Fractional Ownership is a fairly new concept that is gaining traction in the UAE.

It was not too long ago when the mere idea of property ownership was limited to something that belongs to me, you, or we’ve arranged some rental or loan agreement. And the use of stock units, or shares, are usually associated with owning pieces of a business or a company. However, recent shifts in business models are changing how we are fundamentally thinking about the ownership of assets. 

Fractional ownership, clearly defined as a scenario where several unrelated parties can share in the risk and ownership of a property, is a concept that is resurfacing in new and interesting ways. In this report, CMtoday explores to understand this growing trend and how this may impact the management sector. 

What is Fractional Ownership?

Before we begin, it is key to understand the concept of Fractional Ownership. Lynnette Abad, Director of Research and Data, Property Finder, says that this is a fairly new concept in the UAE, which was introduced only a few years ago. “The concept is based on a crowdsourcing/crowdfunding model whereby a group of investors purchases a fraction of a single property. The structure typically is done where a Special Purpose Vehicle (SPV) is created for each property. The SPV is then divided into shares and allocated to the buyer in a proportionate amount to their investment. This means that you own the SPV, which in turn owns the investment property. As per the crowdsourcing platforms currently in Dubai, the average minimum investment for an investor is AED 5,000. The average yield on a property is no less than 6% on crowdfunding platforms and each property is hand-selected by the fund,” she adds.

This concept is now slowly gaining traction, primarily driven by foreign investments and tourism. In the UAE, where hospitality and tourism are major revenue generators, such a concept could attract more local and international investors and could benefit the market during the Pandemic recovery. 

In August last year, the Dubai Land Department (DLD) announced the launch of a ‘Fractional Title Deed’ initiative. The initiative is in its pilot phase and aims to attract both foreign and small-town investors and is extended to hotels or serviced apartment projects in Dubai. Now, Fractional Ownership is in fact becoming the preferred option for many investors specifically in Dubai—the global hub for trade and business—as it allows many of them to diversify their investment portfolio and attain high annual returns in hassle-free methods.

It became more popular following the emirate's 'Invest in Dubai’ initiative, which aims to provide easy and efficient investment options for residents. An example of how this concept became widely accepted in the emirate is the emergence of SmartCrowd, the first financially regulated real estate investments platform (REIP) in the region. Says Russell Owen, COO, Lootah Real Estate Development (LRED), “This platform made it easy for people to invest in real estate by providing an exceptional digital experience to users. In fact, LRED has partnered with them to launch our REIP, which is Real Share—which we believe will further revolutionise property investment in the region.

It is expected to embolden crowdfunding in Dubai’s property market and help reduce the barriers in real estate investment.”

Fractional vs Timeshare Ownership

Over the years, the terms Fractional Ownership and Timeshare have confused buyers, and both may look similar on the surface and involve shared ownership of a property. However, this is where the similarity ends. Explaining the difference between the two, HP Aengaar, CEO, Provis, says that in fractional ownership, the buyer enjoys a real stake in the property without paying the full value of the asset, maintenance expenses, and taxes. On the other hand, Timeshare buyers only purchase the right to use the property and pay for maintenance fees, either monthly, quarterly, or annually.  

“Traditionally, Timeshare Title Ownership remains with the property owner and gives multiple buyers the right to use the property for a designated length of time, typically for 1-2 weeks. While in Fractional Ownership, multiple buyers hold the title and depending on their portion of the share, generally the usage varies from 2 - 12 weeks,” adds Aengaar.

Fractional ownership, especially the kind offered through Lootah and Real Share, gives people ownership of the underlying asset and access to the income it produces. Therefore, fractional ownership is more akin to owning your investment property. Says Owen, “This concept allows multiple owners to each have a part of the title on the property. This lets the buyers gain returns from their portion without having to buy the entire property in full. In the traditional real-estate processes, when potential clients or buyers want to invest in a property, they go through real-estate brokers or intermediaries. This process entails a considerable amount of time and cost of administrative tasks on both sides of the transaction, as buyers and brokers go back and forth to fulfilling property ownership requirements.

Impact

With this new system of multiple owners, there is no direct impact on the property management sector. “Property management should not be affected by fractional ownership properties as they are managed the same as traditional rental properties,” explains Abad. However, it will lessen the burden amongst investors that will otherwise be left with a sole buyer. 

Besides, fractional ownership makes property investment becomes more accessible, especially to younger and digital savvy investors who want to own investment assets, but do not want to be bogged down by them. “These professionals have a tendency to favour experiences more than acquiring physical assets, so this type of investment will be more preferable for them,” says Owen.

However, Aengaar points out that Fractional and Timeshare ownership models present several challenges for Owners Associations. “An Owners Association (OA) management company normally interacts with multiple owners in a single building and not multiple owners in a single unit. In the Fractional and Timeshare ownership models, OAs would need to work with multiple owners of a single unit, which would mean that the laws and procedures pertaining to owner rights, obligations, and liabilities, specifically those relating to service charges payments and the ability to recover these amounts when a default occurs, will need to be revised to reflect the new ownership structure. This could affect the number of assigned OA resources required to complete the job. However, a professional Owners Association manager can ensure that the community remains harmonious for all owners and residents and make use of available technologies and innovations to efficiently utilize resources and optimise expenses,” he explains.

Advantages and Disadvantages 

Experts say that investing in Fractional Ownership is a great option for one’s investment portfolio. Hence, it comes with its perks. Abad states that Fractional ownership is a great opportunity to own a piece of property in Dubai with a minimum investment. “And you can do this without having to put down a large down payment. It's also a great way to invest extra cash and get decent returns,” she adds.

Agrees, Owen. He also says how this option is lucrative because instead of relying on one or two properties for passive income, property owners can diversify and co-own 50 or even 100 properties easily, thereby expanding their earnings.

It also lowers investment risks and increases the likelihood of profit by exposing one to various real estate markets. “For instance, if you only own one property and it is unrented, you are losing income. If that same capital is allocated across five properties, the likelihood that all five properties are unrented at the same time is highly improbable. This can then create confidence in investing, especially amongst newbie investors,” adds Owen.

Also, fractional ownerships offer lower acquisition costs because you only pay for a fraction of the cost of the entire property. The outfitting costs (i.e. renovating, furnishing, and enhancing the property), as well as the operating costs (including property tax, insurance, utilities, and maintenance), are also shared — dramatically lightening all the burdens associated with the complex process of property maintenance on buyers.

However, these advantages come with certain risks as well. Aengaar says that since you are sharing the ownership of the property with several other people could cause some challenges. “For example, although you will have your name on the property deed, you cannot make any changes or redecorate. Even though reselling or transferring the ownership is possible, it is difficult to sell a fraction of a property when compared to selling it as a whole. Since the property is owned by more than 1 person, there might be a clash of plans and timings to use the property. Also, it is difficult to get a mortgage on the fractional property as lenders can’t take security on it if there are multiple owners,” he adds.

At the end of the day, it is important to understand that those who invest in crowdfunded properties are doing so to get access to the underlying cash flow and potential capital upside the investments bring.

Owen says, “You should also keep in mind that all these risks associated with Fractional Ownership are mitigated when you can invest in affordable denominations or diversify your portfolio. Always keep in mind that investing is all about managing risk and reward dynamics.”