Owning real estate is not just about money. In most cases, it holds strong emotional significance for families. Whereas, investing in commercial real estate is typically seen as a smart financial move. How can you buy a pricey commercial property if you can’t afford it? Fractional ownership allows you to invest and own a portion of real estate, even if you cannot buy the entire thing.
Fractional ownership of real estate is a co-ownership framework where an investor can invest in smaller fractions of the property with relatively smaller amounts. This kind of investment allows investors to own premium properties with fairly small amounts of investments and benefit from both capital appreciation and rental income. The idea has become popular over the last few years with owning a fractional part of property turning a profitable alternate investment avenue amidst diminishing affordability of big-ticket size and high-end properties.
“Fractional ownership involves owning a share in a holiday home along with other buyers. Platforms that facilitate fractional ownership allow multiple individuals to collectively invest in a property, sharing ownership and expenses. Investors purchase shares or units of the property through the platform, giving them a proportional share of ownership rights and potential returns. These platforms often handle property management tasks, including maintenance, and resale coordination,” Sudeep Chandran, Founder and CEO of YOURS, a platform for fractional ownership of luxury second homes said.
While fractional ownership has long been popular in developed countries, it is gaining traction among investors and end-users in India. However, the availability of such platforms in India is still limited. Most opportunities currently lie in the commercial segment or involve co-owning properties for investment purposes.
According to Prashant Thakur, regional director & head – research, ANAROCK group, the concept of fractional ownership is gradually picking up steam in India with some tech platforms offering such a model. He said that it is gaining popularity among a few start-ups that are using technology to popularize this concept, which has been successfully implemented in European countries and even the US. In the West, commercial properties high-worth destinations, or vacation homes are most popular.
“Through fractional ownership, multiple investors can have a combined ownership of any single asset, thus making it easier for smaller investors to grab a share of prime properties. Thereafter, all investors can reap consummate benefits from it in terms of rental yield and capital appreciation. In short, one can own a part of high rent-yielding properties as against owning an entire property, or none at all. Mumbai, NCR, and Bengaluru are among the top markets where this model is getting more and more prevalent in recent years,” Thakur said.
At present, fractional ownership of real estate is being offered either through real estate investment trusts (REITs) listed on the stock exchanges and directly by developers through direct selling or web-based Fractional Ownership Platforms (FOPs). “While some of these are regulated, some are in the process of getting regulated. The bulk of fractional ownership in Commercial Real Estate (CRE) is being done directly by developers through direct selling (Strata Sale) and FOPs. The strata sold office stock in CRE accounts for the bulk of fractional ownership stock - at present about 200 mn sq ft accounting for about 28 per cent of the total Grade A office stock in India, which comes under the purview of the Strate Sale model,” Vimal Nadar, senior director & head, research at Colliers India, a real estate services and investment management company said.
“At present, the largely unregulated web-based FOPs account for a small share of the universe of fractional ownership. With SEBI’s recent notification designed to promote FOP registration as SM-Reit, investments through FOPs are likely to see an uptick. This will effectively have the potential to regularize underlying real estate assets (across all asset classes) to the tune of over Rs 4000 crore, in the near to mid-term,” Nadar added.
With the increasing popularity of fractional ownership, retail investors must run a few checks before investing in such models. As listed entities, Reits and SM-Reits will always ensure the protection of investor rights. However, unlisted platforms might lack a standard framework, independent valuation, and thorough due diligence. Hence, investing in REITs and SM Reits will bring added assurance of steady income generation.
“Investors should also assess the valuation, potential rental earnings, yield, and capital appreciation of underlying assets. They must also pre-assess returns on eventual exit and liquidation as much as possible. Moreover, as per the recent guidelines by Sebi, SM Reits are required to ensure that 95 per cent of their assets must be operational and distribute at least 95 per cent of net distributable cash flows. Reits too are mandated to distribute the majority of their net operating income to shareholders in the form of dividends, thereby ensuring stable income. If preferring to invest through FOPs, investors should check whether the complete set of activities undertaken by FOPs falls under the regulatory ambit of the Real Estate Regulatory Authority (RERA). In the case of commercial real estate, investors can also assess the tenant mix and check for lease tenure and expiries, for the property they wish to invest in,” Nadar said.
When considering fractional ownership of real estate, it's crucial to understand the concept, benefits, limitations, and other terms and conditions. Clarify your investment purpose—whether it's purely for investment or end use—and choose platforms and properties accordingly.
“Before agreeing, review it thoroughly to understand your rights, responsibilities, and any potential limitations or restrictions associated with the fractional ownership arrangement. Like traditional property investment, due diligence is essential as conducted by YOURS before placing the property on the platform. Research the property, its location, market trends, and potential risks. Consider factors such as property valuation, maintenance costs, and resale prospects,” Chandran said.
“When co-owning a property through a platform, the credibility, reputation, and track record of the fractional ownership platform are important. Look for platforms that adhere to regulatory guidelines, provide transparent information, and offer robust investor protection mechanisms,” Chandran added.
Just like in the case of other real estate assets, one has to be cautious when selecting a property or even a platform. “It is always advisable to seek the help of certified and organized real estate advisors since this whole segment is still in its infancy in India. Also, one needs to understand the division of the upkeep and maintenance expenses of bills, repairs, etc. Also, default by one of the investors will impact other investors,” Thakur said.
