A property investment scheme has opened doors for ordinary investors to buy a stake in luxury real estate. Known as the fractional ownership method, the scheme allows a much broader cross-section of investors to become part owners of high-stakes developments, usually resort properties.
Dubai-based Jacob John, 59, from Kerala, India, is among a growing number of small-time investors who have ventured into fractional ownership, having invested in a pricey property in his home country.
John owns one-sixth of a Signature Suite in Aiana Munnar — A Moonriver Resort in Munnar Kerala, in an investment model that also gives him up to two weeks per year of free stay in the resort property.
In Dubai, fractional ownership has been adopted by some developers. A few years ago, the Fairmont Heritage Place on the Palm Jumeirah offered part ownership of some units sold through a company registered in Jebel Ali Free Zone.
Investors were offered a one-thirteenth share of each unit and a minimum 21 days usage per year. But it restricted shareowners from selling their stake for three years. With Dubai being one of the biggest luxury home markets in the world, experts believe fractional ownership can add tremendously value to the prime real estate market, provided proper regulations are in place.
“Dubai receives a large number of visitors from Saudi Arabia, the UK, Europe, India, etc, who come here for four to eight weeks,” says Sanjay Chimnani, managing director of Raine and Horne Dubai. “They look for a house as they are based out of Dubai, but will not stay more than eight weeks in a year in the city. This is why part ownership in a high-value property like a Signature Villa on the Palm makes a good option. I believe there will be a market if the proper framework is there for part ownership of luxury assets in Dubai.”
John says the smaller ticket size will make fractional ownership attractive to Dubai investors. “Being a Dubai resident for over 30 years and a keen investor in real estate, I am aware that there are a lot of overseas buyers and residents who would like to invest in hotels in Dubai and other locations in the UAE, seeing the dual benefit of holiday use and rental income — if only it is at a much smaller ticket size,” says John. “This is where I think the fractional ownership model could be implemented in Dubai.”
Owner incentives
As part owner of a Signature Suite in Aiana, John gets a title deed in his name and receives rental revenue that is shared among all the owners through a rental pool system. He does not have to pay annual maintenance charges, as these are deducted from the rental income.
“I visit India every year on holidays to spend quality time with my family during breaks,” says John, who manages his own company in Dubai. “I usually check into a luxury resort with them for a few days each year, which is fun but quite an expensive thing to do. When I heard that a luxury resort was being built on a fractional ownership model, I was excited.”
He adds: “Owning a luxury vacation home is a dream come true for most people, but once it is built, maintenance becomes a mounting and recurring cost. Most often, it will be occupied for just a few days in a year and may not generate any income, although its value as an asset would appreciate.”
When investing under the fractional ownership method, a buyer purchases only a fraction of the value of the property. “Therefore, you invest a much smaller amount and yet get an asset with a title deed in your name,” says John. “Since you [have] a title deed, you can sell, transfer or gift it to your children.”
As part owner, John says he enjoys a host of other privileges apart from free stays every year, including food, beverage and spa discounts, nomination facilities and vouchers.
Aiana’s idea
“[There is] a lot of interest from the GCC towards property in India,” says Amruda Nair, joint managing director and CEO of Aiana Hotels and Resorts. “This is not limited to Indians living in the UAE, but also other nationalities residing in the UAE. However, 40 per cent of investments do come from non-resident Indians [NRIs] in the Gulf who are keen to own property in India.
“Aiana is an Indian-inspired hotel and resort management brand based out of India, headquartered in Doha, Qatar, offering fractional ownership to buyers for its resort properties in South India. GCC investors and NRIs who want to buy a holiday home, without having the hassle of maintenance, security and service, find fractional ownership an attractive means of acquiring a luxury resort asset.”
Like Aiana Munnar, the Aiana Hassan resort project also offers the fractional ownership model to investors and buyers. “Ferns Estate, the developer, has already acquired three properties within a 250km radius of Bangalore,” says Nair. “The Holiday homes are built as an integral part of the resort, giving homeowners access to all the amenities and facilities of the resort. All housekeeping and maintenance is managed by the resort against an annual maintenance fee.
“The opportunity to exchange stays at other resorts also makes the proposition more attractive to foreign investors who want to own a holiday home in India, but exchange it for other vacation destinations.”
Dubai market
Chimnani says fractional ownership has been successfully implemented in other luxury asset classes such as jets and yachts, which are not typically used by owners throughout the year, making them more suited to shared ownership. The concept was later adopted in luxury resort properties and quickly gained popularity in the US and some European markets in the past decade.
“The system works in the luxury home segment, wherein a buyer wants a second or holiday home but is not going to use it beyond four or six weeks in a year,” says Chimnani. “Therefore, in the part ownership method, [the part owner] has the benefit of not paying the full cost of the home, maintenance and other associated costs. However, we need tighter laws and clear guidelines from the Real Estate Regulatory Agency to make it secure and appealing to the buyers, since property is generally shared between six to 12 people who do not know each other.”
Filippo Sona, Director and head of Hotels — Middle East and North Africa at Colliers International, says the fractional ownership concept is much more suited to resort properties in a prime location.
As this is a very specialist area of the shared ownership business models, Sona says the concept needs to be managed properly as it can create a degree of discomfort for the developer.
“The success of this business model derives from the quality of the asset, its location and the strength of the brand, combined with the organisation behind the development and management of the fractions,” says Sona. “The returns and the right of use of the portion are the key factors that attract investors. Dubai is certainly a key city to develop further this concept. Elsewhere, the idea may prove to be difficult to provide the desired results.”
Fractional ownership provides buyers with an equity stake in the property, which can be sold or transferred like wholly owned real estate, Sona explains. Fractional owners purchase the property with a deeded title, which effectively means owners can mortgage, buy, sell or pass the deeded property to others, subject to local laws, says Sona.
“[Fractional ownership] is an actual purchase of the property itself. It serves then as a real estate investment, not simply the purchase of ‘right to use’.” he explains. “Secondly, fractional ownership broadens and diversifies the market for the developer by creating new demand through better market price points, which usually results in increased profitability when accurately conceived and executed. Thus, the members typically own the real estate and developers have the opportunity to gain profit from the initial sales.
“This is to be considered as a medium to long-term investment; buyers who expect an early exit may be disappointed with the return. The property needs to stabilise its operation before providing a decent return on investment and asset appreciation. There, buy only in prime resort locations, with a global brand and a maximum of eight owners per unit.”
