Fractional Ownership: A New Way of Investing in Real Estate

Fractional ownership is a comparatively new concept in the real estate investment market. It allows individuals to own a fraction of a property rather than purchasing it outright. Fractional property investment has gained popularity in recent years, and many investors are now exploring this novel way of investing in real estate.

What is Fractional Ownership, and How Does it Work?

Fractional ownership, as defined by Investopedia, is an investment approach in which the price of an asset is split between individual shareholders. All the shareholders share the benefits of the asset, such as usage rights, income sharing, priority access, and reduced rates.

Fractional investing is common in the purchase of expensive assets, such as land, shares, luxury cars, and aircraft.

Fractional real estate investment allows multiple investors to own a portion of the property, sharing its costs and benefits. Typically, the property is managed by a professional management company that takes care of maintenance, rental, and other operational aspects.

When it comes to fractional investing, the possibilities are vast. Imagine owning a luxurious beachfront villa in Bali, a cosy cabin in the Swiss Alps, or a stunning penthouse in New York City. With fractional ownership, these dream properties become more accessible and affordable.

Let's delve deeper into how fractional ownership works. Say you are interested in purchasing a share of a beachfront villa in Bali. The property is divided into equal shares, and each investor owns a specific percentage. For instance, if the villa is divided into 10 shares, each investor would own 10% of the property.

Here is how fractional ownership works:

• A group of investors pool their money together to purchase an asset.


• The asset is then divided into shares, and each investor owns a certain number.


• The investors have the right to use the asset for a certain number of days each year.


• The investors share in the profits or losses from the asset.

There are a few different ways to structure fractional ownership. In some cases, the investors own the asset directly. In other cases, they own shares in a company that owns the asset.

It's important to note that fractional ownership typically operates under a predetermined agreement or contract. This property agreement outlines the rights and responsibilities of each investor, including the duration of their allocated time, rules for renting out the property, and any other relevant details. This ensures that all investors are on the same page and that the property is managed efficiently.

Fractional Ownership: A Rising Trend

Fractional ownership is a growing trend in India, as it allows investors to own a portion of a high-value real estate asset without having to commit to the entire purchase price. This can be an excellent way for investors to diversify their portfolios and gain exposure to the real estate market without taking on too much risk.

According to a recent Times of India (TOI) report, India's fractional real estate market is expected to grow 16% in the coming years. The top cities for fractional ownership in India are Bengaluru, Mumbai, Delhi, and Chennai.

A number of factors are driving the growth of fractional ownership in India. These include:

• The rising cost of real estate: The cost of real estate in India has been on the rise in recent years, making it difficult for many people to afford a home. Fractional ownership provides a way for investors to get into the real estate market without spending a large amount of money.


• The increasing popularity of vacation homes: Vacation homes are becoming increasingly desired in India, as people are looking for ways to escape the hustle and bustle of city life. Fractional ownership allows investors to own a vacation home without committing to it full-time.


• The growing number of online platforms: Several online platforms offer fractional real estate deals in India. This makes it easy for investors to find and invest in fractional ownership opportunities.

The Benefits of Investing in Fractional Ownership

There are several advantages to investing in fractional ownership.

• Fractional real estate provides an easier entry point into the real estate market. Rather than purchasing a whole property, investors can buy a fraction.


• Fractional ownership allows investors to access high-end properties, like luxurious beachfront villas or prestigious city centre buildings, which would otherwise be unaffordable. Fractional investing opens doors to exclusive and sought-after real estate.


• Fractional property investment enables the diversification of real estate portfolios. Investors can spread their investments across various properties, locations, and types of real estate, reducing risk and increasing potential returns. By tapping into different markets and regions, they can capitalize on growth opportunities.


• Fractional ownership offers convenience and flexibility by relieving investors of full ownership responsibilities. Partnering with a reputable management company ensures hassle-free ownership, as they handle maintenance, finding tenants, and rental-related issues, ensuring the property's upkeep and income generation.


• Fractional property investment lets you earn income by renting out your portion of the property when not in use. A property management company handles marketing, bookings, and maintenance. So, the property can generate revenue even when not personally enjoyed.


• Fractional ownership allows investors to use the property for a specific period each year. This enables them to enjoy a vacation home in their dream destination without bearing the full financial burden of owning the entire property.


• Fractional ownership offers the advantage of potential appreciation. Like traditional real estate, the property's value can increase over time, allowing for financial gains upon selling your share.


• Fractional ownership also includes enticing perks like access to exclusive facilities such as pools, fitness centres, spas, and concierge services, enhancing the overall ownership experience.


• Finally, fractional ownership fosters community and networking. Investors with fractions in the same property can connect and collaborate with like-minded individuals, leading to valuable connections, shared knowledge, and potential partnerships for future fractional investments.

Latest Update on Fractional Ownership

The popularity of fractional ownership has been steadily increasing. As more people learn about the benefits and ease of investing in this model, the fractional real estate market is witnessing significant growth.

The current trend suggests that fractional ownership is not limited to residential properties alone. Commercial properties, such as offices and retail centres, are also being offered as fractional ownership opportunities.

The Securities and Exchange Board of India (SEBI) has proposed to regulate all online platforms that offer fractional ownership of real estate assets. The SEBI's consultation paper, which was released in May 2023, proposes several regulations for fractional ownership platforms, including:

• The platforms must be registered with SEBI.


• The platforms must have a minimum net worth of INR 100 million.


• The platforms must offer only fractional ownership of real estate assets that are located in India.


• The platforms must ensure that investors have clear and transparent information about the properties they are investing in.


• The platforms must have a dispute resolution mechanism in place.

The SEBI's consultation paper was open for public feedback until May 27, 2023. After the feedback was received, SEBI reviewed the proposals. As of July 24, 2023, the SEBI still needs to make a final decision on the regulations for fractional ownership platforms. However, the proposed rules are a positive step towards ensuring that fractional property investment platforms are regulated and that investors are protected.

Why is Fractional Ownership Real Estate Growing?

Fractional ownership has gained popularity due to several factors. Firstly, it provides access to high-value properties that may otherwise be out of reach for individual investors. Luxurious vacation homes, resorts, and high-end properties can be enjoyed through fractional property investment.

Secondly, fractional ownership allows investors to share the responsibilities and costs of property ownership. This can lead to reduced financial burden and lower risks than sole ownership.

Lastly, fractional ownership offers the potential for passive income. By renting out the property during periods when the investor does not need it, they can generate additional revenue, offsetting the costs of owning and maintaining the property.

Models of Fractional Ownership

There are different models of fractional ownership, each with its unique features and benefits.

1. Time-Based Fractional Ownership
   

   In this model, the property is divided into fractions based on time intervals, such as weeks, months, or seasons. Each owner has the right to use the property for a designated period each year. This is popular in vacation properties, where each owner can enjoy a portion of the year in the property.



2. Fractional Ownership by Shares
   

   In this fractional property investment model, the property's ownership is divided into shares, similar to owning stocks in a company. Owners hold a specific number of shares representing their ownership percentage. This allows for more flexibility in selling and transferring ownership.



3. Residence Clubs
   

   A residence club is a fractional ownership type where multiple individuals collectively own a luxury property. They typically share access to the property throughout the year, and the management handles maintenance and scheduling.



4. Syndication
   

   Fractional ownership through syndication involves pooling resources from multiple investors to purchase a property. An investment company or real estate developer manages the property, and each investor receives a share of the profits based on their ownership percentage.



5. Condominium-Hotel Fractional Ownership
   

   This model combines traditional hotel services with fractional ownership. Investors own a portion of a condo unit within a hotel property and can use the unit for a certain period each year. The hotel management takes care of renting out the unit and providing hotel amenities.



6. Equity Sharing
   

   In equity sharing, two or more parties jointly purchase a property and share ownership. One party may live in the property while the other acts as an investor. Profits from any potential appreciation or rental income are distributed according to the agreed-upon terms.



7. Destination Clubs
   

   Similar to residence clubs, destination clubs offer a portfolio of luxury properties in various locations. Members pay an upfront fee and annual dues to access the club's properties for a certain number of days per year.



8. Fractional Ownership of Commercial Real Estate
   

   This fractional real estate model allows multiple investors to pool their resources to acquire commercial properties like office buildings, retail centres, or industrial complexes. The rental income and expenses are distributed among the owners based on their ownership percentage.

Fractional Ownership v/s Real Estate Investment Trust (REIT) – Which is More Beneficial?

Fractional ownership and REITs are both ways to invest in real estate without having to buy an entire property. However, there are some critical differences between the two investment vehicles.

Fractional ownership allows investors to purchase a portion of a property, such as a vacation home or a commercial building. This can be a good option for investors who want to own real estate but don't have the financial resources to buy a whole property. Fractional ownership can also give investors more control over their investment, as they can choose the property they want to invest in and have a say in how it is managed.

REITs are organizations that own and manage income-producing real estate. REITs are traded on stock exchanges, so investors can indulge in buying and selling shares of REITs just like they would for stocks. This makes REITs a more liquid investment than fractional ownership, as investors can easily exit their investment if they need to. However, REITs are not as customizable as fractional ownership, as investors do not have a say in which properties the REIT invests in.

Here is a table that summarizes the key differences between fractional ownership and REITs:

Feature	Fractional Ownership	REIT
Liquidity	Less liquid	More liquid
Control	More control	Less control
Customization	More Customizable	Less Customizable
Risk	Lower risk	Higher risk
Potential Returns	Lower potential returns	Higher potential returns

Major Companies Involved in Fractional Property Investment in India

Fractional ownership has gained traction in the Indian real estate market as well. Several companies are now offering opportunities for fractional investment.

Here are some of the major companies involved in fractional property investment in India:

1. Assetmonk is a new-age fractional property investment platform that allows investors to buy fractional shares of high-value commercial properties. The company offers investors the ability to invest in properties starting at INR 25 lakh, and has a portfolio of over 100 properties across 10 cities.


2. hBits is a premium fractional real estate investment platform that offers fractional ownership of carefully selected, high-quality properties. The company has a portfolio of over 50 properties across 10 cities, and offers investors the ability to invest in properties starting at INR 10 lakh.


3. YieldWiseX is a fractional ownership platform that allows investors to buy fractional shares of residential real estate.


4. 99acres is a leading real estate portal in India that also offers fractional ownership options. The company has a portfolio of over 100 properties across 10 cities, and offers investors the ability to invest in properties starting at INR 5 lakh.


5. Strata is a fractional ownership platform that specializes in industrial properties in India. The company offers investors the ability to invest in properties starting at INR 25 lakh, and has a portfolio of over 50 properties across 10 cities.

These companies have demonstrated expertise in managing fractional ownership properties, ensuring smooth operations and maximizing returns for investors. As the market for fractional property investment continues to grow, we can expect to see even more companies entering this space.

It is important to note that fractional ownership is a relatively new concept in India, and there is still some regulatory uncertainty around it.

The Potential Risks of Fractional Ownership

1. Disputes among co-owners: In fractional real estate, you'll need to come to an agreement on how the property will be managed. This can be challenging, especially if you have different ideas about how the property should be used or maintained. If you can't agree, it could lead to costly and time-consuming disputes.


2. Illiquidity: Fractional ownership properties can be challenging to sell, especially if you need to sell quickly. This is because there are fewer buyers for fractional ownership properties than for traditional single-owner properties.


3. Risk of Depreciation: The value of the asset you own fractionally could decline, impacting your investment. This is a risk with any investment, but it's something to be aware of when considering fractional ownership.


4. Hidden Fees: Fractional ownership programs often come with hidden costs, such as management fees or maintenance fees. These costs can add up, so it's important to read the fine print before you invest.


5. Fluctuations in the market: The property's value may be subject to changes in the real estate market. Investors must be aware that the value of their fractional ownership can go up or down depending on market conditions.


6. Other risks: The profitability of these properties can be influenced by various factors such as occupancy rates, rental demand, and economic conditions. Investors should conduct thorough research and due diligence to assess the income-generating potential of fractional ownership property.

What to Look for in a Fractional Ownership Property

When considering a fractional ownership property, there are several factors to consider.

Fractional ownership can be a great way to own a vacation home or other high-value property without paying the full price. However, there are a few things you should look for before you invest in a fractional ownership property.

• The property itself: The first thing you should consider is the property itself. Make sure that it meets your needs. If you're looking for a vacation home, you'll want to consider the size of the property, the amenities it offers, and the activities available in the area.


• Location: Location plays a crucial role in the desirability and long-term value of fractional property investment. It's important to choose a location with strong growth potential, whether it's a popular tourist destination or a thriving business district.


• The fractional ownership agreement: Once you've found a property you like, you'll need to read the fractional ownership agreement carefully. This document will outline your rights and responsibilities as an owner and the terms of the fractional ownership arrangement.
  Make sure you understand everything before you sign the agreement. Ownership rights, usage privileges, fees, and exit options must be clearly defined and understood.


• The management company: If you're going to use the property yourself only sometimes, you'll need to choose a management company that will handle the day-to-day operations. Ensure the management company has a good reputation and that they're experienced in managing fractional ownership properties.


• The cost: Fractional ownership can be a more affordable way to own a vacation home, but it's still an investment. Ensure you understand the total cost of ownership, including the purchase price, the annual fees, and any other expenses.


• Other risks: Along with these risks, there are some additional risks also associated with fractional ownership. These risks include the possibility of financial loss, disputes with other owners, and changes in the property's value. It's important to understand these risks before you invest.

How to Find the Right Fractional Ownership Opportunity

There are various ways to find suitable fractional ownership opportunities.

One option is to engage the services of a real estate broker specializing in fractional ownership. These professionals have extensive knowledge of the market and can provide valuable insights.

Another approach is to explore fractional property investment platforms that connect investors with fractional ownership opportunities. These platforms offer a wide range of properties and provide a convenient way to browse and compare different options. Some of the most famous ones are Fundrise, Realtymogul, Pacaso, and hBits.

It's also essential to conduct thorough due diligence before making any investment decisions. This includes reviewing the property’s financials, analyzing market trends, and seeking professional advice if needed.

Conclusion

Fractional ownership offers a unique and exciting way to own a share of a desirable property. It allows you to enjoy the benefits of real estate ownership without the full responsibilities. With the flexibility to use the property for personal use or generate income through rentals, fractional ownership opens up a world of possibilities for investors seeking a piece of their dream property.

As the market grows and evolves, fractional ownership is becoming an increasingly attractive investment option. However, it's essential for investors to carefully evaluate each opportunity, considering the risks and rewards, before making a decision.

With the right approach and due diligence, fractional ownership can open new doors and provide a fresh perspective on real estate investment.

FAQs

What is Fractional Ownership in real estate?

Fractional ownership in real estate refers to a property ownership model where multiple individuals or entities co-own a particular property. In this arrangement, the property is divided into fractions or shares, and each owner holds a percentage of the property's value, typically represented as shares or units. These shares can vary in size, and a management company or entity usually organizes the ownership structure.

What are the disadvantages of fractional ownership?

Here are some of the disadvantages of fractional ownership:

• Less control
• Difficult to sell
• Hidden fees
• Risk of disagreements

Is fractional ownership legal in India?

Yes, fractional ownership is legal in India, but no specific legal framework governs it. This means that the different fractional ownership models are subject to different laws, such as the Companies Act 2013 or the Limited Liability Partnership Act 2008, depending on their nature of incorporation.

Is fractional ownership safe?

Fractional ownership can be a safe and profitable investment if you do your due diligence and invest in a well-managed property. However, it is essential to be aware of the risks involved before you invest.