PropTech Spotlight – Fractional Investment
The idea of fractional ownership, the method in which several parties can share in and mitigate the risk of owning a high value asset is not a new idea. Indeed, the concept of stocks themselves counts as a form of fractional ownership, with each individual share representing a percentage stake in a company
In real estate, we can see something similar in the form of Real Estate Investment Trusts, or REITs. A REIT is a company that owns and in most cases, operates income generating real estate. A typical REIT will have investments in property across multiple sectors, such as residential, commercial, industrial etc. in order to have a diverse portfolio and mitigate risk. The net annual income generated by these properties is then paid out as dividends to the investors. By UAE law, REITs must pay out a minimum 80% of their net annual income as dividends, in countries like the USA, which pioneered this concept, that amount is 90%.
In the UAE, the first REIT, the Emirates REIT was founded in 2010 and is currently the largest Sharia compliant REIT in the world by both assets and market capitalization. With Emirates REIT’s average return of 11.32% year on year, REIT’s are a proven concept for investment with a great track record for investors.
However, this model is not without its drawbacks. In order to function, a REIT requires a lot of administration and a high amount of capital in order to invest. For smaller investors, REIT’s might not be a good fit.
PropTech and Fractional Ownership
With technology changing the way we do business and bringing previously closed off markets within reach of regular people, fractional ownership as a model of investment has an increased appeal. Fractional ownership offers the ability to invest in a wide spectrum of property types at a much more reasonable entry point. Where a REIT might purchase a whole building as an investment, fractional ownership allows for the same basic idea to be carried out on a smaller scale, such as hundreds of investors pooling small amounts to purchase a flat.
This approach has already gained traction around the world, and within the UAE itself. Firms such as Atlant in the US and Propertyshare in India are already busy bringing the ability for fractional ownership in a property to the masses. In the UAE, Dubai FinTech Hive alumnus, Smartcrowd is already live, offering investors the ability to invest in premium properties across Dubai for as little as AED 5,000. In addition, Smartcrowd allows it’s investors to choose where and what they want to invest in, as opposed to a traditional REIT where investors have little to no say in the company’s investment decisions.
The rise of fractional ownership models of investment is a boon to the market. In particular, smaller investors no longer need to feel side-lined and can now take part in the property market, buying and selling fractions of their properties and bringing in more capital. As the saying goes, “A rising tide lifts all boats.”