What is Fractional Ownership in Real Estate?

  • January 3, 2024

Fractional ownership has gained significant popularity in the Indian market, especially within real estate investment. This trend has increased inclusivity in the real estate sector through several fractional ownership arrangements.

This advancement in fractional investment also empowers all retail investors to partake in highly lucrative and previously exclusive real estate opportunities. The question of where and how to begin might be on your mind if you are interested in entering the field of investment.

What is fractional ownershipContinue reading ahead to explore the avenues of initiating your journey into fractional ownership in real estate investment. 

What is Fractional Ownership in Real Estate?

Fractional ownership in real estate refers to a situation where multiple individuals or entities own a share or fraction of a property. It is divided into smaller, more manageable ownership interests instead of one person or entity owning the entire property. Each fractional owner has a percentage stake in the property. This includes the corresponding portion of the property’s use, rental income, and appreciation.

Fractional ownership is an efficient option to buy and own property without investing a huge sum of money in owning the whole property. It further allows investors to diversify their investment portfolios. It helps reduce risk by spreading several investments across different assets. 

Fractional ownership can apply to various assets, such as:

  • Commercial property
  • Farms
  • Vacation homes
  • High-end properties
  • Second homes

Types of Fractional Ownership in India

Fractional property investment is a relatively recent concept in India. Yet, it has gained swift popularity among investors seeking a flexible approach to real estate investment.  Fractional ownership of real estate in India presents an appealing alternative, given the substantial cost of real estate and limited financing options for small-scale investors.

  • Joint Development Agreements (JDAs)

Fractional ownership in India is often observed through Joint Development Agreements (JDAs). This contractual arrangement establishes a partnership between a landowner and a developer. Thus, the ownership delineates their collaborative efforts in developing the land and distributing the proceeds from the property sale.

Joint development agreements

 

Investors participate by making financial contributions to the project. It also involves a share of profits and their investment in the JDA. 

  • Real Estate Investment Trusts (REITs)

REITs represent another prevalent form of fractional property investment in India as publicly listed entities. They manage a portfolio of several income-generating real estate assets while owning them.

Investors can acquire REIT shares for fractional ownership, too. It entitles them to dividends corresponding to the earnings generated by the real estate assets held by the REIT entity. REITs offer a liquid and diversified approach to fractional home ownership in real estate.

  • Fractional Ownership Platforms

The popularity of fractional property investment platforms has surged in India. These platforms are often referred to as real estate crowdfunding platforms. They allow investors to explore diverse properties and make investments of their preferred magnitude.

Each investor or buyer has a proportionate stake in the property. This makes them the owner of the corresponding portion of a rental income. This approach also allows for diversification across multiple properties and flexibility in investment size.

  • Co-working Spaces

Fractional ownership has garnered significant interest in co-working spaces in cities like Delhi, Mumbai, Bangalore, and Pune. While singular entities own these spaces, investors can acquire fractional property ownership of shares.

Co working spacesThis model allows investors to benefit from the growth of the co-working sector, with returns based on the performance of the shared workspace. Fractional ownership in co-working spaces provides investors with exposure to the commercial real estate sector without the need for full ownership of an entire property.

Growth of Fractional Ownership

The growth of fractional property ownership in India has been remarkable. The need for flexible and affordable real estate investment options fuels it. The market size of fractional ownership properties in India is experiencing substantial expansion with an annual growth rate of 10.5%. The same market will surge at an impressive estimate of 65%. It implies an increase from $5.4 billion in 2020 to $8.9 billion in 2025.

Factors contributing to the growth of fractional ownership in India are:

  • Financial Accessibility

Fractional ownership addresses the financial challenges associated with real estate investment in India. With the high cost of properties, this model allows investors to enter the real estate market with a more manageable financial commitment, attracting a broader pool of participants.

  • Diversification Opportunities

Investors are increasingly drawn to fractional ownership because it helps them diversify their real estate portfolios. Individuals can spread risk and access different segments of the market, too. They can do so by holding shares in multiple properties or participating in REITs. 

  • DiversificationEase of Entry

Fractional ownership eliminates some of the barriers to entry traditionally associated with real estate investment. It allows investors to engage in fractional property ventures without the need for significant upfront capital. This also makes real estate accessible to more individuals.

  • Liquidity and Flexibility

Fractional ownership provides liquidity and flexibility, unlike traditional real estate investments that may involve a more extended commitment. Investors can enter or exit their investments more easily, contributing to a dynamic and responsive market.

  • Technology and Platforms

The rise of technology and dedicated platforms for fractional ownership has streamlined the investment process. Real estate crowdfunding platforms and digital investment tools provide investors user-friendly interfaces to explore, select, and manage their fractional ownership investments.

  • Regulatory Support

Regulatory frameworks have evolved to accommodate and regulate fractional ownership structures. Clear guidelines and legal frameworks have contributed to increased investor confidence in this innovative approach to real estate investment.

  • Rising Awareness

As awareness grows regarding the benefits of fractional ownership, more investors are exploring this option. Educational initiatives and success stories contribute to a positive perception of fractional ownership as a viable and attractive investment strategy.

  • Changing Consumer Preferences

Shifts in consumer preferences, particularly among younger generations, favor more flexible and dynamic investment models. Fractional ownership aligns with these preferences, providing an avenue for participation in the real estate market without the constraints of traditional ownership. This often involves offering a letter of allotment to the interested parties. 

Things to Know Before Fractional Investment in Real Estate

You must consider several factors to make informed and strategic decisions before engaging in fractional investment in real estate. Here are important points to know:

  • Choose a Reputable Investment Platform

Research and select a reputable investment platform that specializes in fractional real estate. Look for platforms with a track record of successful transactions, transparent practices, and positive reviews. Ensure the specific investing platform complies with regulatory standards.

  • Assess Investment Potential

Evaluate the fractional property’s potential for appreciation and rental income. Conduct thorough research on the local real estate market, economic trends, and the property’s location. Assess the overall investment viability, considering factors such as market demand, infrastructure development, and future growth prospects.

  • Understand the Ownership Structure

Familiarize yourself with the fractional ownership structure. Understand how investors allocate shares, the voting rights associated with ownership, and the available exit strategies. Clarify any uncertainties and ensure that the ownership arrangement aligns with your investment goals. You can always use a deed of declaration document to attain and impose your ownership rights. 

  • Examine Fee Structure

Understand the fee structure associated with the fractional investment. Be aware of transaction fees, management fees, performance fees, or any other applicable charges. Transparent fee structures contribute to an understanding of the overall costs and potential returns.

  • Review Investor Rights and Protections

Carefully review the investor rights and protections provided by the fractional investment platform. Understand the terms and conditions outlined in the investment agreement, including dispute resolution mechanisms and any safeguards to protect investors’ interests.

  • Consult with a Tax Professional

Seek advice from a tax professional to understand the tax implications of fractional real estate investments in your jurisdiction. Different regions may have varying tax regulations regarding fraction property ownership, rental income, and capital gains. Understanding the tax landscape helps in accurate financial planning.

  • Consider Exit Options

Evaluate the available exit options for fractional investments. Understand how to sell your investment or exit the partnership. Clear exit strategies contribute to the overall liquidity and flexibility of your investment. It allows you to adapt to changing circumstances or capitalize on new opportunities.

Advantages of Fractional Ownership in Real Estate

Fractional ownership offers several benefits in the real estate sector. You must be aware of these advantages if you are interested in this field of investments. 

  • Lower Entry Barriers

One of the primary advantages of fractional ownership is the reduction of entry barriers into the real estate market. Traditional real estate investments often demand a substantial upfront capital investment, limiting access to a select group. Fractional home ownership democratizes real estate by allowing investors to enter with a smaller financial commitment, making it accessible to a broader range of retail investors. This inclusivity enables individuals to participate in the shared real estate market, unlocking potential financial rewards.

  • Passive Income

Fractional ownership in real estate presents the opportunity for passive income through rental returns. Investors earn a proportional share of the rental income generated by the property, creating a regular income stream. This feature particularly appeals to those seeking to diversify income sources or achieve financial independence. Additionally, fractional ownership may offer the potential for selling the investment at a higher value in the future, allowing investors to realize capital gains.

  • Fractional investmentDiversification

Fractional ownership enables retail investors to diversify their portfolios effectively. Commercial real estate offers stability and lower volatility, unlike traditional options such as stocks and mutual funds. The emergence of fractional ownership platforms makes commercial real estate accessible to retail investors, providing access to higher returns than other assets. With consistent returns and the potential for long-term wealth building, fractional ownership becomes an attractive choice for retail investors looking to diversify their fractional investment portfolios.

  • Access to Premium Properties

Fractional ownership allows individual investors to access premium properties that may have been previously unattainable. Participating in fractional ownership allows investors to gain a stake in institutional-grade properties backed by blue-chip tenants. This access opens opportunities to benefit from potential appreciation and rental income associated with high-value assets. Fractional ownership thus levels the playing field, enabling individuals to diversify their portfolios and tap into advantages typically reserved for institutional investors.

  • Hassle-free Management

Real estate investment often involves various administrative burdens, including property management, maintenance, tenant issues, and paperwork. Fractional ownership offers a hassle-free experience as professional property management companies typically handle all operational aspects. This particular approach allows investors to enjoy the benefits of real estate ownership. It frees up time for investors to focus on other priorities. They can be a part of the process by reaping the rewards of their fractional investment.

Fractional Ownership vs REITs

There are certain points of distinction between fractional ownership and REITs. The following table compares both and showcases their differences. 

 

Characteristics

Fractional Ownership

REITs

Ownership Structure Direct ownership of a specific property share Indirect ownership through shares in a real estate portfolio entity
Investment Control Investors have control over specific property decisions Limited control as decisions are made by REIT management
Liquidity Potentially lower liquidity depends on the market for fractional shares With higher liquidity, shares can be bought or sold on the stock exchange
Minimum Investment Requires a smaller minimum investment It may require a larger minimum investment, subject to the share price
Management Responsibility Investors may have some involvement in property decisions Passive investment with professional management handling operations
Diversification Allows for direct diversification across specific properties Offers diversification across a portfolio of various real estate assets
Access to Premium Assets Provides access to premium assets through direct ownership Offers exposure to institutional-grade assets through indirect ownership
Tax Considerations Tax implications may be different based on the direct ownership structure Tax-efficient, with REITs often having favorable tax treatment

Bottom Line

The choice between engaging in fractional investing depends upon your specific investment goals. This applies when considering fractional investments in premium properties within the Indian market. It further depends on your readiness to bear risks and current financial standing.

Choosing fractional ownership of real estate for investment can have a significant appeal if you want to expand the scope of your investment portfolio. Partnering with real estate specialists like Asmita India Reality can help you participate in multiple properties without committing to the total purchase cost.

Hence, you stand to gain from rental proceeds through fractional ownership by investing in a property segment.

Frequently Asked Questions 

  • Is fractional ownership a good investment?

Many experts believe fractional ownership is better than other investment options regarding safety and stability. Fractional home ownership is a hard asset, and the returns do not fluctuate with the market. 

  • Is fractional ownership legal in India?

SEBI does not control fractional ownership in India. So, it is mandatory for all investors to invest 80% of their money in income-generating assets. However, it is not a compulsion, and the money can be invested elsewhere. 

  • How do you calculate fractional ownership?

Add the costs of all available fractional shares for a specific home and divide this total by the property’s fair market value. Ensure the fair market value represents a realistic price reflecting the amount the property could sell for in the current market within 90-180 days.

By asmitarealty
By asmitarealty
By asmitarealty

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