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Dubai’s fractional ownership deed: What it is and how it affects investors

Article-Dubai’s fractional ownership deed: What it is and how it affects investors

The Dubai Land Department has introduced a fractional title deed scheme to boost the Emirate’s hospitality industry and offer more affordable property deals to small investors.

The new initiative, recently announced by the DLD's Registration and Service Sector, is aimed at attracting investment into hotel or serviced apartment projects in Dubai, one of the best cities for tourism and lifestyle. Under the initiative, an investor will be able to buy a quarter or a half of a hotel or serviced apartment, rather than in full.

“A fractional title deed pertains to an individual unit that is divided into two or four fractional shares, each with its own title deed. As is the case with other properties, these deeds can be transferred, sold, or mortgaged,” a DLD representative told The National.

The concept is expected to encourage crowdfunding in the Dubai property market and help reduce the 4 percent transfer fee paid for a sales transaction. Under a fractional title deed, the buyer is expected to pay a transfer fee only on the amount they have invested, and not on the entire value of the unit. "Abreast of the growing number of Dubai investors, especially smaller investors, the fractional deed offers them the opportunity to become co-owners of properties by only investing a portion of the value. This reduces the financial cost on investors entering the real estate market by granting them the flexibility to invest within their budgets," a DLD spokesperson added.

“This initiative is still in its pilot phase for one project, and we look forward to more projects supporting its full implementation. DLD will announce the name of the project upon successful completion,” the DLD representative added.

There is no set limit for minimum investment under the fractional title deed model. “The investment required under the deed is dependent on the cost of the unit in question which would have been decided by the developer based on market conditions,” the representative said.

As is the case with the hospitality sector globally, the hotel market in the UAE slowed down in the second quarter of 2020 due to the Covid-19 pandemic, according to real estate consultancy JLL. Occupancy levels decreased to 52 percent in Dubai in the year to May 2020 compared with the previous corresponding period in 2019. Similarly, average daily room rates (ADR) in Dubai decreased by 17 percent over the same period to $144 (Dh529), according to data from STR Global.

Industry stakeholders said the UAE implemented a robust strategy to manage the pandemic with the key priority being to safeguard the health and wellbeing of citizens, residents and visitors, who started arriving from July 7, a development that will boost the tourism sector's road to recovery and increase the occupancy of hotel apartments.

"Joint ownership of hotel apartments is an amazing concept for Dubai as it is one of the most visited cities in the world and that's the reason it is working very well here. This concept is becoming a trend as we have seen some of the big developers in Dubai offering joint ownership in their hotel apartments," said Babar Ali, CEO of Home Smith Estate Brokers.

However, questions remain regarding how service charges will be paid under fractional ownership. If the unit is facing service charge arrears, industry sources said that individual owners might need to get a no-objection certificate from the developer if they wish to sell their share.

“As we’re at the very beginning of fractional ownership coming into the Dubai property market, do your due diligence on any possible investment as you usually would and make sure you read through all the paperwork to understand exactly how it will work where you are looking to buy,” said Lewis Allsopp, chief executive of Allsopp & Allsopp, a Dubai real estate brokerage.

“Consider how much control or input you have, how and when you will receive your returns, what management fees you will need to pay, how easy it is to exit the investment if you want to at any point and what your overall rights are,” Mr Allsopp added.

Ms Prathyusha Gurrapu, head of research and advisory at Core warned that financing options could be limited for fractional ownership of units, with more options potentially becoming available in due course. “Depending on the property, holding term and restrictions on exit, there may be some liquidity issues that buyers should be cautious about,” she added.

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