All You Need to Know about Fractional Ownership

Many people wish to own a property and they work hard to save enough money to do so. It could be a car or a piece of real estate. However, it may take years for a person to collect the required amount.

Would it be helpful if there were a quicker, less expensive way for you to establish your ownership of a property or asset? What if you were able to own a portion of the asset while still receiving returns from that fractional ownership?

A new way to own a fraction of real estate that you have been looking for is through fractional ownership. 

After the pandemic placed everyone on a financial roller coaster, fractional ownership of commercial real estate has emerged as a promising idea for safe investments. It offers both daily returns and long-term capital growth. For regular people looking to make profitable investments, fractional real estate ownership is a blessing due to its low risk and high return qualities. 

If you take a look at the total portfolio of different fractional ownership companies, which initially ranged from Rs 30 crores to Rs 40 crores, they have now each increased to $100 million. It indicates that the top four operators collectively control a market worth roughly $400 million in the fractional ownership sector. When you consider that each owner participant’s ticket is between Rs 5 lakhs and Rs 10 lakhs, that size is very significant.

Read on to learn more about fractional ownership of real estate and how it can help ordinary people. 

What is Fractional Ownership, and How Does It Work? 

Fractional ownership, as the name implies, is the idea of owning only a fraction of any property as opposed to being the sole owner. It describes a set-up in which many investors pool their money to buy a property. They jointly own a valuable asset in a passive position. 

With this strategy, a single investor can own a property with less financial stress and realize returns on their investment. The asset, in this case, could be anything, including residential or commercial property, a warehouse, a jet, or a boat. According to their investments, each investor will receive a fair share of the profits and costs associated with these assets.

Commercial Real Estate(CRE) in India is currently a profitable investment. A fractional ownership in a commercial property can be obtained for as little as Rs. 5 lakh as the minimum investment. 

For instance, in one of Bangalore’s most popular locations, there is a luxury office building worth Rs 100 crore. Anyone other than a High Networth Individual (HNI) cannot afford to buy it due to the extremely high range of capital investment. Even though it provides many benefits and is a safe investment choice, an ordinary citizen who offers only Rs 10 Lakh cannot obtain it. But what if several people band together, pool all of their resources, and place an offer for Commercial Real Estate? This means that everyone gets to own a portion of the office and share the profits equally. As time goes by and the market price of real estate rises, all those who invest in office space may earn rental returns as well as long-term capital gains.

That is exactly what the idea of fractional ownership of real estate intends to achieve. It allows those with limited resources to own a portion of fractional real estate.

A Specific Purpose Vehicle (SPV) is used to carry out the process of fractional ownership in CRE. To buy and manage a property, money is raised through SPV. In this scenario, an investor will have shares of the SPV that is holding the property.

Possible Models of Fractional Ownership

You can select the ideal model for your property from the available options based on the type of property, the tax treatment pertaining to the respective model, and the most feasible and affordable model. 

Here are some potential fractional ownership models: 

Joint Ownership

• According to this model, each co-owner holds ownership of the property and the right to use it. But, it should not interfere with the rights of the other owners. 
• With the permission of the other co-owners, one co-owner may freely sell their shares in the property. 
• The co-owners do not have a “first-refusal right” agreement.

Cooperative Model

• Interested investors form a cooperative society to purchase assets in the name of the cooperative society. 
• All investors have to be society members as well as fractional owners of their properties. 
• If a fractional owner sells their shares, the shares are passed on to the new fractional owner.

Company Structure

• In this investment strategy, investors set up a company structure. They then buy assets in its name.
• The company is bound to abide by the rules and regulations given by Company Act. 
• This option is better than the first two because you can avoid paying stamp duty. 
• This model, in contrast, also has a unique set of duties.

Trust Structure

• Here, a single trust is established by all interested investors. The property seller serves as the trust’s creator. 
• To the mutual benefit of all fractional owners, a seller conducts the deed as per the specific instructions.
• You can benefit from this model in terms of taxes if you can set up an offshore trust in a nation with which the tax treaty is owned by India.

Fractional Ownership in India

The fractional ownership industry in India is steadily growing. It is due to the CRE market which is expected to rise 16% in the future. This will raise the demand for fractional ownership. One of the reasons for this boom is the increasing demand for office space, a growth in financial firms, MNCs, and other commercial projects relocating to India. These factors will almost certainly contribute to rapid capital growth in the coming years.

But, investors should keep in mind that fractional ownership is a fairly new concept in India. The investment may lack coordination and accountability among investors at times. Thus, it is crucial that investors exercise due caution before making any kind of investment.

Wrapping Up

The phrase “the rich get richer and the poor get poorer” must be familiar to you. This statement could be taken to be true for investment opportunities in our nation, where enticing options like Commercial Real Estate (CRE) can only be afforded by High Net Worth Individuals (HNIs). However, with the advent of fractional ownership, the CRE industry has become more accessible to the common person.

For more details, you can reach out to our experts at Bhive for advice if you are planning to invest in CRE.