Real estate investments have emerged as a preferred choice among Indians, gaining significant popularity in recent years. Fractional ownership, also known as co-ownership, allows multiple investors to collectively own a share of real estate properties. Each investor holds a fractional interest in the property, proportional to their investment. This democratises access to real estate investments, enabling individuals to participate in lucrative markets with lower capital requirements.
This can be an attractive option for individuals who want to invest in real estate but lack sufficient resources to purchase a property outright. There are several approaches to investing in fractional real estate. One of them is to invest in a property through a real estate crowdfunding platform, which allows investors to pool their money together to purchase a property. These platforms, known as FOP’s, or Fractional Ownership Platforms, leverage technology to streamline the investment process, offering transparency, security, and hassle-free transactions. Another approach is to invest in a real estate investment trust (REIT), which is a company that owns and operates a portfolio of properties and shares the profits with its investors.
Benefits
Accessibility: High-value commercial properties are typically out of reach for individual investors. Fractional ownership makes it accessible to them and a much broader investor base, including millennials and first-time investors.
Diversification: Investors can diversify their portfolios by owning fractions of multiple properties across different locations and property types (residential and commercial), mitigating concentration risk.
Liquidity: Unlike traditional real estate investments that often involve lengthy holding periods, fractional ownership offers liquidity through secondary markets, allowing investors to buy and sell shares efficiently.
Passive income: Rental income generated from the property is distributed among investors proportionally, providing a steady stream of passive income without the hassles of property management.
Fractional Real Estate Investing vs. REITs
Fractional real estate investing involves purchasing a portion of a specific property alongside other investors, providing direct ownership with the potential for higher returns and tax benefits like depreciation deductions. It requires higher initial capital, is a long-term investment with a set holding duration (around 5–10 years), and offers control over property selection and management.
On the other hand, REITs are companies that own and operate income-generating real estate across various sectors, trading like stocks and offering diversification and liquidity. While REITs provide passive income through dividends and exposure to a broad real estate portfolio, they may be subject to stock market volatility. The choice between fractional real estate investing and REITs depends on factors such as risk tolerance, investment horizon, tax implications, and capital requirements, with some investors opting to diversify across both options.
Challenges
Limited control: As a co-owner, you may have limited control over renovations, tenant selection, or the sale of the property. Decisions regarding the property are typically made by a majority vote or by a designated management company.
Market volatility: Indian real estate markets exhibit resilience, yet they can be influenced by various factors such as economic fluctuations, policy changes, and geopolitical uncertainties. As a result, fractional owners may encounter challenges during market downturns, which could impact the value of their investments. However, these markets also present opportunities for recovery and growth over time.
Taxation issues: Fractional owners need to consider tax implications such as capital gains tax, stamp duty, and property taxes, which can impact investment returns. Taxation laws for real estate transactions in India can be intricate and may evolve over time, so staying informed is important to ensure a smooth investment experience.
Liquidity concerns: Selling shares might take longer compared to traditional property sales. Finding buyers for fractional shares or exiting investments may be difficult, particularly during economic downturns or when market conditions are unfavourable.
Technology and infrastructure: Fractional owners rely on the platform’s expertise for management, property administration, and communication. Ensuring the reliability, security, and scalability of technology platforms is crucial for the success of fractional ownership initiatives.
How safe is it?
Fractional ownership of commercial real estate can be a relatively safe investment, especially when you make informed decisions and carefully evaluate the property’s potential and associated risks. Investors benefit from diversified portfolios and reduced financial risk as they share the responsibility of ownership with others. However, the security of fractional ownership depends on factors such as the credibility of the managing company, the stability of the real estate market, and the specific terms of the ownership agreement. Thorough due diligence and understanding of the risks involved are crucial for investors to make informed decisions and mitigate potential downsides.
Tips for first-time investors
- Investigate the platform thoroughly, including its fees and track record. Look for reviews, ratings, and testimonials to ensure credibility and reliability.
- Analyze the property’s location, potential for generating rental income, and prospective valuation.
- Familiarise yourself with how fractional ownership works, including the terms, fees, and potential returns. Understand the rights and responsibilities associated with your ownership stake.
- Prioritise SEBI-registered platforms to ensure regulatory compliance and investor protection.
- Understand the exit strategy offered by the platform or company. Determine how and when you can sell your ownership stake if needed, and assess any associated costs or restrictions.
- Evaluate your risk tolerance and investment goals before committing capital to fractional ownership.
- Begin with a smaller investment amount to gain experience and confidence in fractional ownership.
- Keep yourself abreast of market trends, regulatory changes, and economic developments to make informed investment decisions.
The future of fractional real estate ownership in India appears promising, driven by technological advancements, evolving investor preferences, and the growing demand for alternative investment avenues. The fractional ownership market can be a good option for investors who are looking to diversify their portfolio and gain exposure to the real estate market without committing to a full property investment. While it presents numerous benefits such as accessibility, diversification, and passive income, it also comes with its own set of challenges, including limited control, market volatility, taxation issues, and liquidity concerns. By adhering to best practices, staying informed about market trends , and aligning investments with individual financial goals, one can navigate the landscape of fractional real estate ownership in India with confidence and reap significant rewards.