All about Fractional Ownership of Real Estate: A New Way to Invest in Property

September 16, 2023

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If you are looking for a way to invest in real estate without having to buy a whole property, fractional ownership might be the option for you. Fractional ownership is a concept that allows investors to own a part of a property and share the benefits and costs with other co-owners. In this blog post, we will explain what fractional ownership is, how it works, and how it differs from REITs, another popular way to invest in real estate.
What is fractional ownership?

Fractional ownership is a form of collective investment where a group of investors pool their funds to buy a property, usually a high-value commercial asset such as an office building, a hotel, or a shopping mall. Each investor owns a fraction of the property and receives a proportionate share of the rental income and capital appreciation. The property is managed by a professional company that handles the maintenance, leasing, and administration of the asset. The investors can also sell their fractions to other buyers or on a secondary market.

Fractional ownership is different from timeshare, where multiple owners have the right to use a property for a certain period of time each year. Fractional owners have an actual stake in the property and can benefit from its financial performance

How does fractional ownership work?

Fractional ownership can be done through various models, but one of the most common ones is through a special purpose vehicle (SPV). An SPV is a separate legal entity that is created to own and operate the property. The SPV issues shares or units to the investors, who become shareholders or unit holders of the SPV. The SPV also raises debt from banks or other lenders to finance the purchase of the property.

The SPV collects rent from the tenants of the property and distributes it to the investors after deducting expenses and fees. The SPV also pays interest and principal on the debt. The investors can also benefit from the capital appreciation of the property when they sell their shares or units or when the SPV sells the property.

The minimum investment required for fractional ownership can vary depending on the platform and the property, but it can be as low as Rs. 5 lakh for some commercial properties in India. This makes fractional ownership more affordable and accessible than buying a whole property.

What are the benefits of fractional ownership?

Some of the benefits of fractional ownership are:

  • Diversification : Fractional ownership allows investors to diversify their portfolio across different properties, locations, and sectors. This can reduce the risk and volatility of their investments.
  • Professional management : Fractional ownership frees investors from the hassle of managing the property themselves. They can rely on the expertise and experience of the platform and the SPV that handle all aspects of the property management.
  • Liquidity : Fractional ownership provides more liquidity than direct ownership, as investors can sell their fractions more easily than whole properties. Some platforms also offer secondary markets where investors can trade their fractions with other buyers and sellers.
  • Transparency : Fractional ownership platforms provide detailed information about the properties, such as valuation, due diligence, occupancy, rental yield, and capital appreciation. They also provide regular reports and updates on the performance of the properties and the SPVs.
What are the challenges of fractional ownership?

Some of the challenges of fractional ownership are:

  • Regulation : Fractional ownership is a relatively new concept in India and there is no specific regulation governing it yet. However, SEBI has issued a consultation paper on micro, small, and medium REITs (MSMRs), which could potentially regulate fractional ownership platforms in the future.
  • Taxation : Fractional ownership may have different tax implications for different investors depending on their income tax slab, holding period, type of income (rental or capital gain), and type of entity (SPV or trust). Investors should consult their tax advisors before investing in fractional ownership.
  • Control : Fractional owners have limited control over the property and its management. They have to abide by the decisions of the platform and the SPV regarding leasing, maintenance, renovation, and sale of the property and its management. They have to trust the platform and the SPV to act in their best interest and protect their rights.
How does fractional ownership compare to REITs?

REITs, or real estate investment trusts, are another way to invest in real estate without buying a whole property. REITs are companies that own and operate income-generating properties, such as malls, offices, hotels, and warehouses. REITs issue shares to the public and pay dividends to the shareholders from the rental income and capital gains of the properties.

Some of the similarities and differences between fractional ownership and REITs are:

  • Type of property : Fractional ownership allows investors to choose specific properties that they want to invest in, while REITs offer a diversified portfolio of properties across different sectors and locations. Fractional ownership can give more control and customization to the investors, while REITs can provide more diversification and risk reduction.
  • Minimum investment : Fractional ownership can have a lower minimum investment than REITs, depending on the platform and the property. For example, some fractional ownership platforms in India offer fractions starting from Rs. 5 lakh, while some REITs in India have a minimum lot size of Rs. 50,000.
  • Liquidity : REITs are more liquid than fractional ownership, as they are listed on stock exchanges and can be traded easily. Fractional ownership depends on the availability of buyers and sellers on the platform or the secondary market, which may not be as active or efficient as the stock exchange.
  • Regulation : REITs are regulated by SEBI and have to follow certain rules and guidelines regarding disclosure, governance, valuation, taxation, and distribution. Fractional ownership is not regulated by SEBI yet, but may come under its purview in the future if MSMRs are introduced.
  • Taxation : REITs are subject to dividend distribution tax (DDT) at 15% and capital gains tax (CGT) at 10% for long-term gains and 15% for short-term gains. Fractional ownership may have different tax implications depending on the type of income (rental or capital gain), the type of entity (SPV or trust), the holding period, and the income tax slab of the investor.
Fractional ownership is a new way to invest in real estate that offers many benefits such as affordability, accessibility, professional management, and transparency. However, it also has some challenges such as regulation, taxation, and control. Fractional ownership is different from REITs in terms of type of property, minimum investment, liquidity, regulation, and taxation. Investors should consider their goals, preferences, risk appetite, and budget before choosing between fractional ownership and REITs.
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