Only a small number of Indians are investing in residential and commercial buildings that pay rent to optimize their returns on investment. Amidst stock market volatility and low-interest rates on fixed deposits (FDs), we have noticed a spike in individuals buying high-value assets (commercial real estate or luxury villa). Following that, investors share both the revenue and expenses associated with it in proportion to their investment.
We are witnessing the creation of a new asset class known as fractional ownership, in which numerous unrelated investors pool their resources to collectively own a high-value asset. This not only lowers the entrance cost for prospective investors but also provides them with all of the benefits of owning the asset without the need for large amounts of money upfront. With fractional ownership, investors share the advantages with co-investors while also reducing the risk of ownership.
How does it work?
A property’s structure is determined by its size, tenure, and several players. If a grade-A office building costs between Rs 150 and Rs 500 crore, the structure will typically be a private limited company that forms a special purpose vehicle (SPV) where the minimum contribution per buyer/investor is in the range of Rs 25 lakh and the private limited company allows for more than 200 participants or shareholders in each SPV to participate.
Since the typical ticket size is small in residential real estate, the structure is more fluid (in the range of Rs 50 lakh-Rs 5 crores). The SPV structure is in the form of an Association of Persons (AOP), which acts identically like a private limited company with the exception that instead of shares, the percentage of each person’s ownership in the property is indicated in the AOP, and the property is registered in the name of the AOP. A separate property rental and facility management agreement is also prepared, which provides guidelines for all owners to use the property based on distribution and should be proportional to their stake in the property.
Why invest in fractional ownership?
Partially owned commercial real estate has the advantage of allowing small investors to invest in high-end assets. It’s a good choice for retail investors who can’t afford commercial real estate (CRE) because of its hefty price tag. Additionally, fractional investments allow investors to diversify their portfolios across various properties and locales, reducing portfolio risk dramatically. They can also be sold at any moment on a secondary market, providing liquidity.
Commercial real estate isn’t the only type of fractional ownership that’s rising in popularity with the wealthy (HNWIs). Covid-19 has left a significant imprint on urban homeowners in the post-pandemic era, and fractional ownership of vacation houses is catching up rapidly. These days, buyers are looking for properties that have a view of the ocean or a mountainous setting, but at a fraction of the cost. To occasionally escape the city, fractional ownership is an alternative.
It’s impossible to overstate the appeal of such a paradigm, especially in a circumstance where the pandemic has undermined much of the allure of inner-city living and boosted the urge to flee it. Every investor also benefits from their investment in terms of rental income as well as capital appreciation as well as personal usage of their property in the case of a second or third house.
Note that a fractional owner of commercial real estate may not have any access rights at all to the property in question. If he sells the property, however, he may be entitled to a part of the rents received and appreciation profits.
Is It safe to invest in fractional ownership opportunities?
As a result of fractional ownership, retail investors have access to some of the most desirable properties with a good tenant profile. People can now pool their money to buy a Rs 100 crore office complex, for example, with each contributing at least Rs 25 lakh. In particular, young Indians are becoming interested in it since the tenants are well-established enterprises (so your rental income is guaranteed); and when an investor wants to depart the property, he may sell his stake to other investors and go.
Accountability of Fractional owners
Normally a property with many owners is handled by a property management firm. For the construction/renovation of the building, in addition to the eventual sale, this business is in charge. These obligations could be assigned to one owner or distributed between multiple owners, depending on the situation. It’s your responsibility to pay your fair share of property taxes, including additional taxes in places where fractional sales are subject to new tax assessments.
Whilst there is some funding involved, most of the money is contributed in cash by owners. Investors may not have actual control over the property, which makes lenders leery of funding such agreements.
To own a Grade A commercial property, such as an office building, factory, or industrial warehouse, requires a significant amount of money. So it’s no wonder that it’s always been a favorite of the wealthy. Partial ownership in such a scenario allows mid-segment purchasers a whole new financial asset class to choose from, one that is tailored to their budget.
Assetmonk is one of India’s fastest growing Proptech firms offering crowdfunding and fractional ownership investment opportunities in top Indian cities such as Bangalore, Chennai, and Hyderabad. We list properties with an IRR of 14-21% after conducting strict due diligence.
Fractional Ownership FAQ's:
When a group of investors pools their money to purchase real estate, this is known as fractional ownership. They both possess a high-value asset in a passive capacity. These methods make it easier for an individual to buy a property and allow him or her to receive returns on their investment.
If you possess a fraction of real estate, you receive a deed for the property, not a period for which you can use it. As a result, the prices are lower than if you owned the home outright, but you still have access to it if you’re happy with the sharing arrangement.
Divide the total cost of all fractional shares offered in a single home by the home’s fair market value to find the fractional pricing multiplier. A realistic value for the home would sell in 90-180 days under current market conditions.