What Could Drive The Success Of Fractional Ownership Of Property In India

In India, numerous web-based platforms have emerged over the past three years, allowing investors to participate in fractional ownership of real estate assets like malls, warehouses, and buildings with a small investment.

Fractional ownership, as the name suggests, entails owning a fraction or portion of a commercial property instead of the whole unit. This help reduces the size of investment, enabling higher liquidity in the real estate eco-system. It also lowers the transaction cost for multiple owners. This investment option has been available globally since 2015 in markets like the U.A.E and the U.S.

"For the real-estate industry, it increases the monetisation potential of capital-intensive and long gestation-period commercial real-estate projects," Vivek Rathi, director of research at Knight Frank India, told BQ Prime.

Unlike earlier, when the end consumer made an outright purchase to use the property, the users lease the asset nowadays in more than 80% of the cases and ownership resides with the investors, according to Rathi. "Such investors will get a better opportunity to liquidate (their assets) when necessary."

The multiple owners, who intend to buy a big-ticket commercial property, create a group themselves or through a fractional ownership platform—an investing strategy in which the cost of acquisition of real estate is split among several investors, who invest in securities issued by a special purpose vehicle established by the FOP. Such SPV purchases the real estate asset.

"Depending on the platform offerings, the property can be purchased by individuals in the form of a defined share, say 10% of the shareholding or built-up area, say one square feet," Rathi said.

Likewise, at the time of investment exit from the property, owners may do so by transferring the shares or tokens owned by them, he said, explaining that it would help boost the private capital inflows, which have become as active as institutional capital in recent times.

The market regulator has proposed to regulate platforms offering fractional ownership of real-estate assets to safeguard the interests of investors.

SEBI has proposed to bring such fractional ownership of real estate assets as micro, small and medium REITs under the Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations.

"Implementing the REIT principle will dispel any ambiguity that potential investors may have regarding FOPs," said Anshuman Magazine, the head of India, southeast Asia, Middle East & Africa at CBRE.

The proposed regulations would strike a balance between compliance costs associated with governance and investor interests. This would also enhance the commercial attractiveness of the MSM REITs as a viable investment product, according to Magazine.

The proposed framework to regulate FOPs as MSM REITs provides a pragmatic solution to the regulatory ambiguity around this product, according to experts.

"There is a need to understand the fractional ownership premise and that is increased liquidity because of reduced ticket size, diversification benefit," Rathi said. "At the same time, challenges could arise from differences of thought process or ability of multiple owners on undertaking refurbishment works or leasing terms, and other general investment risks."

In such a scenario, a regulatory guideline under the capital markets supervisor and modelled on the lines of a much-evolved REIT framework would benefit the investors, according to Rathi. "Some concessions can still be provided, considering that the dynamics are different compared to REIT assets."

Experts say the regulatory oversight of such platforms by SEBI is a positive development towards bringing greater transparency and accountability to the sector and improving investor protection for real-estate assets in India.

"It will expand investment opportunities for individual investors and democratise access to a traditionally inaccessible asset class for smaller investors," Asheesh Chanda, chief executive officer of Kristal Advisors (SG) PTE.

"Overall, this could lead to more diverse investment portfolios and increased opportunities for wealth creation in India," the Kristal founder said.

The success of the concept would depend on the excess return it generates over a comparable REIT product. "Although the concept of fractional ownership is yet to mature in India as an alternative investment instrument, this initiative by SEBI will strengthen investor confidence and further attract more investors in this domain," Magazine said.