What is Fractional Investment in Real Estate in India?

Fractional ownership is called co-ownership where more than one investor invests in a property. In that case, each owner gets the rights and obligations of that property. They must pay annual taxes; repair and maintenance costs as well as insurance premiums. Additionally, fractional owners have the freedom to sell their shares whenever they want. However, all that depends on what was agreed within the contract about co-ownership.

This provides them with access to profitable ventures. Otherwise, these options would be out of their reach or unfriendly to their budgets. This is different from timeshares or leaseholds as it offers legal ownership and rights for those who invest in it.

Real estate is especially popular for commercial properties. These include office buildings, retail spaces, industrial complexes, and warehouses. These properties generate stable rental income and appreciate over time. Yet, they also need large capital outlays, maintenance costs, and management expertise. Fractional owners can overcome these challenges by pooling their funds and resources. They can then enjoy the benefits of owning commercial real estate. 

In this article, you will learn about fractional ownership and the types of fractional investing in real estate. You will also learn how fractional ownership works. Additionally, you will find out whether it is beneficial for you.

Overview of Fractional Ownership in Real Estate in India

Aspect	Details
Definition	A way for multiple investors to share property ownership, providing legal rights and the ability to sell shares.
Types of Fractional Ownership	– Joint Development Agreements (JDAs) – Real Estate Investment Trusts (REITs)  – Specific Purpose Vehicles (SPVs)   – Online Platforms e.g., SliceVista, Strata, hBits, etc.
Advantages	– Affordable entry   – Access to premium properties   – Potential for appreciation and income   – Legal ownership and decision rights
Disadvantages	– Potential for illiquidity  – Market risk   – Complexity in management
Getting Started	– Find a suitable platform  – Research properties   – Invest in a property share
Trends in India	– Growing demand for commercial real estate   – Changing investor preferences   – Technological advancements

What is Fractional Property Investment?

Fractional property investment is ownership that focuses on investing in real estate for income and growth. Fractional property investors can choose from various properties. They might choose residential, commercial, or vacation homes. Investors can invest in these properties through a platform. The platform handles the investment’s legal, financial, and operational aspects. Fractional property investors can enjoy passive income from rent payments. They can also enjoy potential capital gains from appreciation. 

Types of Fractional Ownership in Real Estate

You can classify fractional investing in real estate based on property type, number of investors, and the legal framework. Here are some of the common types of fractional ownership that you can find in India

1. Joint Development Agreements (JDAs)

In this ownership, a landowner and developer sign a contract where they share profits from the sale of that property built on that land. Investors can take part in a JDA by contributing funds to the project and they will receive their share of the profits. 

2. Real Estate Investment Trusts (REITs) 

These organizations list and oversee a collection of real estate properties that produce revenue. REIT shares are available for purchase. They get dividends from the properties’ profits. REITs are governed by the Securities and Exchange Board of India (SEBI) and operate on certain guidelines. 

As an example, they have to give shareholders a minimum of 90% of their income. Additionally, they have to put at least 80% of their assets into finished, rental buildings. 

3. Specific Purpose Vehicles (SPVs)

These are made by private organizations for particular purposes. For instance, they might be the owners and managers of a single property or a collection of them. SPV shares can be purchased by investors. They acquire a portion of the underlying properties as their own. REITs are less flexible than SPVs. They are not bound by tight rules and are free to invest in any kind of real estate. However, compared to REITs, they also lack liquidity and transparency.

4. Online Platforms

On an internet marketplace, investors can purchase and sell portions of properties. Investors can peruse a range of properties. Their features and returns can be compared. After that, consumers can select the options that fit their spending limits and tastes. Examples: SliceVista, hBits, etc.

Also Read: What is a Real Estate Investment Trust

Advantages of Fractional Ownership in Real Estate

1. Affordability

Investors can buy fractions of properties for as low as Rs. 5 lakh or even Rs. 20,000. This way, investors can diversify their portfolio across many properties and locations. They can do this without spending a fortune.

2. Accessibility

It opens up a reasonable number of premium properties that are usually accessible only by high net-worth people. Due to Fractional ownership, you can also get access to that.  These properties have high occupancy rates, quality tenants, long-term leases, and attractive returns. They don’t have to hustle a lot in dealing with, finding, and acquiring these Real Estate. 

3. Appreciation

In India, there is a growing market for commercial real estate, particularly in Tier-I and Tier-II cities. Therefore, we anticipate that the properties’ value will rise. When the market is doing well, they may charge more for their fractions.

4. Income

Fractional ownership provides investors with a steady source of passive income. Investors receive this income from the rental payments of the properties. Fractional owners distribute the rental income among themselves. They do this based on their share of ownership. Rental income is usually higher than other forms of investment. For example, bank deposits or bonds.

5. Security

Fractional ownership offers security to investors. It gives them legal ownership and rights over the properties. Unlike other forms of shared use, fractional owners have a say in the decisions about the properties. They can make choices about maintenance, renovation, or sale. They also have recourse to legal action in case of disputes or fraud.

Disadvantages of Fractional Ownership in Real Estate

1. Illiquidity

Investing in real estate with fractional ownership results in less liquidity. Finding buyers or sellers for fractions of properties could be challenging at any particular moment. The kind of property determines how liquid fractional ownership is. The quantity of investors and the presence of secondary markets are other factors. When it comes time to sell their investments, investors could have to settle for less money or wait a long period.

2. Risk

Fractional ownership involves risk. The properties’ performance may vary depending on market conditions. It can also depend on tenant quality, occupancy rates, and maintenance costs. Investors may lose if the properties fail to generate enough income or appreciation. Investors may also face legal or regulatory issues. This can happen if the fractional ownership is not structured or compliant with the relevant laws.

3. Complexity

Fractional ownership adds complexity to real estate investing. It involves many parties, agreements, and transactions. Investors have to deal with the co-owners, developers, managers, and regulators of the properties. They also have to keep track of the income, expenses, taxes, and returns of their investments. Investors may need professional advice or help. They may need help to navigate the complexities of fractional ownership.

Also Read: Top Reasons to Invest in Commercial Real Estate

How to Get Started with Fractional Real Estate Investing?

In Fractional real estate investing you invest in property without purchasing the whole thing. It allows you to own a portion of a property alongside other investors. Fractional investing differs from regular real estate investing because traditional real estate investing requires you to own the entire property. 

• First of all, find a platform that offers fractional investment opportunities.

• The second thing that you have to do is compare based on their fees, returns, property types, locations, and least investment amounts. 

• You also need to research the properties that interest you. For example, look at their location, condition, occupancy rate, rental history, and market worth. 

• After finding the property that aligns with you, sign up on the platform. Then, you can invest in the property by buying a fraction of it. 

• You will then receive monthly or quarterly distributions from the rent payments. You will also get periodic updates on the property’s performance and value.

Also Read: Importance of Location in Property Investment

Why Fractional Ownership in Real Estate is Gaining Popularity in India?

Fractional ownership in real estate is a new concept in India. Yet, it has gained significant popularity and traction in recent years. Some of the trends that are driving the growth of fractional ownership in India are:

1. Rising Demand for Commercial Real Estate

The demand for commercial real estate in India has been increasing. This is because sectors like IT, e-commerce, logistics, and healthcare have been growing. These sectors must have large and modern spaces for their operations and expansion. Experts expect the demand for commercial real estate to remain strong after the pandemic. India is emerging as a preferred destination for global companies and investors.

2. Changing Preferences of Investors

Investors’ preferences in India are changing. They want to earn higher returns. They are also seeking more flexibility, convenience, and transparency in their investments. Fractional ownership caters to these preferences. It offers a new and attractive option for investing in real estate.

3. Advancement of Technology

Advancements in technology have enabled fractional ownership to emerge and grow in Indian real estate. Technology has made it possible to create digital platforms. These platforms connect investors with properties. They help transactions through blockchain and smart contracts. Technology has also improved the transparency, security, and efficiency of fractional ownership. It has done this by providing real-time data, verification, and communication.

Also Read: Tax Benefits Of Buying A Commercial Property

Conclusion

Fractional ownership is a concept that allows many investors to share the ownership of a high-value asset. For example, a real estate property. Fractional ownership in real estate is especially popular for commercial properties. They generate stable income and appreciate over time. 

It offers several advantages to investors. For example, it’s affordable, accessible, appreciated, provides income, and is secure. But, it also has some disadvantages, such as illiquidity, risk, and complexity. 

It is a new concept in India. But, it has gained significant popularity and traction in recent years. This is due to factors such as rising demand for commercial real estate. Investors’ preferences are changing, and technology is advancing.

Also Read: Real Estate Investment vs Index Funds