Ever since the Securities and Exchange Board of India (SEBI) has cleared the fractional ownership framework for realty assets, there is an euphoria among the stakeholders. The built environment of Indian real estate that is always looking for new and exciting avenues to attract the investors. It has hence carried home the message that the “Next Big” investment basket has arrived. A Track2Realty report.
Fractional Ownership is a new and yet evolving concept in India. It is therefore imperative for an average investor to understand its plus & minus, advantages & nuances before taking a plunge into it.
What is Fractional Ownership
Fractional Ownership, as the name itself suggests, is where you buy a fraction/share of a building (commercial, warehouse or holiday home) along with other investors. There is a Fractional Ownership platform that brings all the participating investors together to make a purchase on their behalf. Since most of the retail investors can’t afford an outright purchase of a costly property, they pool together and enjoy their share into the property.
For instance, a sea facing holiday home in Goa at the cost of INR 3 crore might not be affordable to a middle class retail investor. But one can easily shell out INR 30 lakh and get a one-tenth share of the said property. This investor can now either himself avail 35 days of stay every year or the Fractional Ownership platform will rent it out and give the proportionate yield to the owner.
New SEBI Framework
The SEBI has now approved the proposal to introduce a framework for Fractional Ownership. This will be treated as the Micro, Small and Medium scale REIT with an asset value of at least INR 50 crore, compared to the current minimum asset value of INR 500 crore for the existing REITs. Earlier, in August this year the SEBI had floated a consultation paper for regulating all web-based platforms offering Fractional Ownership.
Industry Reactions
G. Hari Babu, National President of NAREDCO maintains that SEBI’s recent green light for Small and Medium REITs and oversight on Fractional Ownership platforms is a transformative milestone for real estate. The decision to lower the minimum asset value to INR 50 crore offers enticing entry points for investors, aligning with the industry’s evolution. Calling this a progressive stride, he believes this to ensure investor protection and disclosure practices.
“The formalization of Fractional Ownership is crucial for fostering investor confidence, benefiting not only commercial but also affordable housing. The regulatory framework is anticipated to drive growth in this innovative property ownership form, reflecting trust in the evolving investment landscape. This marks a significant step towards a more dynamic and inclusive real estate environment,” says Hari Babu.
Shravan Gupta, CEO of YOURS, a platform for fractional ownership of luxury second homes, says the SEBI initiative and guidelines to regulate the Small & Medium REITs and real estate Fractional Ownership segment is welcomed as a positive and necessary step. This move signifies the strengthening of the segment and reflects increasing demand from investors.
“The guidelines proposed by SEBI are crucial for formalizing the sector, instilling investor faith, and addressing the complexity of Special Purpose Vehicle (SPV) securities issuances. Particularly beneficial for retail investors unfamiliar with such structures, the regulation is anticipated to contribute to the growth and acceptance of this innovative form of property ownership, aligning with established practices in developed nations,” says Gupta.
Aryaman Vir, CEO at WiseX is delighted to see SEBI moving ahead after extensive discussions with the key industry players and users. According to him, the regulatory approval addresses the evolving landscape of real estate investments. SEBI’s acknowledgement on the growing trend of Fractional Ownership platforms and extending regulatory oversight is commendable. We believe that it will not only foster investor interest in the real estate space but also ensure investor protection, common disclosure practices, and a robust redressal mechanism.
“The lowered minimum asset value of INR 50 crore for Small and Medium REITs will open exciting opportunities for investors seeking more accessible entry points into real estate ownership. The ability for SM REITs to create separate schemes enhances flexibility and innovation in structuring real estate portfolios. We look forward to the positive impact these regulatory changes will bring to the fractional ownership ecosystem, promoting more inclusivity and diversification in real estate investments, says Vir.”
What may work with Fractional Ownership
Investors looking for diversification of portfolio
Option of either rental yield or self-use
Holiday home seekers looking for high value properties
Grade A office space aspirants with limited budget
Potential to use the property rather than just getting the income generated, like the REIT
Investment in identified asset that an investor can physically check
What are the downsides
Regulatory framework is just evolving and SEBI regulations with REIT too have gone through its own learning curve
No clarity over investment basket, for example whether allowed in under-construction
Riskier investment than REIT in terms of corporate governance & practices
Returns are not that attractive in the present framework
No additional tax benefits
With a holiday home all the participating investors would like to avail during the holidays only, thereby making it as challenging as the time share concept that lost its sheen
Fractional Ownership platforms to charge maintenance fee, thus further reducing the returns
Exit is not as easy as stock or REIT, a new buyer has to be ready to enter
Advice to investors
The retail investors who are already having individual property, stocks, mutual funds and gold, can go for Fractional Ownership as a means to diversify their portfolio and mitigate the overall investment risk. However, since this is an not-yet-tested investment basket and the concept as well as regulations are just evolving, it is definitely not a product for risk averse small investors.
Those looking for high-value holiday homes in hills or seaside should also keep in mind that their chances of availing the luxury of vacations is in proportion and subject to the participating investors and their willingness to avail it during the holiday season itself. If some tax incentives are given over the earned rentals of Fractional Ownership property, then only can it be a lucrative option from the standpoint of ROI.
Ravi Sinha
@RaviTrack2Media
Ravi Sinha is a journalist with over two decades of cross-discipline media exposure. He is the CEO of real estate thinktank group Track2Realty. He has been writing extensively on the real estate sector for more than a decade now. Evaluation of real estate brand performance is his core domain expertise and he has immense insight into consumers’ psychograph. He has conceptualised Track2Realty BrandXReport as India’s 1st & only objective & non-paid brand rating journal that is industry-accepted benchmark of brand equity & ranking of the Indian real estate companies.
Track2Realty is an independent media group managed by a consortium of journalists. Starting as the first e-newspaper in the Indian real estate sector in 2011, the group has today evolved as a think-tank on the sector with specialized research reports and rating & ranking. We are editorially independent and free from commercial bias and/or influenced by investors or shareholders. Our editorial team has no clash of interest in practicing high quality journalism that is free, frank & fearless.
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