- How does the concept of fractional title deed work?
- Wouldn't this lead to contentious disputes?
- What are some of the pitfalls investors must watch out for when signing a fractional title deed for a property?
- Is this concept practised in other global cities? Is it a success? Is it more prevalent in the serviced apartment sector or the mainstream residential sector?
How does a fractional title deed work?
With the aim of attracting investors to the Emirate, the Dubai Land Department (DLD) announced a 'fractional title deed' initiative.
A fractional title deed effectively divides what would normally be one unit (held via a single deed) into two or four parts. The investor may buy up to half or a quarter of the unit. Each part or fraction of the unit will be held via its own title deed that may be dealt with or disposed of, i.e., mortgaged or sold, as would be the case with any other deed.
Although similar in its appearance, the concept is unlike that of a "timeshare", which usually involves the multiple investors buying "time" in a property whereby the owner has the right to occupation for a specified period of time in any year, as opposed to the actual real estate.
The fractional ownership scheme is aimed to attract smaller investors and is most relevant to the hotel-apartment sector. This concept of ownership will allow such investors to become co-owners by investing a smaller amount into the property. However, this is not restricted to any particular target market, as a DLD spokesperson stated that a fractional title deed may be registered under anyone's name.
Pitfalls, risks, and disputes
As a DLD spokesperson stated, the initiative is currently in its pilot phase and thus, how the initiative plays out in Dubai is yet to be seen. As with any shared ownership such ownership will not be without potential problems especially relating to clashes arising between owners and also with property managers. The applicable rules relating to fractionally owned properties may thus be amended or added to from time to time in subsequent phases to address any issues that may arise.
In relation to the fractional ownership the owners will be required to enter into management agreement(s) with entities that operate hotels or services apartments, detailing each of the parties' rights and obligations. Such agreements will likely be tailored to provide for not only the regular operating of the fractional ownership, but also include the procedures to deal with disagreements and disputes. After all, the costs of a legal dispute and the stress inherent in property disputes can undermine and overshadow the very savings that fractional or shared ownership is intended to offer smaller investors.
Selling a fractional ownership will generally have additional nuances as compared to whole ownership. Additional considerations include the rights and procedures agreed in any agreement or the management agreements and even the constitutional documents of the scheme between the fractional owners and the relevant management companies. Buyers will need to be aware of the other fractional owners and of the management company when purchasing.
The involvement of hotel management negates many of the risks that would otherwise create issues, as it will be in the hotel management's best interests to manage the property well, attract investors and increase the value of the apartments. The rentals received will be pooled and from which the expenses and service fees will be paid and thereafter the owners will be entitled to the remaining income in accordance with their fractional ownership percentage.
Prevalence of fractional ownership
In other global cities, timeshares and other shared ownership concepts hit their peak before the era of home-sharing came to the forefront. Whilst home-sharing (think Airbnb) is targeted more directly towards "users" than investors, there was clearly demand and sufficient supply for the same.
The idea of "timeshares" was popularised a few decades ago, but its pitfalls, especially exit opportunities and lack of return on investment made it much more polarising. Fractional ownership opportunities gained popularity by lowering the initial investment barriers and offering a potential return that is pegged to the rise in the value of real estate and to receive income from the rentals, with the more popular the hotel brand, the bigger anticipated income.
The market for fractional ownership of real estate has seen growth especially during and in times following sluggish property markets. Fractional ownership is more prevalent in and is targeted towards hotel-apartments and serviced apartments. The effect of COVID-19 across the world and the path to recovery of global markets could likely usher growth in the fractional ownership market.
Originally published August, 2020.
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