Fractional ownership is an evolving concept in real estate, on the lines of REITs, albeit with a difference. Unlike real estate investment trusts (REITs), which are listed entities that own income-producing real estate, fractional ownership is the coming together of investors to pool their funds and jointly purchase real estate. Although the idea is to rent it out and earn equitable rentals, many investors are also getting into fractional ownership for the convenience of having ‘offices for limited purposes.
As this is an evolving asset class, there are various deal structures along with the concept of fractional ownership. At the basic level, two models of fractional ownership exist in the commercial real estate market today. At an organized level in tier-1 cities, investors are acquiring rent-yielding commercial spaces for rentals. However, across tier-2 cities and peripheral locations, investors are also acquiring fractional ownership for limited self-use. For example, a small office seeker could get fractional ownership of an upscale office complex with as low an investment as Rs 5 lakhs, roughly. The same office space could otherwise cost Rs 50 lakhs if it is purchased outright.
Fractional property ownership advantages
Would fractional ownership of commercial realty change the real estate market? Why is fractional ownership seen with so much optimism that it even promises to over-shadow REITs in India? The answer lies in the way we the Indians look at our investments in general and property investment in particular.
Firstly, Indians always look up to the usability of the investment, often over and above the ROI. That is one of the reasons that gold investment is weighed higher than many other financial products.
Secondly, fractional ownership gives greater control over the investment. One can inspect the investment and make decisions with a physical product in hand. This is unlike REITs which are only a piece of paper in hand.
Thirdly, Indians are by and large risk-averse in the financial market. This is evident from the fact that many still prefer bank fixed deposits which offer rates that are lower than inflation, to stocks or mutual funds. A physical property provides much-needed cushioning against market fluctuations.
Future prospects for fractional ownership of property
Amit Goenka, MD, and CEO, of Nisus Finance, is upbeat on the prospects of fractional ownership when he says that what started as an experiment around three years ago has today become a sought-after asset class among the HNI segment. People are now looking at almost double-digit returns. It is not just commercial spaces but also warehousing that is making it an attractive proposition. It is a very serious mainstream investment opportunity for small investors.
“If you look at the total portfolio of various fractional ownership companies, which started with Rs 30 crores to Rs 40 crores, they have today grown to $100 million each. It means the total market size of the fractional ownership market among the top four operators is roughly about $400 million. That is a very significant size if you look at the ticket size of each owner participant, which is between Rs 5 lakhs and Rs 10 lakhs.
Ashish Narain Agarwal, founder, and CEO, PropertyPistol, points out that while investing in financial instruments, whether it is fractional ownership or REIT, is good, one must exercise caution before doing so. Any business or transaction can pose risks and trust deficits if it is not properly understood, analyzed, and gauged prior to taking a plunge. An investor should research the properties or holdings within the investment portfolio, to be sure that they are still relevant and can generate income.
“One should also ensure that the financial investment option has a robust management team, quality properties in suitable locations, transparency in sharing information, etc. It is always good to keep a track of how a portfolio has been managed and transacted historically, to get a fair idea, or consult an investment expert who can guide one accordingly. The key is to be aware, focused, and vigilant to study the market thoroughly before finalizing on any deal,” says Agarwal.
Pros and cons of fractional ownership in commercial realty
Fractional ownership is more like a private portfolio than a regulated portfolio and hence, falls under the Sandbox Regulation of the SEBI. Effectively a crowdfunding platform, fractional ownership since its gaining ground in India has witnessed transactions worth Rs 750 crores in the initial five years.
Fractional ownership has performed better than REITs (giving returns of 8%-8.5% as against 7%-7.5% for REITs) if capital gains tax is taken away and only net yields are factored in. However, it is more for risk-taking investors and not for risk-averse investors. Fractional ownership has a distinct advantage in that it invests with an identified asset that could generate revenue and that asset could be physically monitored. So, some amount of capital protection is always within sight, as against a tradable asset class like REIT where the retail investor has no control over it.
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