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The Appeal of Fractional Investing in India
- Fractional ownership addresses various challenges that traditional real estate ownership presents. The fact that fractional investing is highly accessible to regular investors makes it appealing in India.
- According to Knight Frank data, the market size of fractional ownership properties in India is projected to grow by 65 percent, from $5.4 billion in 2020 to $8.9 billion in 2025, at an annualised rate of 10.5%.
- Potential buyers are often put off by high property prices, large down payments, and ongoing maintenance expenses. By removing the financial obstacles, fractional ownership enables people to invest in desirable properties and a variety of markets that would not otherwise be accessible. Additionally, this strategy removes the need for one-person property management, giving investors a hassle-free experience.
- Moreover, fractional investing allows for portfolio diversification, which is critical for risk management. Fractional investment is not only suitable for individual investors but also appeals to institutional investors and real estate funds. According to a report by Knight Frank India, the adoption of fractional ownership by real estate funds has increased by over 50% in the last two years.
- Fractional ownership is highly appealing to those who want to enjoy luxurious homes or vacation properties, diversify their investment portfolios, and leverage shared resources to maximize their investment potential in the real estate market.
- Fractional ownership allows big investment firms to spread their risk over a variety of markets and property types by allocating capital across a wide range of properties. By combining various properties in their portfolio, these institutional investors can optimize their returns and ensure a more stable investment strategy.
What is Fractional Property Ownership?
Fractional ownership offers an opportunity for investors to come together and jointly own commercial properties, like office buildings, retail spaces or industrial complexes by pooling their funds. Instead of purchasing an entire property, investors can buy a fraction or share of the property, which grants them certain rights and benefits.
Fractional ownership in India not only opens up new channels for investors, but it also lowers the cost of investment and reduces risk.
How Does It Work?
Pooling of Funds: Investors pool their funds to purchase shares in a property.
Shared Ownership: Each investor owns a part of the property, reflected in the share percentage.
Income and Expenses: Rental income and appreciation benefits are distributed, and expenses are shared among the owners based on their ownership percentage.
Assessing the Worth: Is Fractional Investing Worth it in India?
An ROI analysis is required to evaluate the value of fractional investing in India and determine its financial viability. Fractional ownership can yield significant returns given India’s expanding real estate market, but like all investments, it’s not without risks.
ROI Analysis:
Rental Yields: It is possible to own a fraction of a commercial property valued at INR 10 crore, which is normally out of reach for a single investor. With a rental yield of 8%, an investor putting in INR 25 lakhs can earn INR 2 lakhs annually, minus expenses.
Appreciation: Over five years, the same property could appreciate by 20%, increasing the value of a INR 25 lakh investment by INR 5 lakhs, assuming the property’s value rises to INR 12 crore.
Comparative ROI: If the same INR 25 lakhs were invested in a savings account with a 4% interest rate, the return would be merely INR 1 lakh per year, without any capital appreciation benefit.
Key Takeaways:
Higher Yields: Fractional investments can offer higher yields compared to traditional savings avenues.
Capital Appreciation: The potential for capital appreciation in real estate can significantly enhance ROI.
Economies of Scale: Lower transaction costs and economies of scale in management can improve net returns.
Investors must, however, also consider factors like market volatility, property location, and management effectiveness. Even though the numbers might seem promising, careful research is crucial to ensure that fractional investing aligns with one’s financial goals and risk appetite.
Boom of Fractional Ownership in India
The future of fractional ownership in India appears bright and poised for innovative shifts. Fractional ownership could benefit from several technological advancements that could change the market landscape as it continues to disrupt traditional markets.
TruBoard Partner has projected a 25-30% compounded annual growth rate in the AUM of the fractional ownership market over the next four to five years.
Growth Projections:
- Rapid Expansion: Driven by urbanisation and the rise of the middle class, the market could potentially double in size over the next five to ten years, with an estimated annual growth rate in the double digits.
- Technology Integration: Technology platforms are expected to enhance transparency and ease of transaction, further propelling market growth.
Growth Drivers:
- Economic Factors: A strong demand for real estate investment is a result of urbanisation and rising income levels.
- Demographic Shifts: A younger population is becoming more interested in fractional ownership and has a strong interest in diversified investment portfolios.
Innovations in the Sector:
- Blockchain Technology: By automating the management and distribution of rental yields and other earnings, smart contracts and blockchain integration have the potential to completely transform transaction efficiency and transparency.
- Digital Platforms: Online marketplaces and investment platforms are expected to streamline the investment process, making it easier for investors to buy, manage, and sell their fractional shares.
Predictions for Market Evolution:
- Growth in Residential Sector: While commercial real estate dominates currently, the residential sector is likely to catch up as more people seek investment opportunities in housing.
- Wider Geographic Spread: Tier 2 and Tier 3 cities may see increased activity in fractional ownership investments as the market matures and spreads beyond metro cities.
- Regulatory Framework: Anticipated developments in the regulatory framework could provide more clarity and security for investors, potentially attracting more participants to the market.
With technological advancements and a potential for regulatory improvements, the fractional ownership market in India is expected to become more robust, offering greater accessibility, transparency, and efficiency to investors.
How to Get Started with Fractional Ownership in India
Despite being a relatively new investment class, fractional investment is a growth-oriented industry that is the hottest trend in Indian real estate and is becoming more and more well-known every day. Investors can now enjoy the perks of owning a portion of a premium commercial property without having to bear the burden of purchasing it outright.
As co-ownership of real estate has started gaining traction, the market regulator — Securities and Exchange Board of India (SEBI) — is considering a regulatory framework for fractional ownership.
You can read our blog on fractional ownership to know more in detail how to get started with fractional ownership in India.
Advantages of Fractional Ownership in Real Estate for Indian Investors
For Indian investors, fractional ownership in real estate is gaining popularity due to the following advantages.
Here a few key benefits:
- Lower Entry Barriers: One of the key benefits of fractional ownership is that it provides lower entry barriers, As investing in real estate usually requires a significant upfront capital investment.
- With lower entry costs, investors can invest in multiple properties, generating passive income that can help them fund their other ventures. This democratization of real estate investing allows individuals to participate in the commercial real estate market and enjoy the potential financial rewards that come with it.
- Flexibility: Investors can purchase and sell their shares at their convenience, providing them with the flexibility to manage their investments according to their needs. Professional property management companies also manage fractional ownership projects, enabling investors to avoid the day-to-day management of the property.
● Passive Income: Fractional ownership in real estate offers the potential for passive income through rental returns. Investors can earn rental income on their stake, ensuring a steady income stream. This may be especially appealing to people who want to diversify their sources of income or achieve financial independence.
● Diversification: Any investment strategy must include diversification, and fractional ownership allows investors to spread their money across a number of high-value properties. Investing in multiple properties allows investors to spread their risk and lessen the impact of any losses.
Let’s say you made simultaneous investments in fractional ownership projects in Bangalore and Mumbai, you can reap the rewards of diversification. It could be that the Mumbai project did not produce the anticipated returns but your investment in the Bangalore project compensated more than the loss.
Real estate continues to remain a lucrative investment option with 61 per cent of HNIs and UHNIs looking to buy real estate in 2023-24.
● Access to Premium Properties: Fractional ownership indeed provides individual investors with an avenue to access premium properties that were previously beyond their reach.
The ability to invest in such properties offers a potential pathway for individuals to participate in the lucrative real estate market and potentially generate attractive returns.
● Hassle-free Management: Investing in real estate can come with various administrative burdens, such as property management, maintenance, tenant issues, and paperwork. Fractional ownership relieves investors from these day-to-day responsibilities.
This appeals to the investors seeking for a route into the market without the complexities of property management.
Bottom Line
The future of fractional ownership real estate in India appears promising, given the increasing demand for shared ownership and the technological advancements enabling seamless transactions. It offers investors access to high-end homes, flexibility, and diversity that may have been otherwise out of reach for individual investors. Apart from NRIs and HNIs, small investors can also reap the benefits of investment in properties with high return potential.
The growing demand for commercial real estate and office spaces will give rise to leasing opportunities. The growth in fractional ownership opportunities is closely related to the increase in commercial real estate demand.
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