Fractional ownership in real estate: All the finer details about this emerging investment option

Similar to fractional ownership in stocks, fractional ownership in real estate is also gaining ground. For the unversed, fractional ownership is a model wherein the property is jointly owned by a group of individuals, and each individual is the co-owner of the property as all of them have a fraction of the property. It can also be termed co-ownership or shared ownership. However, like with every investment instrument, there is a risk and a possibility of retail investors falling prey to unlawful acts or fraud.

Hence, to safeguard the interests of small investors, the market regulator SEBI proposed a regulation around fractional ownership of real estate assets in May 2023. 

Mananki Parulekar, Co-Founder, of Claravest Technologies, defines fractional investing or ownership in real estate as splitting a pizza with friends—everyone gets a slice! Instead of bearing the full cost of a property, investors can own a fraction of it. This means one can indulge in the luxury of high-end properties without breaking the bank. By pooling resources with other investors, one can spread the financial burden while still enjoying the benefits of ownership.

In fractional ownership, the asset is held by a special purpose vehicle (SPV) in the form of either a limited liability partnership (LLP) or a private limited company. Investors who invest in the asset become part of the SPV by becoming partners or shareholders, depending on the structure. Likewise, the profits made from the property are distributed among stakeholders based on their investment. 

Pratyush Pandey, CEO, Upflex India, opined that it is a fairly old method prevalent as Timeshare in which hotel or resort assets were collectively owned, but now, post-COVID era, the scheme has accommodated residential real estate, which houses villas and flats in locations that are more drawn towards the holiday, and one does not need to invest the full value of the real estate but a small part and becomes a co-owner.

Is fractional investing a boon for real estate investors?

Parulekar pointed out the following benefits of the mode, but this should be approached after extensive research by investors, the expert cautioned. 

• Helps to diversify your portfolio: With fractional ownership, you can invest in multiple assets across various cities. This lets you explore unique investments without putting all your eggs in one basket.

• Hassle-free stream without the otherwise extensive work involved: Forget the headaches of performing due diligence about property titles, market conditions, developer profiles, or even managing a property yourself. Fractional ownership platforms handle the nitty-gritty, end-to-end, so you can enjoy the experience.

• Complete Digital Experience: The entire investment process is digital, which makes it easy to invest in properties from any part of the world.

• Passive Income: Fractional ownership platforms allow individuals to create a passive income stream via rental income generated from the asset along with appreciation. 

From rental income to potential appreciation, there are plenty of perks to go around, the expert added.

Things to keep in mind when taking this route of investment

Investors, experts say, need to be vigilant concerning the fees charged by different platforms and their individual goals as investors. Additionally, as in the property, one will have a fractional share, so investors need to be mindful of the usage schedules, maintenance responsibilities, and exit strategies before diving in.

“It's important for prospective fractional owners to carefully consider the legal and financial aspects of such arrangements to ensure a smooth and successful experience,” Pandey warned.

Other notable aspects of the investment option

Does fractional real estate investing allow one to stay on that premise?

The contract terms decide about it. One cannot stay permanently. For residential property, you get certain days to stay, whereas, in commercial property, it's impossible to utilise for oneself even for a shorter duration, Pandey answered when queried on the aspect.

In fractional ownership of holiday homes, though, one does get the option of either discounted rates or a fixed number of days each year that they are eligible to stay at the property, said Ajay Nemani, Founder at FF21.

Is there any government-backed interface offering the facility?

Currently, there is no government backing. “But soon one can expect a regulatory body to jump into it to regularise the trade process and implement rules to protect the investors,” added Pandey.

Furthermore, as approvals are required to get into the ambit, there is still some safety rendered for the masses.

“Fractional ownership providers must register with and get approvals from authorities like SEBI (Securities and Exchange Board of India) before they can launch their offerings. So, while the government is not actively promoting or directly involved in fractional ownership, there are some regulations requiring these private companies to register with financial regulatory bodies. The need for approvals does provide a level of security and consumer protection," said Nemani.

What is the outlook for fractional ownership in real estate?

Though at a nascent stage in terms of residential properties and land, a Knight Frank report estimates the fractional ownership market will grow 65 per cent from 2020 to 2025, from around $5.4 billion to $8.9 billion. This rapid growth demonstrates the potential for fractional ownership as an emerging investment model.

Which are the segments seeing the highest traction in the space of fractional ownership in real estate?

In the residential space, it's only holiday homes that are attracting investors, whereas in commercial and warehousing, given the regulations around residential renting and the yields being higher as well, the entry investment into these segments varies from Rs 15 to 25 lakhs.