Fractional Ownership is an evolving concept, on the lines of REIT but very different from REIT. Unlike REIT, which is a listed entity owning income producing real estate, Fractional Ownership is coming together of investors to pool their funds and jointly purchase real estate. Though in its very essence, the idea is to rent it out and earn the equitable rentals, many ‘office for a limited purpose’ investors are also getting into Fractional Ownership for convenience. A Track2Realty analysis.
“Why should I buy an office when all that I need with an office space is four times a month use, only for the purpose of weekly meetings? The real issue is the very nature of my business demands that I must have my client meetings in a lavish office and hence I can’t go for an economical small office. Thankfully, my real estate agent offered me the solution with Fractional Ownership,” says an ecstatic entrepreneur, Raman Lamba.
Since this is an evolving asset class, there are various deal structures along the concept of Fractional Ownership. At the basic level, two models of Fractional Ownership are working in the commercial market today. At an organized level in the Tier I cities, the investors are acquiring rent yielding commercial spaces for rentals. But across Tier II cities and periphery locations, investors are also acquiring Fractional Ownership for limited self-use.
Say for the sake of back of the envelope calculation, a small office seeker having need to keep office address and an hour of weekly meeting could get Fractional Ownership of an upscale office complex with as low investment as INR 5 lakh. The same office space could otherwise cost INR 50 lakh, if outright purchased.
Fractional ownership changing commercial property
Fractional Ownership offers more flexibility than REITs
It is more of private portfolio than a regulated portfolio and falls under Sandbox Regulation of the SEBI
It is effectively a crowdfunding platform
Investment via Fractional Ownership could be either for rental yield or limited self-use
Fractional Ownership market size anticipated to grow $5 billion by 2024, as against $1.2 billion present market size of REITs
Fractional Ownership provides usability of the investment as well
Fractional Ownership provides control over property
Fractional Ownership saves from market fluctuations of REITs and other similar investments
Fractional Ownership has performed better than REITs (8-8.5% as against 7-7.5%), if Capital Gains Tax is taken away and only net yields are factored in
Fractional Ownership is more for risk taking investors and not for risk averse investors
Advantage Fractional Ownership
The question is whether the Fractional Ownership of the commercial spaces would change the real estate market ahead. Why is fractional ownership seen with so much optimism that it even promises to over shadow REITs in India? The answer lies in the way we the Indians look at our investments in general and property investment in particular.
Firstly, Indians always look up to the usability of the investment, often over and above the ROI. That is one of the reasons that gold investment is weighed higher than any other financial product.
Secondly, Fractional Ownership gives greater control over the investment. One can inspect the investment and make decisions with a physical product in hand. This is unlike the REIT that is only a piece of paper in hand.
Thirdly, Indians are by and large risk averse in the financial market. They would prefer less than inflation beating bank fixed deposits over stocks or mutual funds. A physical property provides much needed cushioning against the market fluctuations.
Upbeat Industry Overtones
Amit Goenka, MD & CEO, Nisus Finance is upbeat on the prospects of Fractional Ownership when he says that what started as an experiment around three years ago has today become quite a central asset class amongst the HNI segment. People are now looking at almost double digit returns. It is not just the commercial spaces but also the warehousing that is making it an attractive proposition. It is a very serious mainstream investment opportunity for the small investors.
“If you look at the total portfolio of various Fractional Ownership companies which started with INR 30-40 crore have today grown to 100 million each. It means the total market size of the Fractional Ownership market among the top four operators is roughly about 400 million dollars. That is a very significant size if you look at the ticket size of each owner participant is between 5-10 lakhs,” says Goenka.
Ashish Narain Agarwal, Founder & CEO, PropertyPistol points out that while investing in financial instruments whether it is Fractional Ownership or REIT is good, one must exercise caution before doing so. Any business or transaction can pose risk factors and trust deficit if not properly understood, analysed and gauged prior to taking a plunge. An investor should research the properties or holdings within the investment portfolio to be sure that they are still relevant and can generate income.
“One should also ensure that the financial investment option has a robust management team, quality properties in suitable locations, transparency in sharing information, etc. It is always good to keep a track of historically how a portfolio has been managed and transacted to get a fair idea or consult an investment expert who can guide one accordingly. The key is to be aware, focused and vigilant to study the market thoroughly before finalising on any deal,” says Agarwal.
Pros & Cons
In a nutshell, Fractional Ownership is very different from REITs; it doesn’t follow any REIT norms where regulations are very well settled. It is more like a private portfolio than a regulated portfolio and hence falls under the Sandbox Regulation of the SEBI. Effectively a crowdfunding platform, Fractional Ownership since its gaining ground in India have done transactions worth INR 750 crore in the initial five years.
Fractional Ownership has performed better than REITs (8-8.5% as against 7-7.5%), if Capital Gains Tax is taken away and only net yields are factored in. However, it is more for risk taking investors and not for risk averse investors. Fractional Ownership has a distinct advantage that it invests with an identified asset that could generate revenue and that asset could be physically monitored. So, some amount of capital protection is always within the sight, as against a tradable asset class like REIT where the retail investor has no control over it.
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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