This article talks about everything you need to know about fractional real estate investment in India.
In India, owning property or a house is a dream for many individuals. People have to save for years before they can afford to buy a property. Investing in real estate through outright purchase is becoming an outdated way of using your money. A new concept of Fractional Real Estate Investment is becoming popular in India. It is a modern investment idea wherein investors are able to invest an affordable amount of money in high-end properties, that they otherwise can’t afford.
What does Fractional ownership of Real Estate mean?
Fractional Real Estate Investment is an investment model that allows a group of investors to pool their assets to raise funds for investing in Real Estate property together. All investors under this model, share passive ownership of a high-value asset. Fractional ownership reduces the financial burden on a single investor as all the expenses and profits are shared among the investors. Usually investing in Real Estate requires large sums of money, but with fractional ownership of Real Estates, investors can invest in properties quite conveniently. Fractional ownership can be utilized for personal uses as well as for commercial gains. The asset under fractional ownership can be any commercial property, residential property, private jet, yacht, etc.
The concept of fractional ownership in Real Estate is quite prevalent in the USA and European countries for over a decade. Also, the demand for it is projected to increase in India with more and more Multi-National Corporations (MNCs) shifting their base to India.
What are the Key Benefits of Fractional Ownership?
- Accessibility: Through fractional ownership, investors can access premium properties that were earlier only available for High Net-worth Individuals (HNI) and other large institutions.
- Low ticket size: Investment in fractional ownership of properties starts from a low-ticket size, which makes it a pocket-friendly investment.
- Portfolio Diversification: Through fractional ownership of Real Estate, investors can diversify their portfolios. It allows investors to invest their money outside the volatility of stock markets and low returns on fixed deposits. It provides an entirely new investment class to investors.
- Pre-vetted Properties: Generally, fractional real estates are managed professionally with a fully supported end-to-end process for the investors. All the properties are listed on the respective platforms, and they have stringent screening criteria to undergo thorough due diligence.
- Passive Returns: Fractional ownership offers an investor both passive income generation and an opportunity for long-term capital growth.
- Risk Mitigation: As compared to traditional Real Estate investments, fractional ownership offers an investor greater liquidity and risk mitigation.
What are different Fractional Ownership Models?
Investors can choose among the 4 fractional ownership models depending upon the type of the property, applicable tax treatment, and the model that is more economical and convenient for them.
- Joint Ownership of Assets: Under this model, all the investors have the title to the property and can use the fractional property without adversely affecting the rights of other investors. Any co-owner can sell their share in the property at any time with the consent of the other co-owners.
- Co-operative Model: Under this model, all the interested investors form a cooperative society for the purpose of purchasing the property in the name of the society. All the investors become members of the society and thus the fractional owner of the property. The fractional owners are free to transfer their share to any other person.
- Company Structure: Under this model, investors create a company and then invest in the property in the name of that company. The company created must comply with all the laws, rules, and regulations of the Company Act of their respective countries. This investment is highly advantageous for the investors as it helps save stamp duty for the investors.
- Trust Structure: Under this model, all the prospective owners create a trust, with the property seller as the author of the trust. The seller must execute the trust deed based on the specific guidelines and directions for the advantage of all the fractional owners.
What is Fractional Ownership in Commercial Real Estate (CRE)?
CRE refers to the model that seeks to offer fractional ownership of physical assets including Grade A commercial properties leased by big corporate houses, such as banks, warehouses, or other IT establishments. Commercial properties already have tenants in most cases and generally, commercial tenants occupy the premises for a longer period. Additionally, big companies usually pay their rent on time. Although CRE is a good investment option that generates regular and steady rental cash flow, a large investment is required for it. It is very difficult for middle-class communities to arrange such large sums of money for investment. But with the introduction of fractional ownership, these groups of investors can also invest in high-end commercial Real Estates at a fraction value of the original price. Any investor with an investment of as low as Rs 25 lakhs can invest in commercial properties through fractional ownership and reap the benefits by earning high yields in the range of 8-12% p.a.
Which are the best Fractional Real Estate Platforms in India?
- Propshare: This platform is one of the oldest and most popular real estate platforms in India. They have already sold multiple properties through this model and are receiving good reviews from their existing investors. They generally invest in real estate for 3 years to earn healthy rental yields and good capital gain on selling the property. Propshare also runs a Real Estate Fund. This platform has a minimum investment criterion of Rs. 25 lakhs and an expected IRR of 12-15% p.a.
- StrataProp: Though this platform has fewer properties as compared to Propshare, it focuses on warehouse investments which usually have higher rental yields. They also generally invest for higher periods and have a minimum investment criterion of Rs. 20 lakhs.
- RealX: This platform can be considered a fractional real estate platform in a true sense. This platform provides direct ownership of the property, unlike other platforms that provide access to properties through a Special Purpose Vehicle (SPV) structure or some other fund structure. It offers both commercial and residential properties with a lock-in period of 3 years. The minimum investment criterion on this platform is only Rs. 5 lakhs.
How does Fractional Ownership differ from REITs?
Many investors confuse fractional ownership of Real Estates with REITs. These concepts are very different from each other. The foremost difference is that with fractional ownership investors are investing directly into the tangible commercial or residential real estate, while through REITs they are investing in a corporation, which will further invest their money into the real estate. Also, through fractional ownership, investors can choose the type of property they wish to invest in, whereas REITs investors have no such control as the property is chosen by the management of the company. Therefore, an investor-only has limited freedom when it comes to REITs as compared to fractional ownership.
Summary: Fractional Ownership in India
In India, the fractional ownership market is expected to grow at a steady rate as the CRE market is projected to grow at 16% in the coming years. Though investment through this model is a good option for the investors, still this model is relatively new in India and thus may lack transparency and communication among the investors. Hence, investors can surely opt for this type of investment but only after taking due care and diligence.