Crowdfunding UAE Real Estate: A Game Changer or a Gamble?

UAE property investment is certainly a hot topic!

Recently, a British friend of mine, nearing retirement, asked me a question about the possibility of investing in UAE properties through crowdsourcing. This question caught me off guard, as I hadn't heard much about crowdsourced investment options in Abu Dhabi, though they're gaining traction in Dubai with companies like Stake and SmartCrowd leading the way.

Prompted by her curiosity, I delved into the subject. Here’s what I suggested to her, and if you are also considering to buy properties in the UAE, you need to give it a read.

·?????? To know our verdict - point 4

·?????? Pros & Cons with crowdfunding (risks you need to know) - point 3

·?????? How crowdfunding work - point 1& 2

1.?????? What is crowdfunding in real estate?

Typically, buying a property equates to direct ownership, right? When purchasing with others, you can become joint owners, each listed on the title deed. However, in the UAE, joint ownership is capped at four parties. So, what happens if you wish to share ownership with more than four individuals?

The answer lies in establishing a company that owns the property. In this arrangement, investors seeking to own a portion of the property would instead own a corresponding share of the company. For example, if ten individuals aim to invest in a villa, rather than being directly listed on the villa's title deed—a practice not allowed—they can create a company to own the villa. Consequently, they would possess shares in this company. This approach mirrors the operational model of crowdfunding companies. These entities establish a Special Purpose Vehicle (SPV) for each property, thereby making investors the shareholders of the SPV, because compared to the normal type of companies, an SPV is a distinct legal entity designed exclusively for acquiring and financing a specific asset, such as a property in this context. Importantly, the SPV remains unaffected even if the parent companies face bankruptcy. Thus, investors, as shareholders of the SPV, become the official owners of the property.

2.?????? How does crowdfunding work in the UAE?

Crowdfunding companies manage the SPVs, each owning a property. These companies source attractive investment opportunities, establishing an SPV and registering it with the Dubai International Financial Centre (DIFC) once enough funding is secured. If they fail to attract sufficient investment, the money is returned to investors.

An SPV is a distinct legal entity designed exclusively for acquiring and financing a specific asset, such as a property in this context.

3.?????? The pros and cons of crowdfunding investment

The Pros:

·?????? Low Capital Requirement: The major appeal is that the capital requirement for you to start building up your property investment is as little as only Dh500.

·?????? Saves Time: It saves a significant amount of time for investors—they take care of property sourcing, property purchase paperwork, leasing, management headaches, and selling the property.

·?????? Risk Diversification: A great way to diversify your risk—property investment is expensive, but with crowdfunding, you can easily diversify your risk into different properties with a small amount of investment.

·?????? Potentially High Returns: I use “potential” because it’s not clear on the average ROI, but on crowdfunding sites, they usually highlight returns starting from 35% ROI over the entire investment period to as high as 68% or more!

The Cons:

·?????? Liquidity Issues: SPV is not publicly listed, therefore you can only sell it through the crowdfunding company, which means you have a much smaller pool of investors to sell to, and very little control to crowdfunding companies’ mechanism in promoting the sales of your shares.

·?????? Legal Protection: Although there’s a legal framework protecting the shareholders of an SPV, but given it’s a relatively new things in the UAE, it’s not entirely clear on how each shareholder can protect his or her rights if the crowdfunding companies go under or shareholders have a dispute with the crowdfunding companies.

·?????? Lack of Transparency in Money Management: We saw how crypto tycoon be charged frauds for misleading investors and illegally using investors’ monies. Not saying crowdfunding companies will do the same, but there is certainly very little each investor can do to protect their money once it’s with crowdfunding companies.?

·?????? Higher Fees: It’s more expensive to purchase properties through crowdfunding companies. Compared to normal sales agents’ 2% commission, crowdfunding companies usually charge a 1.5% purchasing fee, an annual administration (management) fee of 0.5%, and an exit fee of typically 2.5%. Some of them also charge for KYC, AML, or capital appreciation fees etc.

4.?????? Our Verdict: Overall, is it worth consideration?

Yes, if you can manage your risk carefully and only use an amount that won’t cause you too much pain even if you lose it all!

Crowdfunding poses higher risks in terms of liquidation and legal protection; however, it can be a great tool for diversifying risk by spreading it across your property investment portfolio instead of locking a huge chunk into just one property. It all depends on how you use it.

Saying that, if you do consider the crowdfunding option, make sure you also research Real Estate Investment Trusts (REITs). REITs has been around for longer time, so it offer clearer legal protections. Plus, many REITs are also publicly traded, which makes it much easier to liquidate. Although prices of your share can fluctuate more with market sentiment, but you might appreciate the ease of liquidation and protection more. See which one is your cup of tea.

Fundamentally, I think crowdfunding is a great way to dip your toes into real estate investment in the UAE, especially in Dubai without costing your bank. However, if I were to do it, or advise anyone to do so, it wouldn’t be my major investment source, but rather the icing on the cake. And always, do it with caution and plan for the worst case scenario.

That’s it for today’s article. If you ever need an expert's opinion on Abu Dhabi real estate, property management, and maintenance, you know where to reach us!

Written by: Meara He

Director of Transparent Property Management

[email protected]

+971 56 442 0883