UAE: Is taking a part ownership in real estate truly worth your money?
Owning fractions of property through real estate crowdfunding platforms and REITs
Dubai: Many people strive to invest in real estate in the UAE to make monetary gains. The UAE’s appeal as a property investment that can earn you higher returns compared to other major global property markets, makes it a lucrative sector worthy of putting your money in.
Although property prices in the present market offer multiple profitable entry points, many investors prefer to diversify their money into multiple assets. Investing the total value of the unit is not financially feasible for several others due to their various financial commitments or goals.
Hence, part ownership or crowding funding concept allows such buyers to fulfil their property investment dream. Part ownership or co-ownership concepts offer investors the ability to own less than a 100 per cent share of individual property instead of the whole unit.
Real estate in the UAE offers multiple platforms for investors to co-invest in income-generating properties alongside other investors. However, let’s first understand the different concepts of part ownership for property investment.
Fractional ownership
In fractional ownership, the property is owned by multiple parties, typically four to six individuals.
Fractional ownership is established by directly having the property owner’s name on the title deed, explained Nick Grassick, managing partner at Dubai-based property brokerage ph Real Estate.
The percentage of property the individual owns is stated alongside each investor’s name. Another way is by establishing a special purpose vehicle (SPV), which is essentially a company formed to be named the property owner.
Crowdfunding
Crowdfunding is a more attractive way to invest in property, allowing up to 100 investors.
Grassick said that many crowdfunding platforms are app-based, offering a more flexible way to own real estate. “Here, the buyers hold shares in the ownership of the property, therefore, benefitting from a share of the revenue created.”
When investing via crowdfunding solutions, not all platforms offer equity investment, which apportions a percentage of ownership to the investor, enabling the investor to benefit from the capital appreciation of the property, he added.
“The number of investors in crowdfunding structure can vary hugely due to the dynamic ability to add investors via an online platform, of course, the greater the number of investors, the smaller the return.”
These structures typically allow up to 100 investors to benefit. When there are over 100 investors, the system becomes a real estate investment trust or commonly termed REIT (a company that owns, and in most cases operates, income-producing real estate), which is subject to much more rigorous controls and regulations, Grassick explained.
Some real estate crowd funding platforms in the UAE: SmartCrowd, Stake
There are different crowdfunding platforms available in the UAE for property investments, like SmartCrowd, Stake, among others.
These part-ownership platforms allow local and international investors to earn rental income from Dubai properties with the flexibility to sell the shares in their properties for potential profits. The schemes are regulated by the Dubai Financial Services Authority (DFSA).
SmartCrowd provides investment properties pre-analysed by a team of real estate analysts before being offered to investors. Certified professionals’ independent valuation reports are provided to investors on this platform to give investors’ added comfort.
Stake, another Dubai-based digital real estate investment platform, allows investors to browse and select one or more properties of their liking after reviewing all the information needed to make an investment. Manar Mahmassani is the co-founder of Stake.
Using these platforms, investors are provided with all insights such as gross yield, net yield (after costs), and potential return on investment so they can make their property investment decisions without the hassles of collecting, analysing, and assessing information from various sources.
A potential investor will also find out information on whether or not the property is rented or not, etc., and get a 3D tour of the property. Some materials such as an Investment Memorandum, financial projections, and third party market and valuation reports are also available.
According to Raja Alameddine, chief executive officer at Dubai-based Lootah Real Estate Development, and Manar Mahmassani, co-founder of Stake, here is how much money you can make on average.
When the investor holds his investment for five years and the property price appreciates 2 per cent per year on average, expected total return on investment (ROI) ranges from 7-10 per cent per annum or 35-50 per cent, depending on the investment.
This is after subtracting all fees, including government fees, platform fees, maintenance costs, and legal structuring costs.
Key perks of real estate crowdfunding platforms, according to experts
For the investors, the main advantage here is that it affords investors the ability to diversify their investment capital across a selection of properties, not put all money in just one unit, Alameddine added.
“This helps optimise returns for investors and lowers concentration risk. Investors can select the exact properties they want to invest in; and via a special purpose vehicle, investors will have transparent ownership and oversight over the underlying assets in their portfolio.”
When compared to an average return of less than 0.1 per cent per annum on most savings accounts at banks in the UAE, it is a great way to put your money to work in a tangible, stable asset class that produces both passive income and capital growth over the long term,” opined Manar Mahmassani, co-founder of Stake, while listing out three main advantages of using crowdfunding real estate platforms.
Real estate crowdfunding platforms provide more flexibility:
The investment can happen in whatever amount you can afford or have the budget for (i.e. instead being dictated by the total property price).
Real estate crowdfunding platforms provide diversification:
With the same budget you have to invest in real estate, you can invest in more than one property which in turn enables you to build a diversified portfolio of assets instead of concentrating your capital into a single unit.
Real estate crowdfunding platforms help outsource investment management:
Typically, the whole unit is administered by a platform that looks after all processes relating to investment such as property acquisition, leasing, dividends, reporting, property management, valuations, and ultimately, exit.
“Benefits 1 and 2 help lower risks for the investor (e.g. vacancy risk), while benefit 3 helps make investing in property a lot easier and hassle-free as compared to owning property outright,” Mahmassani explained.
How about partly investing in real estate through REITs?
Overall, investing via crowdfunding allows investors to better manage their risk over more liquid real estate assets such as REITs (explained above). REITs are of two types - public and private REITs.
Investing in a listed REIT is like buying shares in a listed company, explained Matthew Shanahan, partner and head of the Middle East regulatory and investigations practice at UK-based Clyde & Co. You can purchase REITs via your investment broker or online using a trading app.
“REITs provide exposure to a portfolio of real estate assets and usually distribute a large percentage of their net income to the investors. The minimum investment would be one share, so the barriers to entry are low,” Shanahan added.
“Return on investment will depend on the expertise of the REIT manager and the sensitivity of the relevant REIT to the prevailing economic cycle.”
How does investing in REITs differ from having a fractional ownership?
With REITs, investors can gain exposure to real estate returns in specific industries such as hospitality, education, commercial property, and specific countries or regions, Shanahan further explained.
REIT investment is similar to investing in shares. “It contrasts with other ways to gain exposure to real estate such as fractional ownership that involves buying a fixed percentage of a particular property, such as a 10 per cent share in a residential apartment, along with other investors.”
The initial investment is usually higher (in the tens of thousands of dirhams) in fractional ownership. The buyers take the risk that the specific property will not generate a return if it remains vacant, Shanahan added.
“Sometimes, fractional owners of a property may be required to manage the property themselves or appoint an agent to do so on their behalf. The benefit of fractional ownership is that the buyer has real ownership right in a specific real estate asset and may (subject to terms) sell or transfer his or her right without the need to seek the consent of the other owners,” Shanahan explained.
Isn’t real estate crowdfunding another form of fractional ownership?
Real estate crowdfunding is another form of fractional ownership, offering lower minimum investment (sometimes as low as $100 or Dh367).
“Investors (i.e. the “crowd”) can buy exposure to a small fraction of a particular property that is listed on the crowdfunding platform. The investor would not be required to manage tenants or renovation works, as a managing agent would handle this,” noted Shanahan.
“This investment generates a yield from the rental income, but management fees can eat away at profits. A key benefit here is that investors can gain exposure to several specific properties and build a diversified portfolio of residential and commercial property investments.”