Fractional ownership emerging as a convenient option for small investors

In India, the popular traditional investment avenues are Gold and Real Estate. Gold again mostly in the form of ornaments while real estate is predominantly plots of land (rural/semi-urban) or house (flat) in urban areas. At the time of weddings or new child births, the close or immediate family prefers gifts in these two kinds. Of course, when it comes to real estate and gold respectively, the logic goes that land can't grow and gold can't rust. This age-old believes stands the test of times and proven satisfactory psychologically for Indians, though, many factors like inflation, taxation, etc. are discounted.

When we look at the rental yield i.e., the rent derived from the house value has been at an abysmal rate in India. It generally stands at about 2-3 per cent and in some cases at a max of 4 per cent. While the rental from commercial property has an average of 3 to 4 times that of the residential, the cost of owning a commercial property is high. A good commercial property could even yield rentals in the lower teen percentages but such a property the initial investment runs into a few crores.

This is where fractional ownership of commercial real estate comes into play. This is nothing novel way. Even a decade back, property developers used to offer investors to part own the property by infusing the capital during an early stage of the construction. But even here, the minimum investment used to be in tens of lakhs of rupees as the developer didn't want to fragment the property too much and the limitation of the management of multiple investors into the same asset, so was restricted to a few high-net worth individuals (HNI).

With the technological advancement, now-a-days we see multiple platforms offering such investment options. By lowering the barriers of entry, i.e., the minimum investment cost, they began to provide convenient options to explore commercial real estate, even for retail investors. One could now invest across multiple projects at various locations simultaneously which was almost difficult in earlier years, earning a moniker 'laptop landlords.'

As the name suggest, in a fractional ownership, multiple investors come together to combinedly hold a single asset. Each individual according to their contributions are offered a percentage or fraction of that asset. For instance, if one were to check for a decent commercial or an office space in any of the prime locations of an urban area, it would start with a few tens of crores of rupees. If a property of 100 crore generates, say about, 8 crores as rent, the rental yield stands at 8 per cent. Now, to own such a property, it's impossible for any retail investor.

If this were to be offered in a fractional investment option, 500 investors contributing 20 lakh rupees each could own this property. The platform or the investment company facilitates this transaction by pooling these contributions and by either creating a separate entity or a Special Purpose Vehicle (SPV) registers the proportionate property on them. The generated rent is also distributed accordingly as the proportion to each of the investors either monthly or quarterly. There could be a facilitation fee or management charge that would be collected from across the investors as a percentage of the income or investment.

At times, the facilitation company or the platform explicitly collects the fee or implicitly discounts into the rental yield. Suppose a developer itself launches an investment option of fractional ownership, it may insist for a lease back to the developer upon registration, with a guaranteed rental income appreciating at a fixed percentage at a pre-decided interval. In this scenario, the investor is not dependent upon the tenant occupancy, maintenance costs, etc. but the investor mayn't realize the actual rent generated from their property. That's the cost of convenience. For retail investors, a pre-determined set up not only helps in convenience but also results to consistent cashflows.

Of course, one shouldn't confuse these to be based on REIT (Real Estate Investment Trusts) or MF (mutual funds) which are regulated and governed by SEBI (Securities Exchange Board of India). These kinds of agreements don't even fall under the purview of RERA (Real Estate Regulatory Authority) and hence investors should be way of risks. Despite the attractive proposition, caution should be prevailed. Despite the lowered investment limits of even Rs 10 lakh, investors should understand the risks fully well before investing into such deals. The income generated from such investments are added to the individual's income and taxed accordingly.

(The author is a co-founder of "Wealocity", a wealth management firm and could be reached at [email protected])