Leasehold and freehold property titles explained amid new foreign ownership rule

The National examines the difference between the two types of ownership and why investors often prefer freehold

Mehmet Ali Uysal, Affinity - stainless steel installation at Manarat Al Saadiyat. Saadiyat Island is one of the investment zones, according to Aldar which has developments on the island. Khushnum BhanShow more

Abu Dhabi on Wednesday enacted changes to its laws governing property ownership in the emirate, a landmark move that will allow foreign investors to buy freehold real estate in designated free zones in the UAE capital for the first time. They were previously only permitted to own properties on leaseholds of up to 99 years.

The National explores the difference between freehold and leasehold and how the legal changes improve Abu Dhabi's global ranking as a destination for property investment, and what it means for investors and developers.

What is a leasehold? 

An owner can take the title of a leasehold property for a fixed term but does not own the land on which the property is built. Ultimate ownership of the entire property goes back to the freeholder. The period of leasehold varies from market to market and in Abu Dhabi’s case a leasehold term is up to a maximum of 99 years.

What is a freehold? 

Under freehold ownership, an investor has a direct title of ownership of the property, and the land on which it is built. Undeveloped parcels of land are usually freehold assets, and some investors such as large corporations prefer to acquire freehold titles and build the property of their choice.

So how exactly are the two different? 

While leasehold means buying the right to live in or occupy the property from a freeholder for a fixed period of time, the freehold contract is applicable in perpetuity and when the owner passes away, an heir can inherit it. Essentially, the property stays in the same family, according to UAE property consultancy Bayut.com. Under a leasehold, making improvements on a property to suit an investor’s needs such as alterations or renovation, requires written approval from the landowner.

In freehold titles, the investor has complete control over the property unit and the land. Owners can make changes to the structure and renovate as they see fit, and sell or lease the property at their own discretion, Bayut.com explains.

What does Abu Dhabi's new law mean for foreign investors?

Some foreign investors deem leasehold as an inferior title and prefer to invest in properties that offer absolute ownership so that they have more control over their asset.

“It will enhance incoming investments…. it really gives confidence to foreign investors and clarifies the tiles that they would get,” says Edward Carnegy, Abu Dhabi director at consultancy Savills Middle East. “Institutions, especially, foreign ones, are wary of inferior titles and now within the investment zones they got the option of buying freehold [land].”

Farhad Azizi, chief executive of Dubai-based Azizi Developments echoes that sentiment. "It’s important for our customers,," he says. "They want freehold and they want clear rules like in Dubai, because when all the rules are in place it makes it easier for private developers to build and sell the properties. When we build, we build it for the customers not for ourselves."

Abu Dhabi’s special investment zones include sections of Yas Island, Saadiyat Island and Al Reem Island, among others.

What does it mean for developers?

Investors can be in two categories: individual property buyers and sub-developers who buy land in a master-planned development and build their own properties as part of the bigger scheme. Both Mr Carnegy and Walid El Hindi, chief executive of Abu Dhabi developer Imkan say the amended regulations open up new avenues of investment for developers as Abu Dhabi offers more options for investable assets.

“This is a really good cause for all developers in the region to celebrate, as it creates a really solid foundation for Abu Dhabi’s real estate market,” Mr El Hindi says.

“When you look at how the government is working to develop all parts of the economy in Abu Dhabi, not just real estate, you see how all that connecting of the dots will yield an important tipping point for the city over the next year-and-a-half or two years, which I believe could propel it into the top five global cities in the world over that time.”