Seeking a piece of realty market puzzle? Know why experts tout fractional ownership

Fractional ownership in real estate: Are you seeking a slice of the real estate pie without breaking the bank? Fractional ownership model is for you, say experts. This approach to property investment is gaining traction amongst a diverse range of investors, offering opportunities for partial ownership of high-value assets without the hefty price tag.

Whether you're a small-scale investor looking to diversify your portfolio or a passive income seeker craving rental yields, fractional ownership presents an avenue to dip your toes into the real estate market.

However, as the popularity of fractional ownership grows, so do the complexities and challenges associated with this evolving trend.

Understanding fractional ownership

Fractional ownership entails multiple investors pooling their resources to collectively purchase a property, facilitated by fractional ownership platforms (FOPs). These platforms enable investors to acquire a stake in real estate assets that would otherwise be financially out of reach. 

"Whether it's residential properties in sought-after locations or commercial spaces in prime business districts, fractional ownership opens doors to a diverse range of investment opportunities," said LC Mittal, Director, Motia Group.

Investors typically contribute a predetermined amount of capital to acquire a proportional share of the property.

"Rental income generated from the property is distributed amongst investors based on their ownership stake, offering a steady stream of passive income. Additionally, fractional ownership platforms may provide perks such as complimentary stays or access to premium amenities, enhancing the investment experience," Mittal added.

Types of fractional ownership

In the realty sector, fractional ownership has various forms, each catering to different investor preferences and objectives:

Joint Development Agreements (JDAs)

JDAs establish collaborative arrangements between landowners and developers, allowing investors to participate in property development projects and share profits proportionally.

Real Estate Investment Trusts (REITs)

REITs are publicly listed entities that own and manage income-generating real estate assets. Investors can acquire shares in REITs, entitling them to dividends based on the performance of the underlying assets.

Fractional ownership platforms

Real estate crowdfunding platforms have surged in popularity, providing investors with access to a diverse portfolio of properties. Through fractional ownership, investors can acquire stakes in properties of varying sizes and types, tailored to their investment preferences.

Co-working spaces

Fractional ownership extends beyond traditional property assets to include co-working spaces, catering to the growing demand for flexible workspace solutions in urban centres.

Regulatory landscape and proposed reforms

The regulatory framework governing fractional ownership in India is evolving, with regulatory bodies like the Securities and Exchange Board of India (SEBI) taking steps to address challenges and ensure investor protection.

“SEBI's proposal to mandate registration for FOPs under the Framework for Micro, Small, and Medium Real Estate Investment Trusts highlights the importance of transparency and standardised practices in the sector,” said Suren Goyal, Partner at RPS group.

However, concerns persist regarding the lack of uniform selling practices, independent valuation mechanisms, and investor safeguards. As highlighted by industry experts, the absence of irrevocable buyback guarantees and potential disputes amongst co-owners raise questions about the viability of fractional ownership models compared to exclusive ownership arrangements.

Advantages and challenges

Fractional ownership in real estate provides investors with the benefits of diversification, affordability, and professional property management.

"It allows individuals to access high-value properties, spread risk, and enjoy a passive income without the hassle of day-to-day property management. This model offers a flexible and accessible approach to real estate investment, catering to a diverse range of investors," said Gunjan Goel, Director of goel Ganga Developments.

However, challenges such as co-owner disputes, liquidity constraints, and limited control over property decisions underscore the importance of thorough due diligence and risk assessment before entering into fractional ownership arrangements.

Future of fractional ownership

According to JLL analysis, fractional investment ownership has opened new avenues for investors, allowing them to own a portion of large commercial properties and capitalise on their rising potential. Despite the challenges posed by the COVID-19 pandemic, fractional investment deals worth 350 million were progressing in India.

"This model holds significant promise for the real estate market, poised to become more mainstream as it gains recognition and regulatory clarity. Investors stand to benefit from diversified portfolios, access to high-value properties, and professional management services as fractional ownership continues to evolve and expand," Goel added.