evidence of title under current Hong Kong property law, and changes in legal ownership of property still require formal registration in the Land Registry.

For SPV-backed structures, the SPV (not the individual token holders) holds legal title to the property, and token transfers do not require Land Registry updates. However, this means that token holders rely on the SPV's corporate governance and the terms of the token instruments to protect their interests, and token holders do not hold a direct registered interest in the land.

Structuring Considerations for Real Estate Token Offerings

SPV Structure

The SPV-backed structure is the most legally workable approach for real estate tokenisation in Hong Kong. The key structural elements include:

• A Hong Kong or offshore SPV holds legal title to the property
• Investors acquire tokens representing shares in (or debt instruments issued by) the SPV
• A trustee or nominee may hold legal title to the SPV shares on behalf of token holders to facilitate administration
• Smart contracts on the blockchain manage token transfers and may automate distributions of rental income or sale proceeds
• A property manager or asset manager is engaged to manage the physical property on behalf of the SPV

Investor Protection Mechanisms

Given the novel nature of real estate tokenisation, robust investor protection mechanisms are essential:

• Clear constitutional documentation (articles of association, shareholder agreements, or trust instruments) governing the SPV and the rights of token holders
• Independent property valuation at issuance and periodically
• Transparent reporting on property performance, rental income, occupancy, and maintenance
• Mechanisms for token holder governance (voting rights on material decisions such as property disposal)
• Safekeeping of tokens by regulated custodians
• AML/KYC procedures for token purchasers

Tax Considerations

The tax treatment of real estate tokens in Hong Kong depends on the structure used. SPV-backed tokens representing shares in a company holding Hong Kong property may be subject to stamp duty on transfer at the applicable rate. Distributions from the SPV (rental income passed through to token holders) may be taxable as trading income in Hong Kong if received as part of a business.

International Developments and Benchmarks

Several major markets have advanced further in developing frameworks for real estate tokenisation. Singapore's MAS has facilitated tokenised real estate projects under its regulatory sandbox. In the US, tokenised real estate has been structured under Regulation A+ or Regulation D exemptions from registration. Europe's MiCA regulation provides a framework for some categories of asset-referenced tokens that could include property-backed instruments.

Hong Kong regulators have acknowledged the potential of real estate tokenisation and have included property as one of the categories of assets eligible for tokenisation in various policy discussions and sandbox programmes. Further regulatory guidance specific to real estate tokenisation is anticipated as the market develops.

How Alan Wong LLP Can Assist

Alan Wong LLP advises developers, property owners, financial institutions, and investors on all aspects of real estate tokenisation in Hong Kong. Our services include legal structuring of real estate token offerings, SPV formation and corporate governance, SFC regulatory analysis and licensing support, drafting of token documentation and investor agreements, and property law advisory on the title and registration aspects of tokenised property structures.

Our team combines expertise in both real estate law and digital asset regulation, making us well-placed to advise on the intersection of these two rapidly evolving areas. We help clients navigate the legal and regulatory complexities of real estate tokenisation to deliver commercially viable and legally sound structures.

Contact us to discuss your real estate tokenisation needs.